Former hedge fund manager and financial news presenter Jim Cramer came up with a pertinent quote on Twitter last week:
“Here’s what I have learned: we have been in a bubble since 1981 when I first went to Wall Street. Sometimes it pops, mostly it doesn’t.”
Current price action, valuations, sentiment and news flow all indicate many assets are not just in bubble territory, but extreme bubble territory, relative to history. This is not to say it will pop imminently. After all, this time central banks have implied they will support markets. This is very different to before when the ideology of free-markets, creative destruction and “real” capitalism reigned supreme. Times have moved on.
Relative to history this looks like a bubble, but relative to interest rates and ideology it is not so clear. As long as inflation remains subdued and central banks and governments keep stimulating then it is difficult to see the bubble popping.
Speaking of inflation, it is once again important to keep an eye on the soft commodities as previously mentioned. In the following article John Authers argues that Wednesday’s inflation report is one to watch.
A Dead Soviet Economist Has Bad News for Stocks
If there are truly signs of inflation, then looking out a few months, when lockdowns are hopefully over and most are vaccinated from Covid-19, then the economic rebound effect could be very strong. Add to that the new stimulus package from the Biden administration and there is certainly a potent inflationary cocktail being poured.
Soybeans, which so much of the world depend on are moving towards previous highs set 6 years ago:
Corn prices are showing a similar price action:
The chart below shows the main US Equity index, the S&P500 divided by the main commodity index. Again, this shows commodity inflation moving higher:
And it is not just some commodities that are becoming pricier:
The above from the FT shows the cost of moving goods from China to Europe has recently gone up by three times.
In the previous issue, some of the crazy valuations were highlighted. The stock below makes Tesla’s move look fairly mundane. Plug Power is a fuel cell company:
Below Crescat Capital show their valuation model indicating stocks look stretched:
Retail money, and TikTok stock promotion along with Robinhood investors, Reddit readers of “r/WallStreetBets” are pushing stocks with no earnings no extreme levels:
OTC stocks or pink sheet stocks are companies of dubious value in a very lightly regulated market. Here, more than 1trillion shares traded in December for the first time ever. In single stock options levels are at all-time highs:
Also demonstrated in this chart below:
So, what does this mean for gold?
At the moment, gold seems fairly range-bound, neither willing to breakout to new all-time highs nor yet ready to collapse to the lows of last year. Much depends on the vaccine rollout and the inflation numbers. And, of course, as described above, what happens to stocks and the liquidity in the financial system.
It is assumed by many that central banks will let inflation run hot before raising rates in order not to hurt the economy or the markets. If that happens then gold certainly has a great chance to move higher.
If the end of the Covid-19 road is farther than thought, with the opposing forces of a weak economy, and weak confidence matched against increased stimulus then it seems possible gold will continue to trade within the range.
What is clear, is that despite the bubble, or the perception of a bubble, euphoria, so key for a market collapse, is hardly evident throughout much of the world. Indeed, what seems like a never-ending Covid story is slowly chipping away and the optimism so essential to drive an economy forward.
What started as lockdowns because of high case numbers has given way to lockdowns due to new variants.
The optimism in quick vaccine discovery is giving way to frustration to roll-out hold-ups. Very few are enjoying or participating in the market rally. It seems more likely that there will be more restrictions whatever happens to case numbers until everyone is vaccinated. And that will take a while.
Ultimately, the handling of the crisis has shown that holding assets dependant on human behaviours is only part of the story. Thus, gold will continue to find favour with those who believe in its diversifying properties in a larger portfolio. Especially when valuations are so high, and the system is so wedded to so much stimulus.
As Cramer says sometimes it pops, mostly it doesn’t. The savvy investor will always prepare for the former, while hoping for the latter.
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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.