Everything Is Bad

The title says it all really.

As this Business Insider article suggests we seem to be facing into a very unpleasant storm of financial forces that appear to be conspiring (and compounding) to make life very hard as an investor. In no particular order here are some of the recent events that have likely sunk the boot into your portfolio over the last few months:

  • Trump being named the presumptive Republican presidential candidate
  • Brexit & associated fears regarding the future viability of the EU
  • The Australian double dissolution investment saga (at the time of writing, still no clear majority for either Labor or the Libs)

We’ve written about these topics extensively, and you can use the search function at the bottom of the page to check out specific articles and thoughts about stocks that are perhaps best placed to perform well during the type of moderate volatility that would be associated with any of these events on their own. However, it’s time to face the ugly fact that we might not be able to ride out this storm without some severe market impacts. In a nutshell, the global financial system is very sick, everything is bad and we’re going to suffer some significant pain before the ship is righted. As I type these lines I can’t help but picture Bill Shorten’s smug weasel mouth making a snide remark about stability, ironic given the farcical election he’s been part of has made things worse than ever.

So here are some thoughts about what it all means, why it’s happening and what you should go after if you want to remain invested in the sharemarket over the coming months. There will be no deep analysis on any particular stock, so if you’re here for any tips the best I can do is suggest you avoid traditional blue chips like the plague and steer clear of specs unless your stomach is made of cast iron.

The ASX VIX index below gives a subtle clue as to the sickness that has infected the ASX as well as global markets worldwide. The VIX tracks the volatility of the ASX and spikes in times where prices change rapidly. You’ll note that the VIX is trending up over the last few years with a few monster spikes around the start of 2016. These spikes are representative of the cracks that are starting to show in the system.


Following the GFC of 2007-2009 global interest rates plummeted as central banks attempted to drive stimulus programs and investors were no longer able to use bank accounts to derive a decent return. This had the bonus side effect of making the stock market (in general) far more attractive to a wider range of potential investors than ever before. So what? More investors equates to more demand, and more demand leads to globally higher equity index prices (when all other factors are equal). So far, so good. Existing investors saw their holdings increase in value and newbies got to feel the rush of buying at the right time. Everybody wins! Except…. not for long.

The dirty secret of stock prices is that they’re unpredictable, and no-one really knows how they work. I’m not joking, that’s a serious statement. You’d be aware that there are plenty of rules based on company assets, income, market performance (and other boring metrics) but none will give a perfect explanation of how or why any particular stock price will or won’t change. The reason? Firstly, the humans trading the stocks won’t always act in accordance with rules (I’ve heard they often prefer emotions and “gut feel”) and secondly, often a large portion of any stock’s inherent value is determined by events that haven’t happened yet. Expectations matter, and when you combine speculation with human emotion weird things occur. Take the price of Blackmores for example (ASX:BKL). Everyone got far too excited about the revenue potential of the Chinese export market and the price exploded as investors paid a premium for the stock. After reality started to set in, everyone started selling out again. You might laugh, but this is a perfect metaphor for the market as a whole. BKL went from over $220 a share to a close of $132 yesterday. You’re not going to be too stoked if you bought in north of $150.



So how is BKL a metaphor for the market as whole? Most shares have the BKL effect built in, in the sense that some of their value is derived from expected future performance. The events I mentioned at the start of the article have started eroding confidence about the future, and this feeds into a self-fulfilling cycle where people start to sell their positions as they become concerned about holding value. This behaviour is also driven by fears for corporate profitability as a whole, and is in part also a result of “premiums” built in to prices during the GFC getting stripped out (i.e. the buying because interest rates sucked at the time).

So if your eyes glazed over until this point here’s what you missed.

  1. Investors flocked to global sharemarkets after the GFC, placing a general price premium on stocks
  2. Good conditions between 2009-2016 led to even more price premiums as people expected the good times to keep rolling
  3. Brexit, Trump, generalised fear and uncertainty are starting to reduce peoples willingness to be exposed to the sharemarket as well as erode confidence about the future
  4. Sell offs occur for the above reasons and the market “rebalances” as share prices get re-evaluated in the face of current and likely future market conditions.

The best bit? We don’t know what the future holds, so this could be devastating or a complete non-event. The key take out is to be exposed to businesses that don’t rely on speculative future earnings and those that will always service a known need.

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