What Next?
It’s Mid August and we are supposed to be enjoying a quiet news week and very little trading.
However, this is no ordinary August. It is downright cool here on Long Island. Climate change? Hmm. Not this week.
You have the major players in Western Europe meeting in Washington with ukraine’s leader Zelensky to try and iron out what exactly needs to be done to end the war in Ukraine. President Trump has done what he could to get the wheels turning.
Without wasting too much time and space on a clearly political issue let me just say this; The whole thing sucks. Ukraine has lost territory. Russia has lost hundreds of thousands of young men and women, so has Ukraine. All for what? Some decent farmland? Maybe some minerals? A population that truly hates Russia. In any event, there will be no winners here. The best anyone can do is salvage a really bad situation. Again, I want to save my political rants for Wednesday but I want to ask any Democrat, anywhere in the US, what would be your solution? I suspect not one of them would have a viable answer.
The importance of a resolution is very clear but what does it look like five years from now? Let’s assume the Russians and the Ukrainians sign off on a deal and while Zelensky might not be happy, he will have peace and with that peace comes prosperity.
Ukraine is mineral rich. It has a highly educated workforce and it’s farms are some of the most productive in the World. Foreign companies will be clawing their way back. Not initially but trust me. Ukraine in five years will look similar to Poland and have a vibrant, thriving economy. With Western backing and guaranteed peace (?) things can only look up.
Russia on the other hand will fall further behind. Western investment will not flow into Moscow. Rubles will be tight and the population will continue to suffer.
There are two problems with this scenario however. One, Ukraine was, prior to the war, one of the most corrupt countries on the planet. On the corruption scale, they ranked right in between Zambia and Nigeria. It is possible, that corruption will stall any upgrade in Ukraine. The second big question mark is Putin. Will he be satisfied with a half victory in Ukraine or will he want to test the waters somewhere else?
What does all of this have to do with business on this August Monday you ask?
Not much, but the economic ramifications of this might have a tsunami effect on Europe and the US as businesses rush back in to Ukraine. Markets love new trading partners and if the World Bank starts loaning them money to rebuild, everyone benefits.
Geopolitical news rarely has a lasting effect on the investment world. Sure there may be a bump in stock prices, short term, but the impact will definitely be industry specific. AI will have little to do with rebuilding a country.
Which leads me into AI and some signals that may not be that good. The price to book ratio on the S&P 500 has just reached a level it hasn’t seen since March of 2000, right before the Dot-Com crash. In other words, we might just be in a major bubble.
Am I betting against the companies that have so heavily invested in an AI future? No, but I would not be riding any more of this wave. If your in, hold onto your bloomers, it’s going to be a bumpy ride. If your not, don’t bother.
No one seems to think that the market is overpriced relative to the fundamentals. Why? You have like seven signals for something other than the moon shot we are on. Why keep pouring money into a market that is fully priced and possibly overpriced? Fear of Missing Out?
The clearest signal to me, the grizzled veteran, is that retail inflows are at record levels. I may be too old school sometimes but that, to me, is a gigantic red flag. No offense but when the retail customer jumps in with both feet, it usually does not end well.
I know, I know, that is so 1980-1990. Sue me. I follow trends. I read people’s blogs. I watch where the money is flowing and where that flow comes from. I also listen. When the conversation is centered around people saying they are killing it in the market, that is when I know it is time to get out.
Do I think that the economy is going to go to shit? No, not at all. I just think that valuations are too high for the economy they represent.
I do think we need some corrective action and soon.
Just like when I though we would see a small recession, I think a correction of around 10 to 12 % would be very healthy long term.
Will it happen? Who knows. Anyone that tells you anything with any certainty regarding the market is and always will be, full of shit.