Bubble Trouble

In the lead up to Christmas, two clients threatened to leave and find another adviser if I didn’t invest their money.

The pressure of FOMO (fear of missing out) was beginning to build and they insisted we hurry up and do something, anything!

One client tried goading me by admitting he and his wife were already speaking with another adviser who had some very good ideas for their money.

This was my reply…

Dear John and Jenny*,

As you’re aware, this is the most expensive market in history and to be honest, I would rather lose a client than invest their money at these levels.

Three days later we parted company and everything was transferred to their new adviser.

In the past two weeks, the markets have dropped 11 – 16%. The NASDAQ in particular, has lost nearly all the gains made during 2021 in less than a fortnight.

So what’s going on?

It’s simple. We are approaching the end of a ‘megaphone cycle’.

It works like this…

Interest rates have been in a cutting cycle since the Global Financial Crisis (GFC) to help resuscitate and stimulate world economies.

And every time rates have been cut, asset prices have gone higher creating a divergence between the two, like a ‘megaphone’.

Make sense?

Ironically, this megaphone cycle would have finished two years ago when asset prices were already over extended but then Covid reared its invisible head.

At the time, it looked like the whole world was going to hell in a hand basket and so the central banks cut rates to zero and this accentuated the megaphone cycle further.

But now this cycle is coming to an end because inflation has rocketed and the only way of tempering it is to hike interest rates.

The problem is, the RBA and Federal Reserve spent the whole of 2020-21 assuring us rates wouldn’t rise until 2024. However, they never expected inflation to go this high either.

This megaphone cycle will end like a nasty marriage break-up. There will be lots of volatility (separation) before it finally corrects (divorce).

Have a great weekend!

Adam

* not their real names