Another everything bubble going bang?
Good Monday, MINING AIM, and welcome to my thought of the day.
Apparently, the bubble is starting to crack. For what it's worth, I also called the end of the last bubble in December 2021, and now think we are close to the next pop (before the inevitable rise to new record highs). I also correctly argued that the FTSE 100 would outperform the S&P 500 in 2022, named Rolls-Royce as the best FTSE 100 stock for 2023, and covered the lithium rocket in 2019.
I still derive the majority of my income from large cap work - and have a good track record in making contrarian predictions. And I had thought that the AI bubble would burst at some point in Q4 2024-Q1 2025 - we are starting to see it buckle.
In the last few days, we've had:
Japan's largest one-day drop in history
Warren Buffett mass selling Bank of America and Apple
Bitcoin and Ethereum tanking
South Korea has halted selling
NASDAQ 100 in correction territory
The 10-Year US Note Yield is down 60 basis points in one week
VIX up 100% in a month
US unemployment figures surprise
Now, it's easy to say that what's happened is that investors borrowed capital from Japan cheaply, and threw it into US tech. Japanese Yen got more expensive, and so those leveraged investors are having to unwind and de-risk their positions.
There will be all sorts of explanations after the fact, and I am sure I will be writing some of my views over the next few weeks - because traders love this sort of volatility!
But the bottom line is that whether the bubble pops now or in a few months' time, there is now fear that wasn't there before. Investors thinking that Nvidia is a money printer are now reconsidering their worldview. And this means that when the next shock event comes, many more fingers will be that much more twitchy.
Already you're hearing rumours from across the pond that JPOW is considering an 'emergency' rate cut. Depending on his breakfast, this might be marketed as a balancing cut. Or a stabilising cut. Or perhaps a calming rate cut, to relax the panicked equities?
But the bottom line is that when the rate cuts start, the bubble is going to blow - because you only cut rates to stimulate a flagging economy - and by the time you do it reactively, you will be too late. Just like they were too late to increase them a couple of years ago.
However, it's important to be careful with the fearful language being chucked around. Even though this is the most Buffett has sold in any quarter, he also sold his entire McDonald's stake in 1998, which is now up 1,400%. He sold his entire CostCo stake in mid-2020, and it's now almost tripled in value. He also sold out of his airline stock positions in the pandemic dip, and they have all recovered.
Japan may be course-correcting, but then it's possibly just returning to the confines of the iron coffin. Bitcoin and Ethereum have had larger one-day drops and recovered fast. The US non-farm payrolls might be concerning, but employment is still growing.
Et cetera, et cetera.
The S&P 500 has generated an average annual return of 11% since 1957, including every dip and peak. Even the 2008 recession only lasted five quarters - there will be a short window to take opportunity in the dip, and also to get in on the ground floor of the junior resource sector blast-off.
But the question for MINING AIM, is what happens to the junior resource sector stocks when the bubble does burst - whether now or soon?
My view is that just as in the pandemic mini-crash, small caps will get hit initially. But they will also enjoy a similar one-to-two-year spike thereafter, and perhaps a larger spike than in 2021. This is for a simple reason: the tech bubble has generated trillions of dollars of gains, and when these stocks correct, that money doesn't disappear. It has to go somewhere.
Gold? Already at record highs.
Bitcoin? Crashing with the S&P 500.
Treasuries? Sure, but if inflation comes roaring back, then no.
At least some of that capital will rotate into small caps, seeking fundamental value - and it only takes a very small amount to find its way into MINING AIM stocks to make a huge difference. That cash will be risk-averse and seeking some kind of safety, but if nowhere's safe, then it will go where the risk-reward ratio is most favourable.
Anyway, the point is that when this bubble bursts, the people with cash (or the ability to borrow it) will hoover up all the blue chip deals, but there will also be a large recovery in this beaten-down sector.
Just hold on tight through through the initial volatility. It's going to be a bumpy ride.
- Charles Archer 5/8/2024
P.S. On a personal finance note (and this is not advice, as ever), market crashes are often accompanied by real-world economic problems, so remember the importance of financial resilience, an emergency fund, and diversification. You do not want to be selling stocks in the dip to pay your mortgage because you lost your job.
I say this not to cause any kind of alarm, but out of an abundance of caution. Otherwise, the bubble collapse will be a huge opportunity.
Good luck!