The Bubble is in Cash, Not Stocks…

Consumer Confidence Index

By: Brad Thomas

We are repeatedly reminded by many so-called “experts” that the stock market is in a bubble, and that when central bank quantitative easing programs end stock markets will “crash.”

However, it would appear that the only bubble is people’s uncertainty of the future and their desire to hold large sums of cash. These high cash levels equate to a huge pool of marginal buyers, rather than sellers, for stocks and other “real” assets.

With more buyers than sellers the most likely next big move for stocks is up, not down. This will be the case until equity markets are overbought. Thus, until that time we should not concern ourselves with any material downside.

One of my guiding “mantras” is a quote from the famous value investor John B. Templeton:

Bull markets are born in pessimism, grow in skepticism, mature in optimism, and die in euphoria.

If one can simply identify where we are on this continuum then everything else falls in place! Yes, it does seem simple, but the hard part is interpreting the data and sentiment to discover where we are. In order to do this one needs to have been through a few market cycles to know what conditions of optimism and euphoria are all about.

I started trading in the mid 1980s and I have been through everything between now and then. Yes, it has been one hell of a ride. However, courtesy of this “journey” I know what optimism/euphoria is all about (thank the TMT bubble for that) and what all previous market tops had in common.

Contrary to popular belief the common trait wasn’t that they were expensive, rather it was that too many people owned stocks. Markets reach stages where they quite literally run out of buyers and that is when they are prone to significant downside movements.

So let’s have a look at a few indicators which will shed light on how the market is positioned – i.e. the “ratio of weak to strong hands”. Previous market tops were characterized by high levels of consumer confidence. Granted no one indicator is perfect and free of “noise”, however, it does seem that once the Conference Board Consumer Confidence Index reaches the 110 level the market is in danger of serious downside and investors should be very cautious of being over invested in stocks. Note where the index currently sits – right bang in “neutral” territory.

Consumer Confidence Index

Yes, it is difficult to comprehend but, if consumer confidence is anything to go by, we are probably only half way through the current bull market! This may seem a wild assertion but it is backed up by what investors are doing with their savings.

When optimism is high people feel certain about the future and as a consequence they invest a high proportion of their savings in the stock market. High levels of fear/uncertainty or a lack of confidence is associated with a high proportion of peoples’ savings in cash or equivalents.

This week I couldn’t help but notice the following article in the Washington Post on 18 July:

Washington Post

The first paragraph of the article reads:

Americans are holding more cash in their bank accounts than they have at any other point over the last two decades, a new study found. The average checking account balance reached $4,436 at the end of last year, nearly double the average balance of $2,100 seen over the last 25 years, according to a new report from Moebs Services, an economic research firm. Prior to 2003, checking account balances pretty much hovered around $2,000, according to the report.

Cash levels more or less the highest in a generation! This isn’t “typically” the sort of condition that occurs anywhere near the end of an equity bull market! The same tone of this article was echoed by the following on Yahoo Finance on 21 July:

Yahoo Finance

However one looks at it – cash is still a way more popular investment alternative than stocks: released the results of a new survey about how secure Americans feel about their personal finances compared with 12 months ago. According to the results, Americans overall chose cash as their favourite long-term investment. In fact, 1 in 4 Americans prefer cash investments for money they will not need for at least 10 years. Stocks came in third with 19% of the vote.

Nearly 40% of 18-29 year-olds say cash is their preferred way to invest money they don’t need for at least 10 years, despite the fact that the S&P 500 has gained 17% over the past year while the yield on cash investments is below 1%.

Getting back to Templeton’s quote “bull markets are born in pessimism, grow in skepticism, mature in optimism and die in euphoria” – if these articles and the Consumer Confidence index are anything to go by then we are nowhere near a condition of optimism perhaps at best we are still in skepticism!

Yes, it is very hard to comprehend this given that the S&P is up well over 100% in some 5 years but we should be very careful of jumping to the conclusion that the stock market and sentiment move in a lockstep or linear fashion. I think that many investors are under the mistaken belief that the performance of the stock market translates directly to sentiment.

You might be asking – how has the stock market managed to advance as dramatically as it has over the last 5 years? I think to a large extent this has been driven by corporate buybacks. Many companies have been aggressively buying back their own stocks over the last 5 years which has dramatically reduced the liquidity of stocks to trade. So with liquidity in shares being dramatically reduced it doesn’t take much in the way of buying pressure to push prices higher.

This leads us to a very interesting situation and looming disaster for those who aren’t invested in stocks! Consumers (who are ultimately the buyers of stocks) have the highest cash levels in a generation, combined with the liquidity of stocks that is probably the lowest in a generation and you have the recipe for the best is yet to come in the stock market. Yes, the rally in stocks is likely to continue for many months and the performance may well rival what we have seen over the last 5 years!

- Brad

“Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart.” – Alan Greenspan

How Putin Just Saved Europe, and Other Geopolitical Tales


By: Chris Tell

Picture this scenario. A brother and sister squabbling with one another. Something’s gone wrong, they’re blaming each other, fighting, and generally at each other’s throats. Along comes the boy from next door who pokes fun at one of them and starts pestering them. Brother and sister rapidly put aside their differences, join forces and deal with the boy from next door.

The saying, “The enemy of my enemy is my friend” has played itself out many times throughout  history and, while geo-political relationships may not be as close as siblings, the forming of alliances and the repercussions from having joint enemies can be profound.

During the second World War Stalin realized that he needed the Allies to defeat a Nazi invasion, and in turn the Allies realized that the Soviets were necessary for the war effort. In any other scenario the Allies would have been arch enemies of Stalin and vice versa.

During the Cold War a similar setup occurred with the Soviets and Chinese aiding North Korea during the Korean War, and then aiding the Viet Cong during the Vietnam War.

On a country specific basis many a dictator has been propped up and supported by Governments pretending to their citizens that they in fact abhor the acts of such people. A controlled media and messaging ensure that the vast majority of citizens don’t think too much or dig too much. Government, after all, is largely in the business of marketing. Mobuto Sese Seko, Augusto Pinochet, Saddam Hussein, Pol Pot, and currently the Saudi Royal family. All strategic at some point in time.

I’m not picking on any of these for any particular reason other than that they’re choices which everybody knows about, and the relationships are well documented. Government in all instances does this. Nothing unusual. As they say in Thailand, “Same same but different.”

Well, this time it’s same same but different, too. We’re seeing similar alliances forming now. This time Europe and the US forming an alliance against Russia, and China together with Russia moving towards forming and solidifying existing economic alliances.

Consider that in just the last few months I’ve had the following snippets cross my news-feeds:

In Europe, Putin, the boy from next door, has distracted the Europeans from their political and economic woes, and the infighting which has been building between the Europeans has taken a backseat to more immediate problems. Taking a look at the news since Ukraine started making headlines shows me that distraction appears to be working. I’m not suggesting this was by design. I don’t think that’s the case. It is, however, convenient for EU policy makers who’ve completely screwed up the European marketplace and are looking for someone to blame. Putin is a Godsend.

Life for Europeans will get worse… much worse. Sanctions with Russia are already destroying European agriculture, but at least Eurocrats can blame the economic decline on external factors. Watch for it. You can bet on it. In the meantime, let’s look at who hurts the most from the Russian ban on US and EU food imports.


Keep an eye on PKO, Bank Polski, Poland’s largest lender. Earlier this year they raised $2.7 B in a bond issuance. Little did they know how lucky their timing was. No way would they be able to sell bonds at levels achieved in January of this year, now. The question is, will they survive as their loan book collapses?

While all this is taking place I have to wonder where and what other opportunities arise from this very large and accelerating power shift. An active move away from the dollar is underway and has been for some time. What is important now is that this is being accelerated by the public sector and not the private sector. Moves such as the BRICS setting up the financial infrastructure to transact away from the dollar is bold indeed.

Actions of this nature, or just the mere consideration of such actions, would have been previously met with threats of tariffs, curtailment of aid or even outright sanctions from the United States. That they are taking place now on a near daily basis shows just how fast the geopolitical landscape is changing. The economic decline evident in the Western, socialist world and the US in particular is evident to anyone not reading CNN. This coupled with Obama’s refusal to curtail the NSA has accelerated both the desire and the fortitude of many countries around the world to proceed to change the status quo.

Talking with my private banker in Singapore I asked what bankers thought of all of the FATCA rules. Her response was, “It won’t be too long.” These absurd rules exist and have to be complied with while the dollar is the reserve currency, but when, not if, alternatives exist then simply choosing not to play in that particular sandpit any longer will be more favourable than the revenues currently being earned by complying. Right now banks make too much money to walk away from the existing financial setup, which is dictated by US banks, US clearing houses and US money.

This is changing. The amount of capital flooding into Singapore and Hong Kong is putting pressure on the banks here and pushing up already crazy real estate prices. There are other sectors we’re interested in and taking advantage of. One of them is private equity, which is our particular niche. Capital flows are very important and we believe that the next big M&A activity will be in Southeast Asia and we are moving aggressively to take advantage of this.

In the meantime, I’m curious what opportunities readers think are opening up. Drop a comment below and let me know.

- Chris

“The dollar monopoly in energy trade is damaging Russia’s economy.” – Vladimir Putin

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