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THE TOP is coming


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Since last August, I've been forming a thesis of a repeat of the dot com bubble top and have been on the look out for that in 2021. I've been fully long until last month. Right now there are many signs showing that a major multi year top is forming. But it is still unclear if the top is going to be in now, or is it going to have a mini crash in the last part of August, then go up one more time into the end of the year to fool everyone, before it forms THE TOP by December 2021.

 

FED is going to stop QE soon. They said they are on track to achieve their goals by December for sure, but may be earlier. That's very concerning. The market has been rising on heroin (QE) and brought high valuations to sky high valuations. Valuation does not matter when the central bank is printing like hell (See the attached picture for venezuela stock market index). But it will matter when monetary policy starts to tighten. 

 

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Edited by muscleman
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The major issue is that this is not some fringe theory. People have been talking about this for years. IIRC there was a period of tightening under Trump and the market didnt do anything crazy. So the 2 main things in relation to this...1)why does the Fed do this at a pace that it knows will destroy the markets, 2) Do you really think Democrats will allow this to happen into mid terms? It seems to be in everyones interest to keep floating things or allow the status quo. 

Edited by Gregmal
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53 minutes ago, Gregmal said:

The major issue is that this is not some fringe theory. People have been talking about this for years. IIRC there was a period of tightening under Trump and the market didnt do anything crazy. So the 2 main things in relation to this...1)why does the Fed do this at a pace that it knows will destroy the markets, 2) Do you really think Democrats will allow this to happen into mid terms? It seems to be in everyones interest to keep floating things or allow the status quo. 

 

Trump period was an exception because he passed the massive tax stimulus and brought in a lot of overseas money back to the US. That acted like the quasi "QE". Yet in the end of 2018 when rates started to go up, the market went down quite a bit.

 

Regarding 2, yes I think they will allow it to happen. No one can make the market go up forever. It is like a string that has to come back down sooner to later, and it is far better to have it come down during midterm, and go back up in 2024, than to keep pushing it up through midterm and it will be very hard to keep pushing it during the more critical 2024. My other theory (not sure if I will get banned saying this), is that the Democrats have mastered the winning formula last November through massive mail in votes + no voter id checks, which is why they pushed to pass that federal law this year to allow massive mail in voting + no voter id forever. (Never mind that they also want you to show your vaccine passport.) So they don't care about the market anymore. They will keep winning anyway.

 

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Posted (edited)
16 minutes ago, Spekulatius said:

I wish this were just a dot com bubble. We now have an everything bubble, due to low interest rates. The lower interest rates for longer changes everything.

Rates should be going up soon. You can't have a government with the most reckless unproductive spending, (How many more trillion dollar bills will we see?) and still have low rates.

Edited by muscleman
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The sooner you realize that you can't reliably predict the future of interest rates and stock indices the better off you will be.  The S&P 500 hit an all time high today.  It's a bull market until it isn't anymore.  We could go parabolic on the upside or get a headline tomorrow about a new covid variant that kills people and evades vaccines.  A cyber attack could shut down huge sections of the economy tomorrow.  You can't predict the future so why try.

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Posted (edited)
39 minutes ago, gfp said:

The sooner you realize that you can't reliably predict the future of interest rates and stock indices the better off you will be.  The S&P 500 hit an all time high today.  It's a bull market until it isn't anymore.  We could go parabolic on the upside or get a headline tomorrow about a new covid variant that kills people and evades vaccines.  A cyber attack could shut down huge sections of the economy tomorrow.  You can't predict the future so why try.

It is an educated guess. It is just like, when I look at the sky and there are tons of dark clouds and I predict a rain.

You seem to be confused why the market goes up when covid is getting worse. In the covid thread in this board, I've explained that last year clearly and said once we get another wave of infections climbing, that's bullish for the market.

Edited by muscleman
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10 minutes ago, John Hjorth said:

I just have to give gfp a +1 here.

 

Agree! 

 

Look at everyone who has tried to predict the markets since the internet bubble.  They may have gotten the 1999 bubble right, and then the 2008 housing bubble correct, but everything else wrong since then...or they may have gotten those two wrong, but were correct on the current bull market.  No one has been 100% right predicting markets since 1999, and if they were lucky to get a couple right, they got one dead wrong!  I haven't seen one investment guru, analyst, money manager, poster, economist...anyone...get it correct since 1999. 

 

That being said, my cash hoard is building!  🙂  Cheers!

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1 hour ago, muscleman said:

Rates should be going up soon. You can't have a government with the most reckless unproductive spending, (How many more trillion dollar bills will we see?) and still have low rates.

I disagree. We've done it for two decades. So has Europe. So has Japan. Is it sustainable? No. Will it end? Yes.

 

But we've successfully done it for 20-years. What's another 3-5? 

 

If there is a sovereign debt crisis, it's likely to hit others before us. And since currency values are relative, who do you think the relative beneficiary of that crisis would be? The USD and our interest rates. 

 

Now, don't get me wrong, you'd likely do better off with gold in that scenario, but I don't think the USD is going to get hit by a currency/rate crisis - at least not without it being telegraphed months in advance. 

 

That being said, I'm still VERY cautious of equity exposure. Everything seems expensive. Everything seems distorted. The slightest rise in rates causes chaos (as 2018 demonstrated) and I don't know where that chaos will hit first.

 

It would not shock me to see a continuation of the rolling bear markets that we saw from 2010 onwards where at any given time some sector is down 20-50%.  I'd rather wait to deploy it in those rolling bear markets and swing trade rates with my cash position until then. 

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19 minutes ago, Parsad said:

 

Agree! 

 

Look at everyone who has tried to predict the markets since the internet bubble.  They may have gotten the 1999 bubble right, and then the 2008 housing bubble correct, but everything else wrong since then...or they may have gotten those two wrong, but were correct on the current bull market.  No one has been 100% right predicting markets since 1999, and if they were lucky to get a couple right, they got one dead wrong!  I haven't seen one investment guru, analyst, money manager, poster, economist...anyone...get it correct since 1999. 

 

That being said, my cash hoard is building!  🙂  Cheers!

 

Investing is a probabilty game. No one is able to be correct 100% of the time. And if someone builds his system to rely on 100% of correctness, he will fail big some day, sooner or later. I am a big fan of George Soros and have read his books over and over. I like his approach to form a thesis as the road map, and enter his positions according to what he actually sees is happening, not what he thinks is happening. Of course this is just my guess of how he operates after reading his books and interviews.

 

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6 minutes ago, TwoCitiesCapital said:

I disagree. We've done it for two decades. So has Europe. So has Japan. Is it sustainable? No. Will it end? Yes.

 

But we've successfully done it for 20-years. What's another 3-5? 

 

If there is a sovereign debt crisis, it's likely to hit others before us. And since currency values are relative, who do you think the relative beneficiary of that crisis would be? The USD and our interest rates. 

 

Now, don't get me wrong, you'd likely do better off with gold in that scenario, but I don't think the USD is going to get hit by a currency/rate crisis - at least not without it being telegraphed months in advance. 

 

That being said, I'm still VERY cautious of equity exposure. Everything seems expensive. Everything seems distorted. The slightest rise in rates causes chaos (as 2018 demonstrated) and I don't know where that chaos will hit first.

 

It would not shock me to see a continuation of the rolling bear markets that we saw from 2010 onwards where at any given time some sector is down 20-50%.  I'd rather wait to deploy it in those rolling bear markets and swing trade rates with my cash position until then. 

 

Still VERY cautious of equity exposure? Mind explaining when did you first start to get cautious of equity exposure? 

 

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1 hour ago, muscleman said:

Rates should be going up soon. You can't have a government with the most reckless unproductive spending, (How many more trillion dollar bills will we see?) and still have low rates.

 

Yes, we can have both. MMT something...

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56 minutes ago, muscleman said:

 

Still VERY cautious of equity exposure? Mind explaining when did you first start to get cautious of equity exposure? 

 

 

Late 2019. Have been ~50% cash/intermediate bonds since mid-to-late 2019. I still haven't bought into the idea that this is a sustainable recovery, but my caution hasn't previously been rewarded so am staying half invested just in case. 

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I dunno. I think, generally speaking, I have been pretty fortunate(if not very good) at timing stocks and even the market from time to time. And even still, think its a horribly skewed proposition that requires being almost exactly right at too many crucial forks in the road. So as part of my evolution process as an investor, I completely stopped doing the go to cash thing. There's just too much that can go wrong and cash is a total waste of time. Instead, Ive found that utilizing margin to buy puts or put on high leverage downside protecting trades is the best approach. Shorting can work too but theres usually not enough leverage since you need to size things small there. Worst case scenario your hedges go bust but your longs still clean up.

 

On the long side, I almost NEVER base a long on a macro call. I just buy shit I like no different than buying a tangible piece of real estate. If the market goes up, down, or sideways, I still like my house in the Keys the same. I try to look at my equity holdings the same way. But you have to condition yourself to think that way and its not always easy. But its far better IMO than playing red light, green light with risk on/off with the backdrop being predicated on "fighting the Fed" which is a total losers game. 

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10 minutes ago, LounginMKL said:

 

I thought it was a great letter, but I thought the conclusion was very odd. Marks laid out the two sides, one with little reward and the other will possibly large consequences. He then said staying fully invested or along those lines was reasonable, which to me was odd (I think he's been spending too much time with his Growth At Any Price son). If I was making a market bet which I'm not (although I do hold a fair amount of cash - I know I know cash is trash), I'd wager on conservatism. My reason for holding cash is that I don't have many good ideas. I tried buying puts a few times and am done with that game (I got lucky in March of last year and thought I was good at buying puts). 

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Central governments are running a grand experiment on a massive scale that has never been tried before. I have largely given up trying to understand how it is all going to work out (and i normally love macro stuff). Negative interest rates? Massive amounts of debt? Japan the past 30 years? Wicked crazy 🙂 

 

From an investing perspective my big learning from the past 10 years is when the Fed opens the QE taps and drops interest rates financial assets boom. Especially stocks. And with interest rates so low US housing is now joining the party and pounding the drinks back (Canadian housing never left the party). 
 

My guess is this will become a permanent feature (QE and low interest rates). The Fed cannot end any of the various (larger) measures they currently have in place. As soon as they try financial markets will throw a fit. And because of the wealth effect the Fed will quickly reverse course (if they try) - they will have no choice. 
 

Deflation is coming (looking out about 2 years). I think Lacy Hunt of Hoisington has the best model to explain what is going on right now (lots of recent you-tube videos). We are going to get lots of head fakes (imflation etc) the next 12-18 months as global economies move to the post-covid new normal. But all the secular trends that were driving deflationary forces pre 2000 are still in place: technology, too much debt, slowing in population growth etc. The Fed will fold its tent at the first sign of trouble as they are deathly afraid of deflationary forces reasserting their grip. 
 

What to do? I am watching the Fed. I want to have a nice cash balance when they start to TRY to change course.
 

For now I am happy to remain largely invested. I think there are some nice opportunities out there: Fairfax, Fairfax India, Seaspan, Suncor to name a few that look especially cheap right now.

 

As Druckenmiller says: be inquisitive and be open minded… good luck 🙂 

 

 

 

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2 hours ago, Gregmal said:

I dunno. I think, generally speaking, I have been pretty fortunate(if not very good) at timing stocks and even the market from time to time. And even still, think its a horribly skewed proposition that requires being almost exactly right at too many crucial forks in the road. So as part of my evolution process as an investor, I completely stopped doing the go to cash thing. There's just too much that can go wrong and cash is a total waste of time. Instead, Ive found that utilizing margin to buy puts or put on high leverage downside protecting trades is the best approach. Shorting can work too but theres usually not enough leverage since you need to size things small there. Worst case scenario your hedges go bust but your longs still clean up.

 

On the long side, I almost NEVER base a long on a macro call. I just buy shit I like no different than buying a tangible piece of real estate. If the market goes up, down, or sideways, I still like my house in the Keys the same. I try to look at my equity holdings the same way. But you have to condition yourself to think that way and its not always easy. But its far better IMO than playing red light, green light with risk on/off with the backdrop being predicated on "fighting the Fed" which is a total losers game. 

 

Agreed. Unfortunately (or fortunately for me) I started accumulating and saving assets early and planned tax efficiently. Thus - 90+% of my invested assets in the "markets" are through tax free and tax deferred entities that I've been maxing out for the past 10-12 years. IRAs, HSAs, and 401ks don't currently allow me access to margin or shorting (on a leveraged basis). So I do most of hedging with cash, put spreads, and things I'd expect to have some negative correlation with equities. But as well saw in 2020, gold tanked, bonds were erratic, non-government bonds and munis tanked, and puts got expensive before the real crash set in. So cash really was best. 

 

Any taxable savings I have has been put into my home equity, my crypto assets, and debt reduction. 

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...has been described as "impenetrably ambiguous: either the answer is so obvious it is right in your face, or the answer is as intangible as the wind"

 

 

 

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E8KA8RpVoAcWvBB?format=jpg&name=large

https://twitter.com/EugeneNg_VCap/status/1423842211003736068/

 

I have no idea if the top is coming, I guess it depends on what's happening in the world right now in this moment. Some hedge fund might blow up at any moment taking the whole market down with it. The FED stopping QE will be one thing to watch or anticipate, but I'm not sure how to play that. I thought Covid-19 would be a bad thing for the stock market, but went all-in anyway (stonks seemed cheap, blood on the streets, etc.). Without QE that would probably have been the wrong thing to do...

 

Right now I'm more worried about how to stay invested in great companies over 10-30 years, including many market crashes. I'm also wondering where the bottom will be in Chinese tech. I will probably miss the market top because of this and not seeing what's in front of me.

 

You have to have a model of the world, but you also have to constantly update it. People who have never read Keynes or Graham might not have a model, but might be able to see the big long-term trends anyway (social media & internet). However, people with good models based on what Keynes or Benjamin Graham wrote or said a long time ago, might never see what's in front their eyes (e.g. software eating the world). All models stop working at some point, or only reflect the time during which those models where created. Looking at Li Lu's public portfolio (almost exclusively tech) I'm sure he has updated his model to reflect reality.


Anyway, thanks @muscleman for helping me update my model. I will try to increase the weighting of FED's QE in my model.

 

I will also update the weighting of cryptocurrencies. I already missed the cryptocurrency thing because I didn't include it in my model, because "who likes ponzi schemes?". This crypto thing will be a long-term trend, so it's probably not too late to go "full retard" on crypto later.

 

One thing I think people still don't see, is how big the network effects of social media are and how fast you can go from zero to 100. This is one of the reasons I was thinking of buying $PDD against my instincts.

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don't forget the back end of the magic trick. Let's say rates stay low and markets boom. They will raise cap gains tax to say 50%. That will slow it down without impacting Main street, but definitely will impact the rich. smaller investors have tax sheltered accounts. the rich will be paying if they want to sell anything. but then there will also be higher cost of living for everyone, less services from the debt. so in a way we will pay and that 1 or 10 million nest egg might be as little as a 100k nest egg today. 

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You aren't going to correctly predict the market. If you could, you wouldn't be poor - and posting on this board!

 

For the next few months, the 4th wave will very likely keep a lid on economic growth. As the vaxxed remain asymptomatic and approach 3 of every 4 people in the G7, the shrinking pool of unvaxxed are contracting in increasing numbers. Vaxxing continues to be resisted, and it's unlikely to change anytime soon. Most would expect rapidly rising covid numbers to remain a real drag on economic activity for quite some time.

 

However markets are where they are today, because THIS time around the G7 economies are NOT locking down in response to Covid. Growth largely depends upon how rapidly the unvaxxed either vax, contract the Delta variant, or croak; same dynamic whether in a G7, or some other country - difference is the number of dead. People gotta live, and they gotta work to do it; so buy the consumables

 

History suggests we can be pretty sure we're entering a period of unprecedented, unpredictable change. It also suggests that the popular (market) views of the time are primarily denial, and that the winners were those who thought for themselves. The same thing repeated itself in the US, with the collapse of the housing market and the start of the Great Financial Crises. An immensely profitable period for some of us 😀

 

This thread evidences the market fear ... tell me what I should do! Clearly, the game beaters have been doing their jobs well! 

Now it's just a matter of driving critters through the traps; most would prefer not to be the critter.

 

Opportunity is knocking.

 

SD

  

 

Edited by SharperDingaan
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21 hours ago, muscleman said:

Rates should be going up soon. You can't have a government with the most reckless unproductive spending, (How many more trillion dollar bills will we see?) and still have low rates.

Macro - probably spending more than 5 minutes a year is detrimental to your mental health and your portfolio health.  Are we done now?

 

Reframing to think along the lines of 'is any single security that I hold overvalued relative to its future business opportunities?' and 'is my portfolio sufficiently resilient to weather some turbulence?'

 

If you really want to hold some cash, Klarman is always great to read, but he was usually at most 40-50% cash at any time ever.  Being out of the market is detrimental to long term returns.

https://www.safalniveshak.com/wp-content/uploads/2012/07/Painful-Decision-to-Hold-Cash-Seth-Klarman.pdf

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I've distilled my investment approach to simple.

 

Bubbly.  Things are overly optimistic currently for sure. A great time to raise cash and sell winning positions.  I try to deploy into quality, cash flow positive investments during periods of fear aka Mar 2020.

 

Interest rates: as mentioned by others, I suspect the fed has gone past the point of return and we will see lower for longer.  We are in a period of tremendous prosperity and higher quality of living than anytime before. Technology is booming and consumption is high. When the fed is hosting the party with printing presses and setting the interest rates, why would they stop the party?

 

Risk: what would cause a correction?  Fear.  If you see an implosion of non productive assets, you could see a domino effect take everything down.  Some non productive assets = crypto, housing, non profitable tech stocks, memes, ark, spacs etc.

 

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