Blog | CB Investment Management

How Big Bubbles Create Big Recessions

The most speculative market in history. All time record in US equity call option volume. Buybacks, excess liquidity, record negative real interest rates, and out of control government spending fuel bubbles not lasting wealth.

Liquidity is about to reverse down with the debt ceiling resolution. The credit cycle continues its downcycle.

NVIDIA … Do The Math. Study The History. Investment Status Now: Avoid.

“Risks to the outlook are heavily skewed to the downside, with the chances of a hard landing having risen sharply.” ~IMF

Economics Masterclass With A Track Record. Dr. Lacy Hunt. Recession Is Coming.

Bankruptcies soar at the fastest pace since 2010.

Policy challenge as disinflation stalls.

In General, Stocks Don’t Hedge Against Inflation, over the last 70 years.

The underowned gold market already has record buying support from the most significant buyers.

The urge to buy rising prices is behaviorally irresistable for most investors. Even the most successful investors fall into the trap. As Stan Druckenmiller remembers over 20 years ago:

“I bought $6 billion worth of tech stocks, and in six weeks I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basketcase and I couldn’t help myself. So maybe I learned not to do it again, but I already knew that.”

An investor’s only protection from repeating this mistake is having the discipline and patience to stick to an effective long term process, based on data, math, and history to avoid behavioral override.

As recently shown the revenue and earnings growth of the largest technology stocks, QQQ, has been less than impressive. The chart above shows that for Nvidia, as measured by free cash flow yield, valuation is a problem too. The recent excitement about artificial intelligence seems to have overwhelmed these considerations for the time being, making comparisons with previous bubbles a worthwhile exercise.

Do The Math, Study The History

What are your chances of investment success if you buy a stock with these metrics?

The valuation for Nvidia makes it likely that much of the future growth may have already been discounted. It seems distortions provide a more convincing driver for the recent outperformance.

Speculation is running at all time record levels as measured by buying of US equity call options.

Buybacks, excessive liquidity and out of control government spending fuel bubbles not lasting wealth. Distortions abound.

Government spending has continued to grow strongly, and the debt ceiling constraint boosted liquidity substantially as did the bank rescue.

A Nation of Junkies: The Empty Future of a Stimulus-Speculation Economy well describes the state of the financial system as distortions and narratives increasingly dominate short term performance.

Furthermore, technology buybacks have also been strong in the last three months.

Post a debt ceiling resolution it is likely that liquidity will reverse, as calculated by hedgeye, which likely will become a negative impact for long term assets.

Outside of big capitalisation technology stocks, the stock market has been performing poorly with record divergence. Historically, this level of narrow performance has only been seen at the peak of the technology bubble in 2000.

Furthermore, the equal weighted S&P 500 is down so far this year, which describes a weak overall market with significant narrowness and divergence.

The IMF has a very weak outlook for global growth:

Risks to the outlook are heavily skewed to the downside, with the chances of a hard landing having risen sharply.

Economics Masterclass With A Track Record. Recession Is Coming.

Dr Lacy Hunt’s insights should never be missed. The depth of his research which goes back hundreds of years brings out powerful clarity and conclusions about the mechanics of cycles and the economy. Not only does he describe the evolution of economic cycles, but he also understands the additional impacts of monetary and fiscal policy.

Financial Cycles Lead Business Cycles which lead Price/Labor Cycles and he concludes that a recession is coming. Given his astonishing track record his view is always worth considering carefully.

Also, inflation seems to be falling much more slowly than expected:

Global headline inflation in the baseline is set to fall from 8.7 percent in 2022 to 7.0 percent in 2023 on the back of lower commodity prices but underlying (core) inflation is likely to decline more slowly. Inflation’s return to target is unlikely before 2025 in most cases.
IMF

Does this look like inflation is going back to 2%? …Or has inflation reset at structurally higher plateau of 4-5%? …which is the only solution to sustain fiscal deficits of 6% of GDP!

Increasingly it looks likely that the current cyclical disinflation may be temporary.

Weaker growth and higher inflation is not a good recipe for equity performance. There simply isn’t any evidence from the data below that inflation favors equities.

This data differs from the academic theory that claims stocks pass-through inflation via higher prices.

Money = cash + credit. There’s approximately $5trn in physical US dollars in existence, while there’s something like $70trn in USD credit. So as liquidity turns negative, the bigger credit cycle impact continues to develop in a negative direction with bankruptcies accelerating at a faster rate than at any time since 2010.

The unloved gold market is a long term hedge of currency destruction.

Even though Gold is trading near its all time high, there has been no gold ETF accumulation for nearly two years.

Commodity Trading Advisors aren’t bullish either.

Investors may be missing one of the most powerful signals for buying gold. Central banks accumulated more gold last year than in any year since 1950.

Think about that. The institutions charged with the task of preserving the current global financial system are essentially hedging against their own success more than at any time in over 70 years. Having divested their holdings over the last 40 years they have begun accumulation. The chart below shows that the overall level of their holdings is nowhere near where it has been historically.

What asset class do you think would outperform in a recession? Are you ready?

It is important to recognize that we are in a period of instability. Make sure you have a robust and flexible process to manage your investments in these uncertain times.

“Best Investor” Standards Safeguard Optimal Investing

In order to optimize opportunities safely, investors need to be set up with the most productive framework possible. Why not adopt the methodology of the most successful investors of all time? They all ended up embracing their own version of “Capital Preservation and Compounding”. You can find out why here.

The great additional advantage of “Capital Preservation and Compounding” is its clear definition. Just 5 metrics which can be illustrated in the Risk/Return Performance grid tell you in seconds how well you are doing.

Raise your accountability, transparency, understanding and control of your investing in real time by having access to this information.

Transform Your Investment Experience

The room for policy manoeuvre, and the stability of the current system should not be taken for granted. Volatility has increased and is likely to continue to stay high. The outlook has rarely been this uncertain. Investment management needs Best Investor metrics and techniques as never before.

Market and economic events are moving fast at this stage. If you need a quick review of the issues that you may need to know about for your own circumstances, schedule a FREE consultation today.

Please note these important disclaimers: Educational use Only. The market update published by CB Investment Management, LLC (“CB Investment”) is intended to be educational in nature and is not intended to be a recommendation for any specific investment product, strategy, plan feature or other purposes. Accordingly, it should not be construed by any consumer and/or prospective client as solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation.Advertising and Marketing. Communications such as this are not impartial and are provided in connection with advertising and marketing. This material is not suggesting a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, insurance, legal or tax professional that takes into account all of the particular facts and circumstances of an investor’s own situation. No person associated with CB Investment is a licensed attorney or tax professional and the information contained herein should not be considered tax or legal advice. Links to Third Party Content. This Market Update contains links to articles or other information maintained by unrelated third parties. You acknowledge and agree to the following: All such information is provided solely for convenience purposes only because we believe that it may provide useful content and all users thereof should be guided accordingly. We disclaim any responsibility for the link’s performance or interaction with your computer, its security and privacy policies and practices, and any consequences that may result from visiting it. We do not control the content published by the third-party; we do not guarantee any claims made on it, nor do we endorse its sponsor or any of the content, policies, activities, products or services offered by any advertiser on the site. CB Investment assumes no liability for any inaccuracies, errors or omissions in or from any data or other information provided by the third party and inclusion or reference by CB Investment to any third party link should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.
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Best Practice is a matter of your Best Interest.


Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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