Markets should ignore cyclical factors and focus at the structural factors instead

How often do analysts get the markets wrong? How often to fund managers get stock picks wrong? They get things wrong far more often then they get it right.

2017 was probably the worst year for hedge funds. And the start of 2018 isn’t turning out to be any better.

The problem probably lies with everyone focussing on the business cycle rather than the structural factors driving the markets.

Think about these factors,

Too little choice in equities

Like we covered here, M & A activity and record stock buybacks have reduced share buying choices and further driven up stock prices.

The World’s 10 biggest corporations – a list that includes Walmart, Shell and Apple – have a combined revenue greater than the government revenue of 180 least richest countries combined.

The 10 most profitable corporations in the US made a collective $226bn in profit in 2015, or $30 for every person on the planet.

In the US the top 200 companies (exchange listed and private) account for around 90% of all corporate profits.

In the US, the 500 largest listed corporations spent on average 64% of their profit on buying back shares between September 2014 and September 2016

US companies have announced over $275 billion worth of corporate buybacks already in 2018 and that number is expected to be around $800 billion by the end of the year.

There are far fewer listed companies globally now then there were 20 years ago. 20 years ago, there were over 8000 stock market listed companies in the US, that number has halved by 2018.

With very little choice, valuations are soaring especially for the very big listed companies. Little wonder the market doesn’t worry about valuations any longer.

Amazon trades at what a Price to Earnings ratio of some 200. Apple is worth some $900 billion. Even Tesla which makes no profit and is unlikely to make any profit any time soon is worth some $55 billion, more than Ford or General Motors.

Central Banks buying stocks with cheap money

Like we covered here, Central banks themselves are buying stocks with cheap money.

The Swiss National Bank has around $800 billion in foreign currency investments. Amongst its famous holdings are a $3 billion investment in Apple (and it has been buying more shares) and $1.5 billion investment in Facebook. It has recently forecast that it will make a profit of 54 billion Swiss Francs ($55 billion) for the 2017 financial year mainly down to its overseas investments.

The Bank of Japan has a target to buy 6 trillion Yen ($54 billion) worth of exchange traded funds a year. It now holds almost 82% of all ETFs in Japan and is indirectly the largest shareholder in many large Japanese companies.

A generation that isn’t used to high(ish) interest rates

We mapped interest rates around the world here.

That post went viral. Very viral. It was shared by readers on Reddit, Facebook, Twitter, WhatsApp and Voat among other channels. And we read many comments on social media about the post.

People in Asia were shocked to note that there are countries with negative interest rates. People in the West were shocked to know that countries elsewhere have interest rates over 2%.

Wow. A generation in the Western world hasn’t see high(ish) interest rates. Think of this, you could get some 10% on savings in 2000 on deposits in the US and the UK. Mortgage/home loan rates went as high as 25% in the UK in the 1980s and 1990s.

A generation of people haven’t seen high rates at all. Will they be able to cope with high interest rates? The simple answer – no.

Cryptocurrency markets are entirely manipulated

When the market moves up, 95%+ of some 1700 cryptocurrencies (tracked by coinmarketcap.com) move up. When the market moves down, 95%+ of those cryptocurrencies move down. That never happens in any asset class. But since regulators aren’t really interested in regulating cryptocurrencies, no one is interested in doing anything. New cryptocurrencies are mostly a pump and dump operation. That would never happen in the bond or equities markets.

Student debt and the inefficiency of the system

Student debt in the US and the UK is soaring. The system of keeping students in education and out of the job market strategy is doing well but who is going to pay all that debt? Write off rates are already estimated 50% but the real number in about 15 years will be much higher unless salaries soar some 10% each year now onwards. Hyperinflation anyone?

The big pension shortfall

The UK currently has $6.2 trillion in underfunded government and public-sector employee pensions. For the US that amount is over $25 trillion. And again, those numbers are only increasing. How can the US or the UK possibly overcome those deficits? Hyperinflation (reducing the real value of those shortfalls) or big tax rises. Other options include cutting state pensions for an aging population or increasing the pension age to around 80 years by 2030. No easy way out.

Global debt and ongoing deficits

Global debt is only increasing. And many countries have increasing ongoing budget deficits, specially the US. And it is unlikely to have a budget surplus until about 2030 at the very earliest. And its currency has lost over 10% against major currencies over the last one year (the Dollar index – DXY is down over 10% over the last year). But interest rates are rising, and ratings agencies have its debt rated AAA. What could possibly go wrong?

Everything bubble?

Hedge funds have taken a beating in the last 2 years calling this the everything bubble and expecting it to burst. We agree 2000 was the equities (dot com) bubble. 2008 was the sub prime mortgage (i.e. real estate/property bubble).

This time is being called the everything bubble. It isn’t. It is simply the cheap money bubble. And we don’t think anyone really knows how it will end. The world is addicted to almost unlimited liquidity and to cheap money. Addictions take very long to overcome. This time it is truly different.

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