Bubble Indicators part 3- Animal Spirits Make a Comeback/Chinese New Year

It seems to make sense when stock markets continuously make record highs, that it will have to end soon…oder?

This headline says it all…

Source: @markets; Read full article Bloomberg / WSJ THe Daily Shot (16Jan2018)

Maybe we finally are experiencing a new release of “Animal Spirits”! When did you last hear that expression–must be at least a few years!?!

Receiving for Christmas Tina Brown’s new book, The Vanity Fair Diaries, 1983-1992, she describes 1984 in New York City as follows on page 2: “Reagan’s ascent to the White House marked the definitive end of one era–that of the turbulent 1960s and its threadbare seventies endgame–and the supersonic launch of another gilded age. Tax cuts for the wealthy in 1981 unleased animal spirits on Wall Street. There were new buzzwords like ‘junk bonds’ and ‘arbitrage.’ Go-getters in suspenders, their eyes ablaze with the thrill of winning, thrived in an orgy of mergers and acquisitions. As Senator Daniel Patrick Moynihan put it when asked to define the eighties, we ‘borrowed a trillion dollars from the foreigners and used the money to throw a big party.'”

1984 was two years into what has turned out to be  — a very long bull market which started with the long term decline of interest rates. The decline phase might be over, but still interest rates being so absolutely low will continue to encourage new enterprises and demand. This chart indicates that we could possibly have another 8-10 years of a bull market ahead of us, wow!

Animal Spirits – Will the S&P500 Index purple line (2016 -) follow the orange (2002-2012) or blue (1990-2000)? The first 10 years of the 30 year Bull Market is the black line.

Source: Bloomberg

The Blue line below is Growth in US Labor Force with a 4 year lead. The chart shows pressure on the CPI for another 4 years, implying a continuation of easy monetary policy and hey, rising stocks and bonds (the peak below matches the trough in stocks and bonds)!

Source: BofAML, Skënderbeg Alternative Investments AG; Read full article /WSJ The Daily Shot

Capacity constraints in the USA will force capital investment and perhaps an improvement in productivity.

USA Manufacturing Groups by Industry (January 2016=100): Machinery, Computer & Electronics, Overall Industry, Chemicals

Source: Capital Economics / WSJ-The Daily Shot


…if China and Animal Spirits in the USA continue to grow, this rally in stocks has more legs!

Please visit previous posts at the bottom from last year on bubbles using the Sotheby’s Bubble Indicator and others.

Bubble Indicators — A “Melt Up” (Jeremy Grantham), an Over-Valuation (Berkshire Indicator), Chinese New Year, Shorting Volatility, Oil,  Bitcoin, US Housing, Sotheby’s–all bubbly? But where’s inflation?

Jeremy Grantham of the fund management group, GMO in Boston is known for his critical perspective on the stock market, especially one driven by momentum ignoring true value. He recently published a report called   “Bracing Yourself for a Possible Near-Term Melt-Up / (A Very Personal View)”   He actually perceives a possible continuation of the current momentum, calling it a “melt-up” and imagines the S&P500 testing 3400+! Yet another 25pct! Is this a similar call former FED Chairman Alan Greenspan made in December 1996 calling the markets then mired in “irrational exuberance”, but rallying another four years?

Greenspan calls the market mired in “Irrational Exuberance” (Vertical Red Line): SPX, DAX, EuroStoxx50, and Nikkei 225

Source: Bloomberg

Or are we at a similar point during the last Chinese Year of the DOG (2006) one year before the last bubble peaked? That was the Real Estate-Property bubble in the USA which lead to the Great Recession.

Chart National Association of Housing Builders (NAHB) vs. the S&P500 (SPX)

Source: Bloomberg

The S&P500 Index in the last 5 Chinese Years of the Dog: 2018, 2006, 1994, 1982, 1970 – Tends to correct in H1 and recover in H2 and the following year!

-Source: Bloomberg

Chinese New Year of the Dog: February 16, 2018 – February 4, 2019 // Links to Fun Facts:  Chinese New Year 2018 and/or  Asia-Home.com 

The following chart is named after one of the market’s most respected investor, Warren Buffet’s company. It implies when equity prices soar to a premium of the underlying economy (the US GDP), then equities are clearly overvalued. Indications here show on both charts that equities are trading currently over 130pct of GDP and the peak was in 2000 at over 150pct. It just made it over 100pct in 2007. Bubble indicator?

Top Chart: Berkshire Indicator – Corporate Equities to US GDP

Bottom Chart: A Berkshire Indicator Variant – Wilshire 5000 to US GDP

Source: Advisor Perspectives/ WSJ The Daily Shot

Shorting Volatility has taken the most crowded trade from Bitcoin… (Citywire link) as a concern for fund managers. Fund managers are apparently more concerned about a wrong FED or ECB policy decision or bond market crash than any equity market correction.

Tuesday, January 16, was a rare “risk-off” day for stocks. The VIX index jumped and the volatility-shorting crowd was covering. The inverse-VIX ETF (XIV) dipped almost 5%. More to come?

Source: WSJ The Daily Shot

Oil in a bubble? (IAV Link)

I am a lonely Oil Bear (unimaginable no. 5-IAV ): The first chart  the WTI oil price vs. Equity Volatility – oil price gains are usually reflected in volatility gains which is not happening. The second chart is Bitcoin vs. WTI oil prices. Interesting surge although two different scales!

WTI Oil (Black) vs. S&P500 Volatility (VIX) from 1995 (18Jan2018)
Source: Bloomberg
WTI Oil (Black, left scale) vs. Bitcoin (rt. scale) starting 2017 (18JAN2018)
Source: Bloomberg

Did the Google search frequency for “Bitcoin” predict the latest downturn?

Source: @dbenedet905, @sobata416 / WSJ The Daily Shot

Bitcoin tends to crash once a quarter

Source: @jsblokland, @paulusa59  / WSJ The Daily Shot

What if Oil prices do fall, only housing/rents is left to fuel inflation, is it enough?

Source: @jpmorganfunds; Read full article / WSJ The Daily Shot 

Sotheby’s vs. S&P500

Source: Bloomberg

Stocks vs. Bonds: Even rising interest rates might not stop this equity rally!

Source: Credit Suisse

If those Animal Spirits are for real, it is most likely too early to call a bubble in stocks and may be even bonds!

Past Bubble Indicator IAV Posts:

  1. Bubble Indicator-Every Picture Tells a Story (1 AUG 2017)
  2. Bubble Update… Lots of Talk Currently! More Pictures (Charts, 8 AUG 2017)
  3. Bubble Update Part II: Yields Indicate Stocks are OK, but Bonds??? (10 AUG 2017)
  4. Charts: Bubble Indicators are Everywhere Except Our Sotheby’s? 9 OCT 2017


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