THE EXUBERANCE HAS REACHED WORRYING LEVELS

All the major indices in the US continue to push to new record levels. Such exuberance has not been seen since the dot com super bull run - which points to more risks ahead. Of course some may argue that this time is different. Trump is not in office yet but the markets are all pricing as though the US GDP will grow 4% - 5% a year.

Here's why I think the markets have gone ahead of themselves.

1) The good number in US Factory Orders which rose to its highest in 16 months.This led to a higher PMI number as well. And of course the market cheered. But take out the transportation (aircraft orders) and military spending, it is down. Coincidentally, the US budget deficit rose to US$600B and debt increased to US$1.2T in the year. It looks like the US government borrowed even more money to spend to boost the economy, presumably to help the Democrats retain the Presidency. The US government is spending money at an alarming rate, money it does not have (see chart below).

2) The Unemployment at 4.6%. That is pure manipulated data. A separate report showed that anther 446K joined the ranks of people of employable age but could not find a job. That number is now 95M. Just some months ago it was 94M. Meanwhile, the bulk of it are part time and minimum wage workers and the number of workers holding multiple part time jobs have also increased. So, do you see the picture? Number of jobs is not equal to the number of persons employed. Meanwhile the Labour Participation Rate continue to remain weak - weaker than the pre-crisis level. But the markets never analyse anything beyond the headlines

3) The economy is going to reflate. Interest rates will go higher. It’s good for the banks. Therefore it is not a surprise that the Financials are leading the indices higher. Since when are higher interest rates good for the economy? When the Fed normalised interest rate to 5% in 2008 the entire global economy went into a severe recession. Higher interest rate will impact housing and refinancing.

A person needs to have 45% higher income now to buy a medium cost house than four years ago based on the revised housing loan rate. What does this tell you? To me it looks like housing is getting further beyond the reach of the average income earner. 

Higher interest rate also means higher cost of debt service for corporations. Since the last few years US corporations have borrowed US$2T – US$3T. What will higher interest means to the earnings of these companies?

Another thing which investors are ignoring is the bond carnage. US Treasuries are being dumped, therefore pushing the yields higher. This could impact on the borrowing costs of the US government. The US would have to borrow at a higher interest rate to pay for debts which it incurred at lower interest rate. This is the most dangerous part which the markets ignored.

4) The strength of the US$ will hurt multinationals. According to Fact Sheet 50% of the companies in the S&P earn their revenue abroad. Yet the markets are not even pricing in the impact of the US$ on their earnings.

It does pay to be careful when markets are at such lofty levels.

In the meanwhile, avoid buying any gold or silver miners as I believe there could be a takedown in the precious metal in the run up to the FOMC meeting next week where the markets have price in a 0.25% hike in interest rate. The best time to reassess your position again is after the FOMC meeting. However, other miners in iron ore, lithium and copper have seen their share price risen in the past few weeks.