"A timebomb waiting to go off"

 

That's how British economist Jeremy Warner describes the US stock market at present.

According to the UBS Investment Returns Yearbook, US equities today account for more than 60pc of the value of global equities as a whole, up from around 40pc 15 years ago.

Yet in nominal terms, US GDP is just 26pc of the global total, and even less at around 15pc in purchasing parity terms.

The mismatch between equity valuations on the one hand and actual economic heft on the other could scarcely be more striking. It also looks increasingly hard to justify.

. . .

Yet impressive though this phenomenon may be, it is also indicative of something much more worrying: a giant, all-consuming investment bubble at the heart of the global economy.

Almost everyone wants a part of Silicon Valley’s investment boom. In hoovering up an ever-greater proportion of the world’s supply of available capital, it threatens a frenzied and devastating end to America’s 15-year-long bull market.

. . .

If everybody else is getting rich from America’s stock market boom, the temptation to join in becomes almost irresistible.

I’ve been following stock markets for longer than I care to remember, and though we can all claim to have had the occasional success in spotting the turning points, the big lesson is that prediction is a mug’s game. Hardly anyone manages it consistently.

Here goes, anyway. The telltale signs of euphoria and over-exuberance – and therefore of capital misallocation bound eventually to culminate in loss – are today everywhere to be seen.

There's more at the link.

The inexplicable thing, to me at any rate, is that there are so many hair-trigger moments baked into our current economic cake that any one of them could bring down the entire house of cards, virtually overnight.  Think about it:

• Russia launches massive retaliation (economic and possibly military) against NATO states which are supporting Ukraine?
• China invades Taiwan?
• President Trump activates the US armed forces to tackle the drug cartels in Mexico, Venezuela and elsewhere?
• A new Middle East war severs oil supply routes from the Persian Gulf to the Indo-Pacific region and China?
• The Internet is shut down due to many incidents of sabotage, all of which may be suspected as coming from Russia, but which can't be proved as such in the initial stages?

All these things have already happened, or precursors to them have happened, on a smaller scale.  They could ramp up overnight, leading to major disruptions in geopolitics and world economics . . . yet we're all behaving as if they aren't factors of importance at all.

Add to them major internal political disruptions in all the major nations involved (USA, Britain, France, Germany, and so on) where there is no national unity whatsoever on how to deal with the problems facing each country, or all of them together.  Some are calling for "Governments of National Unity", but when there is no national unity, that's a wee bit tricky to achieve.

And through all this, business and commerce carry on blithely earning and spending money as if there's no tomorrow, no interruption possible.  We're living in a house of cards, and utterly ignoring that reality all around us.

Therefore, dear readers, I can only suggest that we focus on the absolute basic needs of our lives and cover as many of those bases as we possibly can.

• Build and maintain a reserve of food and emergency supplies (toilet paper, light bulbs, candles, fuel, essential medications, etc.) to last as long as possible.  My gut feel is that a minimum emergency stash should be able to take care of one's household for thirty days, and three months is even better.  I'm not sure whether six months to a year is as important, because if the crisis (whatever it may be) goes on that long, others will come to our door intent on stealing what we've got, bringing with them a whole new set of problems.
• Know how to defend your home, your loved ones, and your emergency supplies, and have an adequate supply of the tools and equipment needed to do so, and don't hesitate to do so if this becomes necessary.
• Build up a local network of friends and associates who can help each other make it through hard times.  I've been forcibly reminded of this during my current post-surgery recovery period.  Right now my physical condition will almost completely preclude me from defending or working for my family and loved ones.  Do I have other friends I can rely upon to "step into the gap" and do it for me until I'm on my feet again?  I'd better have!

Get as many as possible of these building blocks in place before worrying about what the stock market is doing.  Only when you've achieved that should you worry about things you can't control.

Just my $0.02 worth . . .

Peter