So many bubbles were overinflated, and so many pointless bad behaviors and mal-investments underwritten, that the fallout will be incredibly widespread. Victims will show up everywhere, and the down-cycle will be all-encompassing.
The latest confirmation of my thesis comes from the Wall Street Journal today. The newspaper reports that the tech “unicorn” bubble I warned about last September is clearly popping, with funding of pie-in-the-sky companies plunging.
Specifically, U.S. startups attracted 25% less funding in the first quarter of the year as compared with the fourth quarter of 2015 – only $13.9 billion. That was the worst quarterly plunge since the dot-com bust. The number of deals concluded also tanked to a four-year low of 884.
What’s more, the median startup valuation collapsed to $18.5 million. That’s a stunning 70% collapse from the record high seen in the third quarter of 2015. Lastly, we didn’t see one single venture capital-backed technology company go public in the first quarter. That hasn’t happened in seven years.
|Are we on the verge of increased layoffs and a flood of empty office space in key markets?|
What does this mean for investors like you? The economy as a whole? Well, think of all the layoffs we’re going to see (and are seeing already) around the San Francisco Bay area. The empty office space that is going to flood the market there. The slump in housing values, restaurant receipts, retail sales and more that will accompany plunging regional wealth.
Don’t live in Silicon Valley, or invest there? Well, it’s not like the bursting unicorn bubble is the only threat to the economy. The energy sector remains in disarray despite the recent bounce in prices. We’ve seen tens of thousands of layoffs there, and just this week, both oil driller Energy XXI (EXXI) and coal producer Peabody Energy (BTU) filed for bankruptcy.
What about autos? Do you really think the major car and truck manufacturers will continue to churn out cars at the recent record pace with sales growth slumping and inventories ballooning? Nope. The credit-cycle turn will bite in that sector, too.
|“Do you really think the major car and truck manufacturers will continue to churn out cars at the recent record pace?”|
One example: Fiat Chrysler (FCAU) said earlier this month that it would lay off 1,300 workers at a plant that produces its Chrysler 200 midsize sedan. Another 120 jobs will vanish at a nearby stamping plant in Sterling Heights, Michigan.
See what I’m getting at? This credit-cycle turn isn’t going to affect just one or two sectors, or a handful of stocks. It’s going to drive activity throughout the capital markets and the economy. That’s why I urge you to watch “The Unseen Hand” as soon as possible, and act on the recommendations I share in it.
As always, I welcome your feedback and comments here at the website. So let me know what you think about the credit cycle, the death of technology unicorns, and the problems in autos and energy when you get a minute.
Are top-rated stocks better than bottom-of-the-barrel ones? Is NIRP policy helping or hurting? What investing strategies work in today’s environment? Those were some of the questions you tackled online in the past couple of days.
Reader Jim said my colleague Mike Burnick’s data on outperformance by solid stocks is convincing to him. His take: “It makes me wonder why I have ever owned anything but ‘A’-rated stocks that pay dividends and grow their dividends.”
Reader Steve Z. added: “Interesting points – thanks! I’d be interested to see how the equity performance by S&P rating does over longer periods of time and in rising and falling markets, including the last two busts. Does lower risk lead to lower returns over the long term, as the outperformance occur during flights to safety?”
As for overall market direction, Reader Solly R. offered this perspective: “It appears to me, that investors have to adopt a ‘go with the flow’ attitude. Fundamentals, debt, politics, central bank policy, are all considerations of a logical person. But the market is NOT logical. Current investors are buying on dips and selling in rallies, and it’s working for now.”
Several of you also weighed in on negative interest rates. Reader Craig B. talked about one investment that should prosper in a time of cheaper-than-free money — gold. His take:
“Negative interest rates are possibly one reason why gold, silver, and precious mining stocks have done so well in 2016 thus far. There is no systemic risk, currency risk, or other concerns with gold or silver. Depending on where you store them, holding costs are negligible, as well. No negative interest rates with physical gold or silver, either.”
Reader Kent offered this cautionary take on NIRP: “I just re-read Jack London’s short story ‘To Build a Fire.’ I’ll use it for my university ESL class. As the man in the story tries to re-start a fire that got smothered because the first fire he built was in a dangerous place, his increasing panic only leads him to ever riskier actions. He finally runs wild, trying to stimulate his failing circulation. He stumbles and falls several times and then falls asleep. The man dies in a reverie about an ‘old-timer’s’ shrewd warnings.
“As quantitative easing has failed to stimulate the doomed central banks’ ill-advised journey, we now see the negative interest rates freezing what little capital life is left. Doubtless there will be an eventual fire. But it will burn the worthless paper that has been issued along with the many financial dreams of people who ignored old-timers.”
Reader Frebon also said central bank policy is hurting more than helping: “All these central bankers have great economic credentials but no common sense. The only thing that will boost the economy is demand, not stock buybacks or overseas investments.
“And the only class willing to create demand is the dwindling middle class who are reluctant to take risk and who can’t spend because they can’t get a return on a safe investment. Put money in their hands and demand will follow.”
Those are some fantastic observations, and I happen to agree with them. There is no free lunch, and the policies put into place over the last several years created huge imbalances and mal-investment bubbles – bubbles that are starting to burst. If you haven’t seen my new documentary video, “The Unseen Hand,” I urge you to view it now for my description of what’s going on – and how you can profit in this environment.
The great Chinese growth engine has ground to a halt, with GDP growth coming in at just 6.7% in the first quarter. That was down from 6.8% in the fourth quarter and the worst since the great global meltdown in 2009.
The problems? First, China’s economic data is cooked like a Christmas goose. So I’m sure that actual growth is far lower.
Second, an orgy of credit growth and government policy actions helped improve Chinese data for the month of March. But that kind of unsustainable, short-term borrowing and spending isn’t sustainable because it relies on old tricks like trying to re-inflate a bursting property bubble. So that calls into question all the “China growth proxy” rallies we’ve seen in various ETFs, stocks, and commodities.
The big Doha meeting of oil producers is right around the corner. Oil ministers and other functionaries are set to gather in the Qatari city on Sunday and discuss a production freeze.
But any freeze will just lock in near-record levels of production, ensuring a well-supplied market. Early reports suggest some ministers (like Iran’s) won’t even attend, and any deal will be so loosely worded that non-compliance and cheating will be huge ongoing problems. We will see.
The European Central Bank’s announcement that it would buy corporate debt, and the rally in oil in March, helped attract money to riskier bond funds and emerging market debt over the past few weeks. But global investors pulled money out of Japanese stock funds for the fifth straight week (the longest such streak since September 2012) and out of European funds for the tenth straight week (the longest losing streak since May 2013).
In other words, we’re seeing more evidence of “QF” – Quantitative Failure – around the world. All we can get are temporary, central bank “chasing” rallies in select assets, rather than coordinated, persistent, all-asset-market strength (not to mention actual growth in underlying economies, which is supposed to be the point of all this “foie gras” policy the first place).
Anything you want to add – on Chinese GDP, the weekend’s oil meeting, or central bank policy? Then make sure you weigh in over the weekend at the comment section.
Until next time,