Unless something happens by end the end of the year, 2017 will be
characterized as a one way upward street. The biggest corrections we saw were
about 3% and there weren't many of them. I've read many market outlooks
from the major investment firms and the consensus view is one of optimism
and somewhat complacency. They are basically saying this:
"the markets should benefit from global synchronized growth with
international markets, Emerging Markets, being the more attractive. There is
little risk of recession as the yield curve is not inverted. The major risk is
that the fed ends up tightening more than expected if inflation flares up".
Last year at the time, the consensus from these "experts" was
far more cautious as there was concerns about political risks and
valuations. Those concerns aren't as prevalent today, yet I would say now
would be the time to be more concerned about political risk and valuation!
Instead I have seen more strategists justifying current valuations saying
that they are fair given interest rates or some other reason. Remember all the
hoopla about the high CAPE ratio? Seems like this is being more ignored now
(but not entirely).
As a bull market rise in stocks or any asset class (such as bitcoin
which I will discuss shortly) progresses it's not surprising to see people make
justifications for it as they finally throw in their bearish towel and embrace
it. Towards the end of a bull run the gains will accelerate and so too do the
justifications which at that point become very weak. I've said before many
times that this has been the most hated bull market I have ever seen.... I am
now seeing some love for this market...but it only took 9 years! Where the fuck
were all you bullish strategists when the S&P was at 1400? lol
So, now that there appears to be optimism and quite frankly some
complacency heading into 2018 does this mean the end of the bull market is
nigh? Well, like I said before, euphoria/complacency and tight money is the
killer of bull markets. What we are seeing now can be categorized more as
optimism with a splash of complacency, but money is not yet tight as the yield
curve is not inverted. However, I will say this, I'm seeing that the
"experts" have also been pointing to the non-inverted yield curve as
a reason to remain bullish and that makes me uncomfortable. Again, where
the fuck were all of you in 2011, 2012, 2013, 2014, 2015, 2016 ? How come no
mention of the yield curve then? Remember the motto of this blog. If
too many people become complacent because of the yield curve or for some other
reasons, the market will find a way to surprise and punish the masses. Either
that indicator won't work this time or there will be some other unexpected
thing that happens. I remember in 2001 when the fed did a surprise interest
rate cut there was all this bullish hoopla because of a statistic which showed
that the market was always up every time 12 months after the fed cuts interest
rates - except for 1929. Well, guess where was the market was 12 months
later....
So, here's what I feel. I still believe the bull market is in tact but
I'm a lot more cautious than I have been in some time and I won't hesitate to
change my stance depending on how things unfold. I believe there is a very high
chance of a major correction in the first half 2018 to wring out the
complacency I see right now. If the market simply keeps on chugging along then
we would likely enter the euphoria/ blow off phase of this bull market.
Speaking of euphoria, let's switch to bitcoin and cryptocurrencies. This
is a classic bubble which is so crystal clear to me having witnessed other
bubbles: The parabolic rise in prices, the hundreds of spin off coins that have
popped up, adding "blockchain" to your company name or any
involvement in blockchain results in an instant 300%+ gain in the stock
price, all the mainstream media attention with celebrities like Katy Perry
asking about it (dumb money), the inquiries I'm getting from friends and
co-workers (dumb money), reports of people borrowing money to buy bitcoin,
outlandish forecasts for much higher prices after prices have already skyrocketed. These are all major
red flags, and this will clearly end badly. Yes, I know many skeptics were
calling bitcoin a bubble when it was at a much lower price and they got made to
look foolish, but the same thing happened with the dot com skeptics of 1999 -
they were right, but early. Bitcoin is 100% in a bubble and I think
there's a good chance that it has already began to implode. I lived
through the dot com bust and I will say it again, all the signs for a peak to
this frenzy are there and all manias end BADLY.
If you want to talk about a risk to the market that's not really being
discounted I would say it's the implosion of cypto currencies. The fact
that there are reports of people borrowing money to buy bitcoin and the
introduction of bitcoin futures pose a dangerous threat to the general economy
if the mania continues. I'm not sure of the extent of leverage behind bitcoin
but it's there and the longer this mania continues the greater the contagion
effect will be. We saw that happen with the dot com bust and the sub prime
mortgage bust. If the cypto-currency bubble has indeed popped which I think it
probably has, it would be for the best as the fallout shouldn't be too bad at
this point, but I can't really say that with confidence at this point.... I
need to investigate this.
