At the end of this bubble was a classic funneling into stocks like Amazon, Microsoft, Apple, Tesla… really the S&P 500 as fund flows went massively into passive U.S. funds the past 5 years. At the same time, we got what appears to be an anti-bubble in stocks that don’t neatly fit into the indexes. These stocks appear to be quite cheap, not just compared to their overvalued index cousins, but on an absolute basis. The real question – and it’s a question I’m asking myself: to what extent are the earnings of these companies a fiction because the global economy has been propped up by artificially low rates for a decade? Are these value traps? I don’t know the answer, but we’re about to find out.
One way to protect yourself from economic risk is to avoid highly cyclical companies. Another is to avoid those with high balance sheet leverage.
Gold has held up well while gold stocks are more volatile and act like stocks. Yesterday I think gold was basically flat while gold stocks sold off later in the day. I like both, but won’t be surprised by volatility. Keep in mind, we appear to be on the verge of a debt collapse which means investors (especially those who employed healthy doses of margin) will be liquidating assets to get a hold of scarce currency to pay off their creditors. At the end of the day, however, central bankers are hell-bent on printing much more of that currency. Many people are now in a position where they can be run over twice: first in a massive asset deflation, second by a hyperinflation.
We live in unprecedented times where everything in the everything bubble is magnified.
~ Kevin Duffy, note to friend, February 28, 2020
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