Market report

Speculative bubbles and life cycles of companies, crash in long-term government bonds. Good entry points are approaching.

October 9, 2023
Speculative bubbles and life cycles of companies, crash in long-term government bonds. Good entry points are approaching.
Marmot Market Report: CW 40 2023. Always up to date with our weekly report. Find out the latest Financial News and understand what to expect from it.

Chart of the week

Source: Isabelnet, 30.09.2023

The chart shows the speculative bubbles of the last 40 years. In macroeconomics, a speculative bubble is a market situation in which the prices of one or more traded goods wit above their fundamental value when turnover is high.
Why this is important
If you enter a market movement too late, i.e. just before the bubble bursts, you make losses of 50% to 70%. Either you recognize bubbles at an early stage and can profit from them or you should leave them alone.
In the past 40 years, the following bubbles have occurred:

- Gold (1980)

- Japan (1990)

- Asia (1995)

- Internet (2000)

- Housing (2007)

- China (2008)

- Biotech (2015)

Speculative bubbles and life cycles of companies

The following bubbles have not ended yet and/or partly overlap:

ARK stands for Cathie Wood's ARK ETF and refers to stocks that have never made a profit and used all earnings to grow more and gain market share. Ev. we are on the path of enlightenment here (see comments on the hype cycle below).

- Bitcoin
Here the spirits divide. Has the bubble burst or is the real bubble yet to come and will the Bitcoin price go from the current USD 28,000 to 1 million?

The term stands for Facebook, Apple, Amazon, Netflix and Google. All stocks that have performed excellently in recent years and have received another boost due to the trend of artificial intelligence. Other stocks in this category include Tesla or NVIDIA.

- AI
Artificial Intelligence. The term refers to the intelligence of machines or software, as opposed to the intelligence of humans or animals. It is the field of computer science that deals with the development and research of intelligent machines. We are still miles away from real AI. Currently, the machines solve the tasks with pure computing power and because this has increased so enormously in recent years, things are possible that deliver amazing results.
With this bubble, we are probably currently at the "peak of exaggerated expectations".
Bubbles all follow the same pattern:

Source: Wikipedia, Hype Zyklus, 7.10.2023

Initial hype is followed by disillusionment. Only a few companies survive the initial hype and then manage to earn money with the new technology.

Source: Wikipedia, Hype Zyklus, 7.10.2023

The problem for private investors with a new technology is that you only hear about it when the biggest increase has already taken place. By the time the media reports it (1), many other investors have already made a lot of money on it.
Where do we stand with the above still open cycles:

The trend is in the middle of the crisis and currently shows little recovery potential. We see ARC at (2). The problem here is high interest rates. For companies that do not make profits and have to finance everything with borrowed capital, it is getting more and more expensive. As long as interest rates remain high, and that's where current expectations are through June 2024, we see little recovery potential here.

- Bitcoin
After the big crisis, we could be at (3) here. Negatives are the many court cases and bans, but should a cash ETF be approved, the next breakout to the upside is imminent.

These are established companies that are reinventing themselves. We see these at step (4).

- AI
The hype has probably reached a peak now. Very few companies are making money from it. Most offer their services for free and hope to be acquired by a big company. But more and more they or the investors run out of money.

What is the best way to profit from bubbles? In the gold rush in the USA of 1850, only a very few who found gold became rich. But so did the manufacturers of shovels and picks. In 1860, during the oil rush, it was the pipe manufacturers. The recipe for success is to invest in the manufacturers of the materials used for the hype.

In the case of the artificial intelligence hype, these are products from NVIDIA. The company makes graphics cards for computer games. These could already be ideally used for mining Bitcoin. Even then, the company profited massively. Now it turns out that the computer chips are also ideally suited to perform the computing operations for artificial intelligence applications.

NVIDIA has little competition. Everyone wants to invest in the field now, but it's still 1-2 years before NVIDIA faces real competition.

Crash in long-term government bonds
Last week saw the release of the number of new non-farm jobs created in the US. These were much higher than expected:

Source: Twitter, Equity Clock, @EquityClock, 6.10.2023

The graph shows in blue the average of new jobs created over the last 10 years. Green shows the trend over the past year and red the trend over this year. Compared with last year, economic activity has cooled somewhat, but not by as much as would be necessary for a recession.

An economy that continues to perform well is generally good, but also means increasing inflation.

This would then lead to a further increase in interest rates.

Source: YouTube, Mario Lochner. 07.10.2023, Time stamp: 3.28

The chart shows the price of 10-year U.S. Treasury bonds (black) and that of a broad global bond index (Global Aggregate, red). After bottoming out a month ago, interest rates seemed to have peaked. The renewed drop in rates came as a great surprise.

Clearly, the trigger was the high employment numbers in the U.S., as described above. But since the expectations for further interest rate increases by the U.S. Federal Reserve have not increased, the movement leaves many perplexed.

Source: Twitter, Liz Ann Sonders, @LizAnnSonders, 5.10.2023

Higher interest rates are not only bad for the economy, but also limit the government's room for maneuver. In the chart above, you can see how much the U.S. government has to spend on paying interest on the national debt. Before Covid, this was just under 7% of tax revenues. By 2030, this figure may rise to 20%. This then leads to heated discussions in US politics and was also one of the main reasons for the historic ouster of the Speaker of the US House of Representatives.

Somewhat unobserved, loan default rates are currently on the rise:

Source: Twitter, The Daily Shot, @SobertLook, 5.10.2023

The chart shows the increase in defaults on multifamily housing in the USA. This has already increased sharply, surpassing the highs seen during the Covid crisis. However, the figures are still a long way from the highs during the financial market crisis in 2008.

Source: Twitter, The Daily Shot, @SobertLook, 5.10.2023

The chart shows the default rate of loans from smaller US companies. In an economic crisis, these usually rise first, as smaller companies generally have fewer reserves than large companies. The figure for 2023 is already much higher than in recent years and continues to rise.
In the event of loan defaults, it is usually the banks that suffer first:

Source: Twitter, The Daily Shot, @SobertLook, 5.10.2023

The chart shows the composition of the loan portfolios of the large and smaller banks in the USA. The smaller banks, however, extend a disproportionately large number of loans to small companies (44%) and therefore suffer mainly when these companies go bankrupt. The large banks, however, are then much more affected when consumers can no longer service their loans. This also includes credit card debt.

Banks have mostly benefited from higher interest rates so far, but if loan default rates are now rising, it is not the best sector to be invested in.

Good entry points approaching
Since the highs in July, European stock markets have already plunged 9%.

Source: Twitter, Lance Roberts, @LanceRoberts, 6.10.2023

The chart shows the number of pu options on the S&P 500, i.e. the number of investors hedging against falling prices. The higher these are, the fewer investors are selling and a reversal is close at hand.
Sentiment among private investors has also changed massively in recent weeks:

Source: YouTube, Mario Lochner. 07.10.2023, Time stamp: 6.38

The chart shows the change in sentiment among private investors. If investors are too greedy, there is usually a threat of a downward trend reversal. This was the case in July. However, if investors are too fearful, an upward trend reversal will follow for the most part. We are now at a level where a trend reversal to the upside occurred in January and March.
With purchases, however, we still worth a little wait because of the uncertain situation in Israel. There is a great danger that the conflict will escalate. It depends now completely on how prudently the Israeli army acts. A land war and full occupation of the Gaza Strip could follow. What would raise the conflict to an even higher level would be an attack by Israel on selected targets in Iran, the Hams' main supplier of money and weapons.

Oil prices have already gained 8% from last week's lows. If a further rise in oil prices well above USD 100 follows, it would hit the global economy hard.

To the wicked there is the macabre saying: "Buy when the guns are thundering". The Israelis' cannons are still silent.

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