We’ve seen several flash crashes and bursting bubbles this year, accompanied by frothy activity popping up in various sectors and asset classes.
This time on the Big Picture, we look at what’s fueling these bubbles and subsequent flash crashes, and what the catalyst might be for the next bear market.
For audio, see Big Picture Flash Crashes and Flash Bubbles
Bubbles in Favored Sectors
With an increase of flash crashes in recent years, and now with market reliance on algorithm-based trading and index funds making up close to 90 percent of daily trading in the markets, we’re more likely than ever to see over-concentration create conditions for rapid market declines.
We’ve also seen bubbles popping up in various sectors and asset classes, such as commodities or real estate in the last decade, the recent run up and subsequent crash in Bitcoin and cryptocurrencies, and most recently, the explosion in marijuana stocks.
Stocks have shot up about 35 to 40 percent — especially the FANG stocks — since the election of Donald Trump.
“This market has been characterized by what I call a series of rolling bubbles,” Jim Puplava said. “They're becoming more frequent. There are probably two bubbles currently. One is in the FANG stocks, which continue to fly higher with several of these companies approaching market caps of a trillion dollars. … The other is in cannabis stocks in Canada. … To give you just an idea of the investor enthusiasm over cannabis stocks, if you take Tilray’s quote page, it was up 250 percent in a week. It's up over 2000 percent since the month of August. Cannabis stocks are probably only the latest rage to catch the eye of investors.”
Markets Not in Imminent Danger
Markets will likely head higher this year and into next year, Puplava stated, before the bull comes to an end. We’ll likely see a few more bubbles before the end, as well.
However, when the bear market takes over, given the dominance of algorithmic trading and passive investing, Puplava noted, it's going to end rapidly. We could see a drop of 20 to 30 percent in the markets very quickly, he added. However, it’s unlikely to persist. “The next bear market will be short,” Puplava said. “It will be steep, fast and furious. It's not going to be a long, drawn-out process of falling prices that can take place over time.”
Stimulus and Stock Buybacks Supporting Markets
We haven’t seen much volatility recently, Puplava noted, for two reasons. For one, the tax cuts and previous monetary stimulus continue to be supportive. The Fed is still in the process of unwinding its balance sheet, and Trump’s corporate tax cuts have especially helped fuel massive share buybacks.
Puplava asserted the difference this time around has probably been the size of the corporate buybacks. With slow and weak economic growth both here and abroad, the best deployment of cash has been for companies to buy back their own shares.
With the tax bill that went into effect this year and the special low rate on repatriated profits overseas, we’ve seen around $2.5 to $3 trillion coming back to the U.S. Companies are bringing back that cash and deploying it to purchase their own shares.
They're also increasing dividends and share distributions — which normally occurs at the end of the business cycle — investing in new equipment or factories and buying other companies. Puplava said this year we could see $3 trillion in M&A activity if the present pace continues. All of this likely means we won’t see a recession or bear market until late 2019 at the earliest.
“This amount of buying is, in my opinion, creating a floor under stock prices,” Puplava said. “The pace of buybacks is accelerating and according to the folks at Goldman Sachs, the pace of authorized buybacks could reach a record $1 trillion this year...everybody's buying back stock.”
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