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IS THIS 1927-1929 AGAIN?

January 12, 2021

Good morning, and we just closed an incredible trade in Tesla.

At the time, it felt we were buying late near the top, but it worked out as one of the best trades ever. So, we know respecting price action, even when disbelieving the levels achieved, can be highly profitable.

That said, the price action now, for Tesla, and the Tech sector as a whole, is heavier than the broad market. Tech needs to stabilise here, or risk becoming a downward snowball, quickly impacting other sectors and particularly the Australian market and extremely so in stocks like Afterpay that have never made a profit.

Yes, there is a bubble. We know that. Of gigantic proportions. Whether it is bursting today or can last even another 3 years remains to be seen.

I do note, rather pointedly if I may, that this actually looks like the the 1927/1929 period, where consumers were buying everything on credit, and goods and services were beginning to be over produced beyond real demand. China is a stark case in this regard. State enterprises pumping up economic data, while the consumer and private investment remains lack lustre. The US of course, is in a far worse situation. In Australia, there is this all over-riding, almost consensus philosophy, that all will be well. Even better than before. It is a nonsense with maximum broad based acceptance and belief.

All the makings of an impending, perhaps 1929 style crash, as a very real risk sometime this year. Just when no one expects it. That's what markets have always done, but they have never, ever, been so extremely leveraged. 1929 was a crash on borrowed money to invest in shares. Everyone getting rich. How much more extreme is the situation today. 

Working families have invested heavily in stocks that have never turned a profit, like Uber, Afterpay, and the even more vacuous cryptocurrencies. How quickly could the financial well-being of a large proportion of the society... disappear.

If the market were to fall now.
This would have a wider, more instant impact than in 1929.

The Stupidity Index, Bitcoin, is down 25% in the past week as things begin to unravel. The process, if the big one, and we cannot be sure of that yet, will make its way through all markets in a matter of weeks, even reaching to the absurdly over-valued iron ore market in due course. When the big one comes, and it must at some point given the highest levels in history of participation and leverage and extreme valuation levels, then no market will be untouched.

After all of that warning, it must be said, that for the moment the broader US market is still in a potentially short term bullish consolidation range. Watch for a break below the past three days trading range in the S&P500 Index for further warning of the great unravelling getting under way. The market may hold, but it is looking increasingly ugly.

Clifford Bennett