Dear Reader, Everywhere around us, the debate about bubbles continue. Are we in another bubble…or is this the new norm? The stock market indices continue to grind higher. Even the Aussie market has finally joined the party. And property, whose trajectory peaked a couple of years ago, is now back on the up and up. Auction clearance rates are up. Median prices are now within a whisker of their 2017 high. That’s all nice and dandy if you’re an owner of both asset classes. However, are these prices sustainable…or is this the last hurrah before the whole thing comes crashing down around our ears? If you’ve been reading these pages for a while, you won’t be in any doubt about how my colleague here, Vern Gowdie, answers that question. Vern is as sure as he’s ever been that the whole damn thing will end in a bust. Even if you don’t agree, it’s sure worth hearing what Vern has to say. You can do that by clicking here. The driver of such high valuations — whether they be shares or property — comes back to one thing…interest rates. It’s a narrative with which we are all familiar. Sure enough, there are other factors as well. Earnings growth, margins, profits, market share and a myriad of other numbers help determine how a company is performing. It’s these numbers that drive the day to day price movement of shares. However, interest rates determine how we value these companies. That determines whether something is ‘expensive’ or ‘cheap’. It’s something that Warren Buffett spoke about as far back as 1994 at the annual Berkshire Hathaway meeting. At the time Buffett said: ‘So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.’ It’s this very same quote that Hamish Douglass shared with Magellan investors in an article, ‘The gravity of interest rates’, in August last year. And again, something he explored more recently at the annual Magellan roadshow. I doubt that Buffett’s view will have changed since making that quote over 25 years ago. If interest rates were 10%, there is no way value investors like Buffett and Douglass would value Apple at US$300 per share — where it has recently traded. Nor would they value Amazon at over US$2,000 a share — no matter how rapidly it is growing. And it is this dichotomy that fuels the debate about value. So much of the debate about value focuses on short term numbers. However, it’s the broader interest rate cycle that acts as the backdrop to any meaningful valuation. The higher interest rates are, the less valuable a future cash flow will be. As Buffett continues: ‘…all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be.’ In other words, the higher rates are, the more interest income an investor is forfeiting by handing their money over to someone else. As rates have gone from double to single digit — and now to near zero (and even negative in many countries) — the value of future cash flows has just about become meaningless. Even the poor old yield curve has lost its curve — it’s just about flat. As an investor, the longer you tie your money up, the more you want to be compensated. That’s why typically, the yield curve is positive. Only does the prospect of a huge economic downturn cause the yield curve to ever invert itself, upside down. However, with a flat yield curve, it makes no difference how long you tie your money up. The short-term rate in the US? A range of 1.5% to 1.75%. And the yield on a US 30-year bond? Try 1.89%. That was the going rate on US 30-year bonds issued at the end of last week. Who would tie your money up for 30 years just to gain an extra 0.1 to 0.2 of a single percent? The answer is…anyone looking for yield. They fear that the yield could be lower next time round. That is the prospect ahead. And it is why conventional ‘wisdom’ has gone out the window. While short-term US rates might not go to zero anytime soon, it’s quite possible for the back end of the yield curve to go to zero…even negative. But what about those countries where short-term rates are already negative? Where an inverted yield means you will get paid more interest the more you borrow, and the longer you hold that debt. As an investor, even if the business barely breaks even, why wouldn’t you fork out money to invest? To get paid to borrow money to buy whatever asset you can. As an investor, surely this is the best game in town. How can you default on a loan when you are getting paid to borrow money? It’s by far the closest thing you will get to perpetual motion in the financial markets. Yep, it all seems a step beyond reality…maybe a lot more than a step. But that is what we all face. Sure, watch profits, margins and all the other numbers on any share you wish to invest. But watch interest rates more closely than ever. As we saw a couple of years ago, even the slightest rate rise — or even the prospect of one — will pull the rug more quickly than any black swan event. All the best, | Matt Hibbard, Editor, The Rum Rebellion |
| ..............................Advertisement.............................. Tiny Aussie company unveils ‘single-atom nanochip’ | The team behind the breakthrough. Source: Company website |
The mainstream — and much of the market — are blissfully unaware of what this small team of physicists (upstart rivals to Google) are on the verge of achieving… It’s something Silicon Valley has up until now deemed impossible… A fully patented breakthrough that could corner billion- and trillion-dollar future industries in biosensors, computing and electric vehicles. The market appears to have completely overlooked this stock. For now… But it has an exclusive licence for a breakthrough quantum IP that could make Google and IBM look stupid in 12 months’ time. And yet (at the time of writing) shares are still selling for under 30 cents…CLICK HERE FOR THE FULL STORY | ..........................................................................
MAGA Never Had a Chance By Bill Bonner ‘To everything there is a season ‘And a time for every purpose under Heaven’ Ecclesiastes Children shouldn’t have to learn that Santa Claus doesn’t exist. And some facts are too brutal even for adults. That things go down as well as up…and get worse as well as better…is blindingly obvious to everyone over 55. But it will come as a rude shock to today’s investors. So will today’s insight: that there are hard seasons in human life as well as soft ones. Human life is cyclical. It’s not onward and upward forever. There are recurring patterns. Frost as well as warm breezes. Clouds as well as sun. Science and technology may grow all year round. But in love, politics, war, and money, we flourish in the summertime…and die back every winter. Nothing like the Yucatán Here in Nicaragua, it’s nothing like the Yucatán Peninsula, where we spent the last two days. Here it is dry. There it is humid. Here it is mountainous. There it is flat. Here it is quiet and backward. There it is crowded, modern, and booming. Here we are on the Pacific; there on the Atlantic. Here it is poor. There it is relatively rich and prosperous. There are seasons here, too. In the summer months, it is rainy. In winter, it is dry. And this time of year, the dust blows across the roads and dry leaves accumulate on the ground. We got back to the airport at 10 pm. In the daytime, we’d have to make our way through heavy traffic, inevitably caught behind a truck, lumbering up a hill at 10 mph while breaking black wind from its tailpipe. But last night, the road was nearly empty. After an hour or so on the Pan-American Highway, we left the blacktop and took a shortcut on a dirt road. There, too, we would normally drive through clouds of dust turned up by other cars and trucks. But with no other traffic, our own dust whirled behind us, coming to rest on the freshly-washed school uniforms hanging on clotheslines near the road. Both Mexico’s Yucatán and Nicaragua’s Pacific coast are attracting more and more US retirees. And this trend — like the rise of Florida before it — may continue for a long time. Rendezvous with destiny Cycles take time. The credit cycle, for example, can last a lifetime. The last time interest rates were this low was around the time we were born – in the late ‘40s. A complete stock market cycle, too, is surprisingly long. But we have to look at them in terms of old money — the gold-backed dollar — to see them clearly. The last major low came in 1980. Then, it took only 1.3 ounces of gold (equal to about $700 at the statutory rate) to buy the entire Dow 30 stocks. Twenty years later the bull market had run its course, hitting a high of over 40 ounces of gold in 2000. That was the high-water mark for US stocks. They never hit such a high before…and never have again since. And there’s still no bottom in sight, 40 years after the last low. Investors and the financial press applaud every up move in the stock market. ‘Dow 30,000,’ they cheer. But to get back to its real level of 1999 — at 42 ounces of gold to buy the Dow — it would have to go to 67,000. Even as stocks go up in new, nominal dollars, gold goes up more, leaving them further behind. And our guess is that this pattern will continue, too…and when the Dow finally finds its bottom — its rendezvous with destiny — it will be under five ounces of gold. End of an empire According to Sir John Glubb, the imperial cycle lasts 250 years. Maybe so. Maybe not. But the US empire definitely seemed on the downswing after 1999. And once the cycle turns, none of the king’s horses and none of his men are able to do much about it. That is a recurring pattern of history, too — like it or not, empires die. All of them. This week, and the last, we have been chronicling the many promises of the 21st century that didn’t pan out. The dotcoms blew up in March 2000. The Information Revolution buried us under a mountain of data. The stock market headed down…and in real terms is still only at half its 1999 level. The mission, whatever it was, was never accomplished in Iraq. The war in Afghanistan has turned into the longest ever. The US military still hasn’t won a war in 75 years. New technology failed to produce a new boom. The most aggressive Federal Reserve response ever (to the crisis of ‘08–‘09) yielded only the weakest recovery on record. The Obama election failed to heal racial wounds. The Trump tax cut failed to increase growth. Tesla has still not made a profit. The Trump trade wars made no appreciable improvement in America’s manufacturing sector. The Baltimore Ravens did not win the Super Bowl in 2020. The seasons change, in other words…even for empires. Disappointments accumulate. And MAGA never had a chance. More to come… Regards, | Bill Bonner, For The Rum Rebellion |
| ..............................Advertisement.............................. ..........................................................................
|