The tech bust is here

Two investing legends – Ray Dalio and Jeremy Grantham – have recently put different cases for why parts of the technology component of stock markets are in a bubble vulnerable to steep correction. Grantham argued that the extreme valuations in growth stocks and the pervasiveness of crazy behaviour were dead giveaways that a bust was imminet. Dalio argues that there are parts of bubble-like frothiness in growth.

To my mind, both are right. Moreover, we are now being presented with a classic bubble-popping pin in rising interest rates. Even if short-dated rates are still anchored by central banks, yields of longer duration are flying and that is always an environment in which “growth” stocks will struggle versus “value” stocks as investors look to prioritise reliable earnings in reference to higher yields over possible future profits.

The second factor in this bust is the particular impacts of the pandemic. The rise of “work from home” triggered a huge capex cycle from households as they built-out new office spaces worldwide with technology products. As economies reopen, that cycle will diminish.

So, where is the tech bust hitting? Daily Shot offers some terrific charts. Value is the new black as growth tumbles:

Same for small cap:

MOMO makes it worse:

No earnings, no joy:

Sun setting on sun:

Real assets booming:

High touch reopening booming:

Defensive sinking:

Banks love the steepening curve:

Prices for value have room to rise as growth falls:

 

But the ERP has bottomed and that is a problem for the permanently high plateau in stocks!

I expect this to continue for several months at least as headline US inflation surges on base effects. But I am still skeptical that it gets much past mid-year. There are various reasons:

  • US economic outperformance on vaccine, fiscal and monetary policy will support the USD and cap commodity prices.
  • Once oil runs above $70 both OPEC and shale will rip back in and sink the price over the subsequent year so base effects will flip.
  • China begins to slow in H2 and much more in 2022, also hurting commodity inflation.
  • Supply side bottlenecks clear over the next year as the global economy reopens and the global inventory rebuild passes.

All of these set 2022 up as a distinctly deflationary year. That said, I can see more enduring inflation in the US if the Biden Administration gets its excellent minimum wage increase proposal up, alongside infrastructure spending. But, even then, that would lift the USD versus all comers and still snuff out commodity inflation as China slows.

In short, this inflation burst and tech rout may be a buying opportunity for growth before long, most notably for those dimensions of tech that look more like quality/value than traditional growth, such as the better components of FAANG.

David Llewellyn-Smith

Comments

  1. Goldstandard1MEMBER

    The tech bust is here, so buy the dip…… not sure about this. A bust is not a dip, same with residential property….people felt like they ‘bought the dip’ but is it a dip over a 2, 5 or 10 year period? That is the question.

    • A tween went viral about Nikola, Tesla, AirBnB, Amazon etc all having either zero assets, zero profits or zero business yet all worth hundreds of billions – its just been purely hot Fed printer goes BRRRRRR! money looking for easy returns.

      The reality is that this hot money will now look for a realistic investment and that will be commodities.

      So who here wants to re-think their position on inflation when trillions of dollars of hot money are flooding into raw food materials like hops, rice, wheat, milk, beef ?

      Imagine wallstreetbets bidding up the price of milk to a couple of hundred dollars a litre.

      No worries – printer goes brrrrrrrrr!!!!!

      Hold on. Don’t sell the peak, buy the dip – just for the lols.

  2. Thinking of how to position investment wise – appreciate any comments.
    If the tech bust has further room to run then shorting the FAANGs (or NASDAQ100 as a proxy) seems logical.
    On the long side – I’m thinking the FTSE100 (pharma, oil, mining) or even our ASX200 (mining, banks)?
    Short NDX Long FTSE100 seems like the logical pair trade, no?

  3. And then the Jay “I will not be like an elephant running through the china shop” Powell steps out into the street in his elephant suit.
    Surely he has mild dementia…………. he has had 100’s of chances to have a calming influence on markets letting them deflate or rise in a less panicked or frenzied manner.

  4. Last year in 2020, America printed a crap tonne of money. I even remember a nice speech by Powell saying, ” The ability for QE to fix the markets is at its limits “.

    Suddenly, its 2021, money printing is all the rage and growth growth growth is here. Bonds are rising and everyones bracing themselves to make millions.

    Investings mostly about Timing and I guess, yeah, a lot of people are picking the right time. Its probably where I lack it because I dont like taking risks. We live in a world where there’s plenty of people who will happily take your money and only a few who give it. Riding the money printing is all we are pretty much doing on any given day. I make jokes about it because it really is stupid.

    To be fair, I dont trust these markets. I dont think we live in a world thats stable or solid anymore. The mere fact Gold is moving against Silver and Platinum suggests we are going in six different directions. A lot of instability and uncertainty out there. I also have a bad feeling about Stocks. People are saying in a year, half Australias Insolvent Business’s are going to collapse and for reasons that baffle me, Stocks are just fine. How is it any different in America?

    I monitor my trades on a daily basis. Im not saying I disagree with MB, as I know they are smarter traders then me. Trading is about Time and I guess when it comes to that, MB’s probably more right then me. I just dont feel very safe in these markets. There’s just a feeling in the air that things arent right. I believe America ( and the world ) will unleash the money printers but I just dont believe its going to translate into all that much growth.

    Whats wrong with this picture?

    I think I’ll monitor my trades on a daily basis, see whats happening and stick with Silver for now. I guess Im saying, ” I dont know what I dont know “. I have a tendency to want to stay safe and in commodities over any other asset class. People say commodities arent safe, well yeah… so what is? Stocks? Real Estate? Bonds?

    As far as Im concerned, the worlds turned into one giant great big Fraud and Im not even sure you can trust Australias Stock Data anymore. I’ll think about it but at this time, Im holding on Silver until there’s actually a reason to do something.

    MB may be right. A commodities shock might be on its way. I dunno… but I just dont have trust in the system anymore. Its the sort of thing I monitor day by day.

    • boomengineeringMEMBER

      Unfortunately you don’t make money without risk. In my case I was severely burnt by the 89 crash and that memory has been a hindrance. Its easy to jump over a fire if you’ve never been burnt.
      Seems to me there will be no safe haven for what’s coming. That’s why its probably been prudent of the MBers to swap their cash for RE. At least they get to use it as a roof for their family no matter the fluctuation in price.

      • Yeah, mate. I agree with you totally. The money fountains are starting to dry up and is being replaced with risk. Worse, your beginning to see Fraud and all kinds of stuff happening.

        The Boomers are a Social Force in American / Australian Society. Economic growth is deteriorating rapidly. The average IQ of your Market these days isnt very high. We seem to be in the, ” Yeah… we have a growth problem so lets throw money and migration at it ” phase. At some point, I wouldnt be surprised to see the rise of Fraud, Stocks collapsing and running away with peoples money and all kinds of systemic failures. I mean, why not? What have these people got to lose. While a lot of people are throwing there money at these ‘Investments’, Im taking long walks along the beach and asking myself, ” How safe is all of this stuff? “.

        The other thing, thanks to the wonderous Leith ( that guys a frickin’ genius ), I’ve begun to think just how important a Labor Force is to your Society. Sure, we always talk about Economics and follow the money flows but rarely do you ever hear people talking about the Labor Force. As someone who’s run Business’s myself, I know a little about Labor and Staff. You cant just lose your top Enterpreneur, hand over the business and expect the new kid to just pick it up from where you left off. Sure, the new kid might have money but in most cases, they have sh*tall brains. Labor is a skillset, a motivation, a passion and life isnt as simple as ” I think I’ll just sell my business today “. When you have 17 years of an oncoming Labor Crisis coming for Australia and tonnes of Business’s built by boomers on the cusp of them all walking out, you’ve got yourself a very risky situation. Sure, thats why Boards are invented… but someones got to have the skill to run those companys. Honestly, most of these Boards with Shareholders on them are completely useless. Most wouldnt know a business if it bit them in the ass. They are great share investors but running a business is a totally different game. Just look at that Packer guy who got his Dads fortunes and now its all falling apart. Not only is his skillset and passion not the same as his Dads but market conditions because of the Aging Demographic are also in a state of flux. He’s run his Dads business into the ground because you cant sell a Business. Without the key people and right market conditions, a business is unlikely to thrive.

        Its a deck of cards and I think all people see is Yield. They dont see the Risk. I chat with Traders and most of them are just kids. Its all just a big Computer Game. Nobodys thinking about the future. Nobodys thinking, ” But what if all this goes wrong? “.

        The other thing that concerns me is people need money to survive. When your trading markets and you’ve got the added pressures of needing money to survive on your shoulders, your making very rash decisions. I guess thats where people like me have the advantage over hedge fund investors. I can just walk away for a month without having a bunch of angry people banging on my door saying, ” Where’s all the profits? “. The only person I have to keep happy is myself. Sure, I may not be making as much money as the whizz kid millionaires who just bought Bitcoins or $20 and sold it for $50k , but at least I have my money… and I havent lost it. You always hear who has made money but you never hear about those who have lost it. News always fluffs up ” too good to be true ” stories but the reality, is someones had to lose.

        The fact almost everyone has become a Trader worrys me greatly. It suggests Covid has wiped us out, Aging Demographics making it worse, Government Corruption is an absolute disgrace and at some point ( if not already ), Social Communitys will just deteriorate.

        The one thing Im beginning to learn about this Economics game is 99% are nothing more then frauds and used car salesman ( MB excepted ). We are talking about ” Life is about Living ” and just about every second economist has some kind of agenda. The gold dealers is one example. Covid wiped out the jobs and without the right Labor Force ( intergenerational welfare is killing us ), I suspect regrowing that is going to be pointless.

        Yeah… sorry for the rant… but its been on my mind all morning… I just dont think things are as safe as people believe it is. I think we’re in a high risk environment and everyone seems happy because… Money Printing. I just dont think people adapt as quickly as we can print money out of a printing press. I think we’ve managed our Labor Force very badly and Im not as convinced that US / Australia will magically regrow its business sector overnight. It takes years to grow a business and I dont see it happening overnight.

        Rant end.

        • ” I’ve begun to think just how important a Labor Force is to your Society. Sure, we always talk about Economics and follow the money flows but rarely do you ever hear people talking about the Labor Force.”

          I guess there are a few reasons why. If you give a sh!te about equality and that people aren’t here for the economy, the economy is here for society, then I guess you would automatically see the benefit of your labour force. If you don’t and you only think of what you, yourself can gain, you aren’t going to give a sh!te about society and how it will fare in the future.

          My experience is most (those with the money and especially those born into it) only care about themselves and will self-justify their stance.

          • The Traveling Wilbur

            +1. Yep. One thing surprises me though – you managed to read the comment you replied to all the way to the end. At least I tried I suppose. Twice. Unsuccessfully.

  5. Quarantine Madness

    Tech stocks will be crushed if we get inflation.

    I think the next 12 months are about inflation, infrastructure and commodities. I don’t see China sleepwalking into an economic crisis.

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