By Kris Sayce, editor, Casey Daily Dispatch
We don’t begrudge anyone making a buck.
We don’t have a problem with Dogecoin…
Or any of the “crazy cryptos” you can buy or sell for just fractions of a cent.
We don’t have a problem with those making money from so-called “meme” stocks – GameStop (GME), AMC Entertainment (AMC), or American Airlines (AAL).
Good luck to them, we say.
And we don’t have a problem with folks following Elon Musk’s Twitter account. If they profit from a Musk tweet, we’re happy for them.
But we do have a problem with those ultimately responsible for the distortions that cause these actions – the government and the Federal Reserve.
After all, it’s because of them that most of this is taking place. And it’s because of them that many folks will see their savings evaporate when the “Everything Bubble” finally ends…
If this is your first time here, welcome to the Dispatch. If you’re a regular reader of our content, welcome back.
We have two main goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Nick Giambruno, Dave Forest, and the founder of our business, Doug Casey.
This week we’ve showcased the latest research from Nick Giambruno. We showed how Nick’s analysis says we should prepare for a “financial hurricane.”
And we’ve shown how governments and central banks are the leading causes of that “financial hurricane.” Today, we’ll continue that theme.
They Know What They’re Doing
The worst thing about all this is that they know what they’re doing.
Last month’s comment from Treasury Secretary Janet Yellen proved that. As Reuters reported:
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” Yellen said in taped remarks to a virtual event put on by The Atlantic.
“It could cause some very modest increases in interest rates to get that reallocation, but these are investments our economy needs to be competitive and to be productive (and) I think that our economy will grow faster because of them.”
Later that day, Yellen “clarified” the remark about increasing interest rates. Why? Because, of course, the markets didn’t like the first comment. Stocks fell. Bond yields went up.
No Treasury Secretary or Fed Chairman wants to end the “Everything Bubble.” Much better to keep it going and let the next sucker deal with it.
The problem, as is true with every bubble, is that the longer it lasts, the more people believe that it’s not a bubble.
That in fact, the economy is growing because it’s strong. And that even if it’s not strong, don’t worry, because the government and Fed will take care of things.
But what if the Fed can’t take care of things?
Was This an Early Warning Sign?
Bubbles don’t end well.
They end with a crash. They destroy wealth. Sometimes, they destroy lives.
We’ve already seen early warning signs of what could come. In March this year, hedge fund Archegos Capital Management collapsed as a number of its investment “bets” went wrong.
Swiss banking giant Credit Suisse will lose $5.5 billion from the collapse. The big bank loaned money to Archegos. It claims it didn’t know the hedge fund was also borrowing money from other banks so it could make big leveraged investments in stocks.
Did it really not know? Or did it not want to officially know? We may never find out.
The bigger question is whether this is an early warning sign for the market. Is it possible that Archegos is the only hedge fund that has over-extended itself?
Or are there others that will emerge when the “Everything Bubble” ends?
Remember Bear Stearns? That turned out to be an early warning sign for the 2008 collapse.
The first sign of trouble for Bear Stearns was in June 2007. It collapsed in March 2008. The market overall didn’t collapse until September 2008.
These things can sneak up on you. The government, the Fed, regulators, and other banks can cover up the problems… for a while.
But the problems build. Eventually, the market reacts… as it did in 2008.
Beware of the “Financial Hurricane”
Now think back to the five stages of Nick Giambruno’s “financial hurricane” that we mentioned Tuesday.
Nick says that these five stages are the clear evidence of problems in the market:
Sky-high stock market valuations
Margin debt problems
Corporate debt problems
President Biden’s corporate tax increase
Let’s look at those five stages, and how the numbers stack up right now.
Using the Shiller price-to-earnings (PE) ratio of the S&P 500 (which takes inflation into account), stocks are trading at a higher earnings multiple (37x) than they were before the 1929, 1987, and 2008 crashes. The only time the Shiller PE ratio has been higher was before the dot-com crash.
Archegos is one example of margin debt problems. Are there others?
Corporate debt defaults for speculative companies are at 8.7%. That’s more than the 5.7% rate in 2016. And higher than the 3.8% rate prior to the 2008 crash.
Stock buybacks are on the up again. S&P Global estimates buybacks will total $651 billion this year. That’s not far off the 2018 record of $806 billion. Is that a sign of trouble? Boosting stock prices through buybacks rather than through higher earnings?
As for President Biden’s corporate tax increase… we’ll see if that goes through. Regardless, the other factors in Nick’s “financial hurricane” are lining up.
Meanwhile, many investors seem oblivious to the risks. Dogecoin, AMC, and GameStop were all up big yesterday. Some folks seem to think there’s nothing to worry about.
We wouldn’t be so sure of that. Check out Nick’s timely research here.
Editor, Casey Daily Dispatch