It’s Midnight and the Market is Doing Shots

It happens at most parties.

The mood is lively. The drinks are a little too good. Next thing you know, some genius dusts off a bottle of tequila and starts looking for the lemon and the salt.

When you’re young and foolish, chances are you were the first person to line up. After all, the party is pumping, who wants to go home now?

As you get a bit older you know a nice tequila can be a fine drink on ice. Slowly sipped. Savoured with friends. But pouring a cheap agave plant distilled into something that resembles rocket fuel down your throat at 1am in the morning generally leads to bad decisions.

Of course, to be smart and say no to it takes practice.

But some people, no matter how much experience they have with late night parties, never learn to say no to the early morning shots.

David Rubenstein, co-founder of the private investing firm The Carlyle Group, says that’s exactly what’s happening in the US market right now.

Rubenstein told his son to imagine the market was like a party approaching midnight. When the party is in full swing and the tequila is brought out, it’s usually to the tune of roaring approval. But as an investor, it’s time to get going.

He reasons that the party can go on much longer than any one realises. But the question is, do you really want to be drinking tequila after midnight?

Rubenstein believes that everything is a little too good at the moment. And this has him on edge, arguing:

Right now, the biggest concern I have is that most people think there is no problem of a likely recession this year or even maybe early next year. Generally, when people are very happy and confident, something wrong happens.

I am nervous that the conventional wisdom is that we have no recession problems around the world – that everybody’s doing quite well. The conventional wisdom is usually wrong, and it might be in this case.

And he’s not wrong.

The US market is the Teflon market. No matter what happens, the US market reacts as if it was good news. 

For example, neither the Dow Jones nor the S&P500 fell more than 3% in a day last year. Which is nothing short of incredible.

It’s even more impressive considering the background of political chaos in Trump’s America. The markets withstood three hurricanes in the US, white nationalists marching, members of Trump’s own political party outed as child predators, blunt immigration measures, and persistent accusations of meddling from the Russians in the 2016 elections.

Trump has even slapped foreign made washing machines and solar-energy components with a massive import tariffs. Normally these ‘nationalist’ policies would cause the market to shake.

But in reaction to the news, the Dow Jones and S&P500 fell only 1.37% and 1.09% respectively overnight. And after a day or two, the rally kicked in once more.

No bad news seems to stick to the US market. Which is why we’re calling it the ‘Teflon’ market.

Global markets expanding

However, while we continue to focus on the US market, everywhere else is pretty darn rosy.

Check out this chart:

US Market

Source: NYtimes
[Click to enlarge]

Every major economy on the planet is expanding. According to The New York Times, there’s no one reason for it, things are just growing.

No tidy, all-encompassing narrative explains how the world has finally escaped the global downturn. The United States has been propelled by government spending unleashed during the previous administration, plus a recent US$1.5 trillion shot of tax cuts. Europe has finally felt the effects of cheap money pumped out by its central bank.

In general terms, improvement owes less to some newfound wellspring of wealth than the simple fact that many of the destructive forces that felled growth have finally exhausted their potency.

The last time all major economies were in the expansion phase was in 2007. You know that year. The year that Wall Street investments crippled the global economy.

Higher oil prices are benefiting both Russia and Mexico. Somehow China has managed to keep the Middle Kingdom running on credit…and still not let the credit growth crash their economy.

Factories in Eastern Europe are running at near capacity. Auto manufacturers in Slovakia, Poland and Czech Republic are increasing the number of cars heading to France and Germany. Japan is showing signs of increasing inflation and economic growth. All the things central bankers like to see.

But the short of it is, there’s nowhere in the developed world that is doing well.

Globally, companies are making money. Politicians and central bankers are congratulating themselves on ‘steering’ the economy in the right direction. On paper, the statistics even allege that the people are prospering.

The party is clearly in full swing. It won’t be long until some mastermind brings out the tequila and declares ‘shots for everyone’.

The problem is, we won’t know how big the hangover will be until the day after the party ends.

Kind regards,

Shae Russell,
For Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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