When will the bubble burst?

The Federal Reserve Board is printing money aggressively. It’s continuing to flood the world with money hoping to stabilize the US economy.

Even the best parties end when the bubbles go flat.

In the late 1960s, pop singer Connie Francis sang “Tiny bubbles/In the wine/Make me feel happy/Ah, they make me feel fine!”

Now, over 50 years later, I wonder if her lyrics apply to today’s ‘pop’ market?

Stock market speculation has become a craze so popular that brokerage firms have imposed margin restrictions on stocks like Blackberry (TSX—BB; NYSE—BB), GameStop (NYSE—GME) and AMC Entertainment (NYSE—AMC). Jerome Powell, the Chairman of the Federal Reserve Board is encouraging banks to lend aggressively, but America’s stock brokerage firms are unwilling to lend on stocks like these, because they have attracted so much speculation.

In his January 4 and 27 announcements, Mr. Powell reiterated his policy of printing money aggressively. The man in charge of the US Dollar, the reserve currency of the world’s banking system, is continuing to flood the world with money. He’s hoping this will stabilize his economy. But he has noticed (and we must also notice) that tiny bubbles are appearing in his wine glass.

These bubbles of speculation in US high tech stocks remind me of the end of ‘the dot-com craze’ in 2000. When that bubble burst, the NASDAQ index dropped over 80 per cent in the next 43 months. In those days there was no pandemic and the FED was not printing money. The facts and figures were different then, but human psychology was the same.

Investor Psychology

At tops, investor psychology is extremely optimistic: at bottoms, extremely pessimistic. The tiny bubbles of wild speculation in high tech stocks are showing us what ‘extreme optimism’ looks like.

What does it look like when a financial bubble bursts? Check the chart of Game Stop. It went from around $18 a share in early January to $483 on January 28, when certain brokerage firms stopped the game. They no longer accepted GME as collateral for margin loans. This popped the bubble and GME dropped to $112 that same day. The next day it ‘tested the high’ by bouncing up to $414. Now it has dropped into a down trend. On Feb. 8 it was trading at $60. This is a ‘fast-track’ example of the spike top pattern I wrote about in my June 2020 article. I am concerned that the American stock market will collapse in this ‘spike top’ pattern, but spread over a longer time. The game-stopper/bubble-popper for the overall market will be the FED, when it stops the money printing game.

Be assured that FED Chairman Powell knows all this and sees the same not-so-tiny bubbles we see. I hope you see them too. Powell is in charge of the printing press and US monetary policy. You are in charge of your family’s private monetary policy. And, those who buy investments and never sell . . . Lady Luck is in charge of their financial fortunes.

Let’s review the various financial games with a watchful eye out for the stoppers.

US stocks

The S&P500 index registered another new high in February, confirming that its long term up trend is still intact. The S&P 500’s long term pattern has set up an unprecedented seven-point reversal top, as I have explained in previous articles. The US Federal Reserve Board is printing money. This is causing inflation in a variety of segments of the economy, especially in the stock market. So far, the FED is managing the COVID-19 crisis well, attempting to stabilize the economy during the pandemic. So far, so good. We know with confidence that the investing public is wildly bullish and speculation is rampant. This type of bubbly exuberance occurs at tops, not at bottoms. Expect an up-to-down trend reversal in early 2021.

The Canadian stock market

The TSX is under-performing its American counterpart, but the basic chart pattern is almost the same. The new high registered this month only marginally exceeded the Feb. 20, 2020 high. The short-term trend is up, the long term is neutral.

US and Canadian long-term bonds/interest rates

“Almost free!” say the Mexican street vendors when they offer souvenirs to tourists. Now, Canadian and US central bankers are offering loans to banks at that same interest rate. Since the February-March 2020 stock market crash, long-term interest rates have been stable. The trend is neutral.

US dollar vs. the basket of non-US currencies

Since the February-March 2020 stock market crash, the US dollar has dropped about 10 per cent relative to ‘the basket’. It is now slightly higher than the old January 2018 low, but still well within the trading range it has held since January 2014. The long-term trend is neutral and the short-term trend is down, but weakening.

An interesting currency bet has been placed by one of the world’s richest men. On February 8, Elon Musk’s Tesla announced its purchase of $1.5 billion Bitcoin. Perhaps he sees it as an alternative to old fashioned US cash.

Canadian dollar vs. US dollar

The loonie has been in a short-term up trend since the financial crisis in winter 2020. That up trend is losing momentum. Canadian investors who like to keep a supply of US currency should buy it now. Why? Firstly, the US Dollar vs. the Basket is near support (see above) and may have bottomed in January. If the USD rises against the Basket, it will rise against the loonie. Secondly, oil prices (see below) touched a new recovery high in early February, but the loonie did not. This divergence is a warning of the likely end to the short-term up trend of our beloved loonie.

The loonie’s long-term trend has been neutral since early 2016.

Energy prices

Printing money causes inflation. Inflation has returned to the energy business. The short-term trend of oil prices is up—the long-term is neutral. The difficulty with analyzing this market is the importance and the unpredictability of the FED. When there’s too much inflation, or when the global pandemic ends, how will the FED’s ‘print-as-much-as-it-takes’ monetary strategy end? Who can predict what will happen after that? For now, the short-term trend is UP and the long-term trend is neutral.

Gold vs. US dollar

The current long-term uptrend of gold started in December 2015 and was confirmed in June 2019. In August 2020, a short-term down trend began. Investors should use this short-term down trend to add to their holdings of precious metals. For those who have no gold investments, buy now.

Many financial advisors recommend holding 10 per cent of your investments in ‘gold, for insurance’. I have never understood what that means. I understand gold, and I understand insurance, and the two do not go together. I am recommending gold as a low-risk asset class, currently in a short-term down trend within a long term up trend. It’s nothing to do with insurance.

The billionaires’ club

In these days of easy money, Elon Musk has chosen to buy a cryptocurrency rather than expand Tesla’s electric car factories. I wonder why. Another super-rich guy, Bill Gates, through his beloved Microsoft, has $132 billion in cash. Berkshire Hathaway, Apple and Alphabet also own over $100 billion in cash, and have done so for several years. I wonder how the super-rich feel about the FED printing money. Last year, Warren Buffet (Berkshire Hathaway) announced a significant holding in silver. Now Musk has taken on a bit of Bitcoin. Are these investments bets against the US dollar? What would happen if more of these giants decide to bet against the US dollar? They are a bit like us: they decide what percentage of their assets should be held in the different classes of investments. In the aftermath of the 2008-10 banking crisis, they decided to carry huge amounts of cash, even as the FED was printing money in QE I, II and III. I wonder why.

One problem the billionaires have that we don’t have, is liquidity. All their eggs are in one basket; a basket so big they can never liquidate their holdings. But they can liquidate cash. Cash can be moved from currency to currency and transferred from bank to bank. After Elon Musk’s purchase, we see that one can acquire $1.5 billion of Bitcoin. I wonder if one can dispose of $1.5 billion of Bitcoin as easily as one can acquire it.

Reality check

$1.5 billion is only around one per cent of Elon Musk’s assets.

Ken Norquay, CMT, is the author of the book Beyond The Bull, which discusses the impact of your personality on your long-term investments: behavioural finance.

This is an edited version of an article that was originally published for subscribers in the February 2021, Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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