Beware the bear rally

I hope you enjoyed the bank holiday weekend and the two-part energy special.

Yesterday I recorded the final piece of a truly unique project on that very topic. James Allen, who has taught me literally (literally!) everything I know about the energy industry and investing in the energy transition, has spent almost six months putting together an online summit for investors interested in the biggest and most powerful trend in the world right now.

I’ve worked closely with him for over a year now and can’t tell you how excited I am about it. Watch this space.

Today though, we’ve got other things to worry about.

I don’t even know where to start to be honest.

A week or two ago I wrote that it was possible the coronavirus narrative had been so wholesomely swallowed by investors that a flattening of the curve (which I hesitantly identified that same day) would send the markets shooting up.

That with Jerome Powell so dreadfully and blatantly addicted to stockmarket gains, corona-optimism, plus central banks charging headfirst into the melee, and the upward move could be powerful. I said I wouldn’t be happy if I was right, and I’m not.

I’ve never been more distressed by the value of my investments going up, to be honest.

I’m clinging on to my gold, silver and mining stocks like they’re the vaccine (not the rushed one Bill Gates is so desperate to force down our throats, but one that works).

It almost feels like investing is dead. For the first time in my life I am questioning the system that we have built for ourselves in the West.

Where executives are taking home 974% more relative to ordinary staff than a few decades ago. Where crappy, shameful managements who borrowed heavily and enriched themselves through buybacks are being rewarded with bailouts.

Where prudent investors and sensible companies don’t get their reward when the tough times arrive, because the Federal Reserve’s rule is no longer too big to fail, but no one can fail.

Where the American president is tweeting his praise and thanks to Saudi Arabia and Russia.

Where China has been put on the UN’s Commission on Human Rights.

Where the Fed is distorting and destroying the free market by buying financial assets directly, using a Wall St intermediary.

Where creative destruction, progress and feedback are suppressed.

Where stocks are back at August or October levels in the US. The data thieves (FAANGS) are actually up this year, reaching all-time highs all over again because they’re planning to lay claim to our health and physical data too, using it to learn where we are at all times for our own good. Yeah, right.

Where World Health Organisation officials can’t even acknowledge the existence of Taiwan (which has done brilliantly), but praise China for its containment of the virus.

But stocks are up, so who cares. Right Jay?

The best defence is a good offence

There are two competing forces in investing.

Risk of financial loss, and risk of missing out on financial gain.

These two competing forces drive every decision we make.

That’s why timing and aggression often matter more than skill.

It didn’t matter what you bought two or three weeks ago.

But we’re back at much higher levels already. Markets are moving fast, and we must work hard to keep up. Portfolios are starting to look rosy again, especially if you followed the advice to get into gold, precious metals and miners a month or two ago.

I honestly would be clinging to those safe-haven, inflation-protected assets like nothing else right now. Their march upward may not be straight, as I fear volatility may surge once more before this is done, but they will perform their function as truly as Jay Powell will perform his.

At the very least they will offer protection against the bull case being wrong, and they’ll help you sleep at night too.

The worst is not over for me. Not by a million miles. If the lows had been met with patience, much lower volatility and a flatter period for markets, I might’ve stayed optimistic, but this ridiculous rebound feels like an absurdity, and ought to falter soon.

Asian countries are starting to see signs of a second wave of infections, and of recovered patients re-contracting the virus. Earnings season is upon us, and oil prices are back to their crisis lows.

Oil prices haven’t been supported by the historic, record supply cuts of OPEC and all global oil-producing nations.

That means that oil investors are focusing on demand. With that in mind, here is the International Energy Agency’s latest (published this morning) prediction of demand for 2020. April is due to see a 29-million-barrel decline. That’s enormous. Ridiculous.

If global economic demand is that low, how on earth are stocks back at summer 2019 levels in some parts of the world? Mania. Fed madness. False hope, I fear.

Source: IEA chief Fatih Birol, on Twitter

So where are we now?

Well, the Dow Jones fell just over 35% and fought back 28%, leaving it 18% below its peak. (I’ve tried to add in percentage arrows peak-to-trough, trough-to-current and peak-to-current, left to right if you can see them!)

Source: Koyfin

That doesn’t feel like much, all things considered.

Three weeks ago, I felt investors were fools for only focusing on the bad news, without considering the possibility for good.

Now, already, I feel the opposite. Everything is good news. Stimulus, flattening of the curve, peace among oil giants. Best stockmarket ever, great gains to be made, tweets the oaf Donald. A contrarian indicator if ever there was one.

And yet in reality the picture seems quite different to me. Predictions of economic depression will soon become reality, enshrined in corporate earnings reports the world over. But markets are not reflecting that.

The price of oil is telling us that the focus is on demand, not supply. Record supply cuts have sent oil back below $20, despite Trump’s baffling and moronic proclamations of personal victory. The forecast loss of demand is jarring, but markets do not reflect that either.

Inflation is also terrible for returns, and one part of the market is reflecting inflationary fears: the gold price. It is at record highs in most currencies except the dollar, where it is heading that way. But stockmarkets do not reflect that either.

Source: Man Group

For my money, the equity market is the village idiot right now.

Oil investors are recognising the economic damage (terrible for stocks), and gold investors are recognising the rising inflationary risk from central banking lunacy (also terrible for stocks).

And the most frustrating thing of all is that because of the attitude of the Fed in the US, the most overvalued market in the world could somehow also be the safest. Can that be possible?

It’s frustrating to see things that seem wrong but are right. To see the world turned upside down.

If you’re like me, you’ll be sticking to the dreamy safe-haven inflation-protected assets. And investing in a few equities too, with a healthy dose of scepticism that central banks will drag equity markets up. That means investing only in long-term trends and companies you truly believe in, for the long run. Lots of gold, silver, and miners, with a side of clean tech or renewable energy growth stocks for me.

For other ideas, my colleague Nick Hubble ran a live online seminar/webinar this afternoon, and for those of you who missed it, and those after some new ideas for these new times, Nick is your man. You can watch it here.

It’s Nassim Taleb’s barbell strategy in action. Lots of antifragile assets which survive or thrive in a shock, with a cheeky slice of risk in case the Fed wins out after all.

And remember, be greedy when others are fearful, but also be fearful when others are greedy.

When the time comes to sell, you won’t want to.

These are mantras which help us to remember the cyclical nature of stockmarkets, and while I may be original in saying so, sentiment feels bafflingly positive right now. Perhaps investors confined to their homes have become immune to the realities of the outside world.

I urge you not to make the same mistake.

See you on Friday, and keep well until then.

Yours sincerely,

Kit Winder
Editor, UK Uncensored

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