“The Crash Is Coming” As “Money-Printing Never Works”
“The Crash Is Coming” As “Money-Printing Never Works” from GoldCore
Few investors have a deeper understanding of the tech sector than Fred Hickey.
The renowned editor of the popular investment newsletter «The High-Tech Strategist» draws alarming parallels to the bursting of the dotcom bubble in the year 2000 and spots high risks in stock market darlings like Amazon and Apple.
For the industry veteran, one important reason to be concerned are rich valuations. He also sees troubles ahead with respect to the rise in interest rates and the growing mountain of debt around the world.
Against this background, the outspoken contrarian sees bright opportunities in gold and in attractively priced mining stocks.
About Fred Hickey
For many investors around the world, Fred Hickey’s monthly newsletter is a must read. It’s a unique treasure of deep knowledge that goes way beyond the tech sector. Having grown up in Lowell, Massachusetts, in the heartland of the computing cluster around Route 128, Mr. Hickey has been fascinated by technology since his youth. After graduating from the University of Notre Dame, he started working for the former telecom giant General Telephone & Electronics. In 1987, he began writing his newsletter for his friends and family. After just five years it went so well that he could make a living out of his investing tips. Today, Mr. Hickey who likes to take long walks in his rare spare time, lives far away from Wall Street in Nashua, New Hampshire, and in sunny Costa Rica.
Mr. Hickey, despite raising interest rates, global trade tensions and turmoil in the emerging markets the stock market in the United States is chasing one record after record. How long will this go well?
Today’s situation reminds me of the fall 2000 which was a very difficult time for me as a contrarian investor. The internet bubble had broken in March when the Nasdaq peaked at 5132 and all those crazy valued dotcom stocks had crashed. In the three weeks after the Nasdaq had peaked it looked like the whole stock market had broken. But it hadn’t because investors rotated into what they perceived to be safer big cap tech names. So, they piled into stocks like Intel, Cisco, Microsoft, Nortel, EMC and Sun Microsystems. And that’s what we’re seeing today in a similar way with stocks like Amazon, Apple and, again, Microsoft.
What happened next?
Once we got into September and October, the market started to roll over. Back then, I was short via puts a number of tech stocks. My biggest short position was Intel and the stock first went higher and higher. In August 2000, Intel rose 20% in just one month and pushed into a new high of almost 76 $ a share. For me, these were some of my toughest days trying to fight the mania. The maniacs were piling into the stock and had no clue. They were only chasing momentum – just as they’re doing it today.
But as soon as Labor Day rolled around, Intel’s shares started to fall because fundamentally the business was deteriorating. Intel had to lower its outlook and the stock crashed 45% in one month. Think about it: At that time, Intel was the second largest company in the world. It’s the equivalent of Amazon today which means that Amazon’s market cap would go from around $1 trillion to $550 billion in just one month. That’s a shocking thing. But the difference is that Intel’s P/E ratio was 55 back then. Amazon’s is 155 today.
Then again, there are also important differences. In 2000, the Fed Funds Rate was 6,5%. Today it’s hardly more than 2%. Shouldn’t that provide some kind of safety net for stocks?
The bulls argue that interest rates are very low. Therefore, they think the coast is clear. But here’s the problem: By dropping rates to zero percent or even lower central banks have encouraged the whole world to take on an enormous amount of debt. Global world debt amounts to $245 trillion and it’s up 40% since the credit crisis. They have tried to correct a debt crisis with much more debt. Just consider the US, for instance: We have more than doubled our debt up to $21.2 trillion and we added $1.4 trillion of debt in the last twelve months. So even though interest rates for US treasuries are historically still very low at this point, we are heading into severe troubles. Even with rates staying where they are today the interest expense for the US government is going to be skyrocketing in the next years just like the price of bitcoin before it broke at the end of 2017.
Why is this a problem for stocks?
This huge amount of debt is causing all kinds of other problems. With rates around the world now rising we’re probably looking at another emerging market crisis. There are some twenty countries now whose currencies have fallen by double digits against the dollar. And in the US, it’s not just the government that borrowed heavily. Consumers have borrowed a record amount of debt as well as corporations. This means that higher interest expenses will more than offsets or at least equalize the positive effects from Trump’s tax cuts – and these tax cuts are going to increase the deficit even more. Yet, the people who funded the US deficits are dropping their treasury holdings. Japan, China, Russia and Mexico have all sold a lot of treasuries. The only ones remaining who are now funding the US in a big way are the Europeans because they still have negative rates. But as rates in Europe eventually are going to rise this support could go away, too. Investors who are piling into these big-name tech stocks are not thinking about that.