For months, the global markets have been rife with speculative excesses. Normally, this would be a worrisome development for any serious investor. Often, speculation dooms bull markets. But so many factors auger well for the markets that it’s hard to call the end of this bull.
So far, instead of the bell tolling for the bull, we have seen a rotation away from many – but far from all –of the areas where speculation seemed extreme. At the same time, over the last six months, we’ve seen unloved sectors quietly assume new prominence.
The critical question – and the answer is unknowable – is whether the rotation can continue, mute the most extreme speculation and save the bull or whether the speculation is just too extreme to manage without dooming the whole enterprise.
For a grizzled market veteran, it’s easy to spot troubling trends. But you never know how far these trends will go and how the excesses will get resolved. Sometimes speculation ends in a fiery ball of destruction. Other times, the speculation works out over time with the pull and tug of the market creating drama but leaving an asset price essentially unchanged for a prolonged period.
One prominent example is the U.S. stock market in the Go Go 60s. A two-decade bull market peaked in 1966. The Dow Jones Industrial Average closed at 995 on Feb. 9, 1966. The market swung dramatically for 16 years but didn’t finally bust through that level until August, 1982.
Gold topped 800 in 1980. It didn’t breach that level again until 2007 — twenty-seven years later. In 1980, an ounce of gold and the Dow Jones Industrial Average were both at 800. Today gold is above 1,800 and the Dow is over 34,000. There have been lots of ups and downs in the meantime for both markets and occasional turns in the spotlight but for the most part these moves have been quiet.
Where are possible areas of concern today? Candidates include the cryptocurrency markets, residential real estate, blank check companies (SPACs), initial public offerings, companies with humorous business models, the fixed income markets.
On this later point, a few months ago Greece issued 30-year bonds at a yield of under 2 percent. A decade ago, Greek 10-year bonds were yielding close to 40 percent.
In April 2015, Mexico sold 100-year bonds at an interest rate of just over 4 percent. Who has the foggiest idea of life 100 years from now? The saving grace is that the institutional investors who bought these bonds, if they don’t work out, are unlikely to be witness to their own folly.
