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Great Micro, Terrible Macro, Unstoppable Booms

October 6, 2023

If you think of rising interest rates as having much the same effect on the stock market as kryptonite did on Superman you can see why shares have been reeling since the peak in the summer/ autumn of 2021.

You could do a read through and say it is not rising rates but rising inflation that is the real problem and behind that even another problem, which is a US economy which just will not throw in the towel.

You can see it here in Kensington, I agree not the ideal place to take the temperature of the UK economy when less than half the inhabitants of the borough seem to be what I would call traditional English if that is not too loaded an expression. I am not talking colour here but the fact that like Babel every tongue is spoken here and the English comes with a kaleidoscope of different accents. All welcome as far as I am concerned.

I just look at the cars, Rolls, Bentleys, Porsches, every kind of Range Rover, G-Wagons, Aston Martins with Teslas, BMWs, Mercedes and Jaguars for the poorer folk. House prices are said to be falling but seem to start at £5m in W8 and rapidly ascend to the GDP of many small countries for larger and more recently refurbished places, while just the annual rent would buy you a street in Newcastle, wherever that is as Gulbenkian might have said (look it up if you are not familiar with where that quote came from – something about his Rolls being able to turn on a sixpence whatever that was).

I don’t know if it is significant but there were three flats (out of a total 12) for sale in my block and all three sold in the last four weeks bringing in families with children and dogs and taking the average age of the block down dramatically. I still feel London property prices are slowly gearing up for another Great Leap Forward, especially if superbore, Kier Starmer, pulls a rabbit out of a hat and loses the next election.

The bottom line of this mysterious combination of circumstances (inflation, interest rates and resilient economies) is that with central banks and, so we learn, Rishi Sunak, determined to crush inflation until it is stone dead bond yields are still climbing and have rocketed over 14 times in the US since the low point in 2020. Talk about a right hook to the chin for stock markets, especially high growth technology shares with so much of their earnings in the future where the discount rate to determine net present value of all those future earnings is so important.

Strategy – Charts Do Not Look Good

I have been through my benchmark list of charts and the overall impression is of a resumption of the bear market. Stock after stock shows the monthly moving averages rolling over and crossing on the down side (dead crosses) after rallying for most of 2023.

It has been a difficult market in recent weeks with no follow through even when shares in companies like Nvidia and ServiceNow report outstanding results and reference equally outstanding prospects. Again I have that sharks swimming under the surface feeling that I had in early December 2021.

As so often it is not entirely clear what is the problem. Inflation seems to be coming under control, especially in the US, without major damage being done to the economy which is showing impressive resilience. Also we have the exciting implications of Generative AI which is being talked up as the biggest thing since the arrival of smart phones, the invention of printing, the Industrial Revolution, the Renaissance, the domestication of plants and animals, the invention of grammatical language, you name it.

Nevertheless stock markets are not happy and it seems to be a time for considerable caution. One of my favourite benchmark charts is the one for QQQ3, a leveraged, daily rebalanced fund which broadly tracks QQQ, an unleveraged fund which broadly tracks the Nasdaq 100.

As you can see the chart does not look great. It could even be one of those why not sell everything moments as we wait for stock markets to look more bullish.

One of my rules is that the time to buy shares is when you are spoilt for choice with exciting buy signals all over the place. This is almost the opposite of what is happening now with most of my benchmark stocks giving sell signals. There are pockets of strength like the mega caps, aka the magnificent seven, but even there momentum seems to be fading.

Rising interest rates put pressure on shares but even rates stuck at high levels are a problem because they make holding cash more attractive and buying on margin more expensive.

The bottom line is that after going through my benchmarks list I am feeling cautious.

Looking further ahead politicians and central bankers will one day find themselves cutting interest rates and it will be happy days all over again but that is for the future.

Bearish Charts Will Turn Bullish

Almost by definition those falling monthly moving averages will turn higher one and that will be opportunities galore. Further on still current weakness will end up as a chunky blip on the charts of many shares. Generative AI plus falling interest rates could be rocket fuel for stock markets when we have that combination.

I am also beginning to suspect a certain degree of inflation is becoming embedded in the system. If so that may not be such a bad thing since rising prices oil the wheels of the whole asset allocation process and lead to happy developments like making everyone a winner in the property market (and wiping out the real liability of debt – an outcome on which I and no doubt the government are particularly keen).

Rents seem to be going crazy – not quite an extra nought but almost and this will feed into salaries and values over time.

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