In today’s Money Morning… priming the pump… the monetary monster is loose… making hay while the sun shines… and more…
It’s been another wild and whacky week for markets. With the ASX flip-flopping between green and red since last Thursday.
So, could that be a sign of further risk to come?
Some of my colleagues certainly seem to think this is the case. With our editorial director, Greg Canavan, sharing this insightful titbit with Insider readers yesterday:
‘While we don’t know the future, the key takeaway is that the probability of a decent correction is increasing. That doesn’t mean we’ll get one. But if the market continues higher from here, it means underlying risks and stresses will probably only increase.
‘The whole point of a correction is to flush out the excesses and imbalances that occur in a strong market. They’re scary, but necessary.’
And while Greg certainly isn’t too worried about long-term plays, he is focused on short-term trades. Strategies that could be more prone to short and sharp decline across the board.
Does that mean it is guaranteed to happen?
No, of course not.
That’s precisely why he prefaced the statement with not claiming to know the future. All he is saying is that the chances of it are increasing as more signals point to a risk overload of sorts.
A situation that we owe to the RBA…
Priming The Pump
Yes, the big story this week for local markets must be Dr Lowe’s commitment to low rates until 2024.
As well as the announcement of a further $100 billion in QE bond buying. Efforts that the RBA hopes will lift wages.
I have my doubts though.
All these modern monetary policies are doing is feeding money into asset prices. Just like we’ve seen in the US — with the insane run-up in both the Dow Jones and the NASDAQ.
So, this commitment from Lowe has only set the stage for more share market and property market insanity. With my expectation that we’ll see asset prices climb even higher.
To many seasoned investors and traders, that may sound preposterous. After all, we’re seeing some truly absurd price to earnings ratios recently. With investors paying huge sums for the expectation of large future earnings.
All you need to do is look at my favourite ASX barometer: Afterpay Ltd [ASX:APT].
The company that might as well be our Tesla. With the stock recently surpassing a $40 billion market cap, and briefly touching $150 per share. Even though the company has still yet to post a profit!
For many traditional or value-oriented investors, this is no doubt a sore point. One that defies market logic and should end in tears for investors.
In my opinion though, it is just an example of the distorted reality of markets nowadays. With central banks pumping out money, forcing investors to seek out growth as yields dry up.
As famous British investor Jeremy Grantham recently commented, rising asset prices in a bull market can be tricky to gauge:
‘Long, slow-burning bull markets can spend many years above fair value and even two, three, or four years far above. These events can easily outlast the patience of most clients. And when price rises are very rapid, typically toward the end of a bull market, impatience is followed by anxiety and envy.
‘As I like to say, there is nothing more supremely irritating than watching your neighbors [sic] get rich.’
The monetary policy monster is loose
What I am suggesting is that asset prices may still have a ways to go yet. Because despite many examples of ‘overvalued’ stocks, the RBA is only going to drive the market higher with this agenda of low rates and QE.
So, while that doesn’t mean we won’t see a correction, it does mean the long-term outlook should be bullish. Especially as I suspect that this latest round of QE is going to lead us down a slippery slope.
Because as Dr Lowe admitted in his justification for the new round of bond buying:
‘If some central banks are doing quantitative easing, the rest of us feel like we need to do that as well.’
That’s a scary admission to make.
Suggesting that as long as one major economy is going down the road of QE, then everyone has to. Because as Dr Lowe notes, it is driving our dollar higher and hurting our export market.
Following up with this scarily ambiguous assessment:
‘We don’t think about this as a war, it’s just how monetary policy is transmitted to the real economy.
‘Do we need to do this for years? I hope not. I don’t expect we’ll need to do it for years.’
In other words, Lowe and his central bank buddies have lost control of the monetary monster they have created. A system that is now totally reactive in the most volatile way possible. Propping up markets with infinite money only leads to distorted valuations.
While that is fantastic news for growth stocks, at least in the medium to long term; eventually it will have to end one way or another. And when it does, expect it to wipe out many investors and overpriced assets with it.
Which is why I suggest making hay while the sun shines. Because if the next three years are to be defined by low rates and nonstop QE, then big gains are still up for grabs.
Because after that, when markets reach their inevitable limit, don’t be surprised if we see another huge bust. One that could be far more damaging than any recession or depression we’ve ever seen.
Perhaps even a total collapse of financial systems as we know it today.
But again, for now at least, the party must go on. At least for a few more years…
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.