commentary

authored by

John Kierans
June 2020

Herd Investors will not be spared.

Introduction

Stock market bears are saying that the stock market is overvalued.  They point to the fundamentals and comment on the disconnect between the expected earning of publicly quoted companies and their share prices.  The chart below demonstrates their point.  They say the red ‘profits’ line is going down and the blue ‘price’ line is going the wrong way.

Stock market bulls focus less on fundamental metrics and more on sentiment.  They say that the market is looking through the next couple of quarters and anticipating higher earnings / profits thereafter.  In their view the worst is behind us and the stock market is indicating this.  The stock market is about the future, not the present and certainly not the past.

As for the Great O’Neill?  We are very open minded.  In our view both the bears and the bulls make good arguments.  Both are wrong.

The Blue Line

The stock market is not a market place.  A market place is where buyers and sellers meet and haggle over prices.  It is a mistake to think that the price of your favorite share has been set in a free and unfettered market place.  Through the use of interest rate policy and corporate bailouts government throughout the world try to push stock prices higher.  Most governments directly buy publicly quoted coporate bonds and some also buy publicly quoted shares.  In short governments are buyers.  They don’t haggle in the market place, they print money and buy!  They are working to push the blue line in the chart above upwards.

The Red Line

Governments are nothing if not busy.  They have also set to work on the red line above.  Normally profits are compressed via taxation and regulations.  This time they have shutdown the economy and will only allow it to paritally reopen under a blizzard of regulations and restrictions.  They are working to push the red line in the chart downwards.

Stock market prices are driven by economic fundamentals or sentiment, but they are primarily driven by government action.  It is a mistake to focus on government intentions, all that matters is the outcomes.  Blue line up, red line down, the rest is just opinion.

Although the Great O’Neill is presently long stocks, we are agnostic, our position can change at anytime.  We are long S&P 3300 Oct calls which may or may not evolve into a stop against a future short position.  We are uncertain.

The only working certainty is that the fiat currency will collapse eventually and most investors will loose fortunes in the ensuing deflationary purge and/or hyperinflationary explosion.  Sadly periods of economic turmoil are inevitable and right now we appear to be entering one.

In this economic cull herd investors will not be spared.

return to commentaries