Perspectives

TSP Charts: Bubble Watch 2018

“So far so good”… said the man as he passed the 60th floor after falling off the building.

Lucky it is a tall building and we appear to have more time.

Don’t get me wrong, I am not predicting crash anytime soon.  These things take time to develop and this one has been developing longer than any other in history.  How long?  It’s a long story.

Sticking closer in time we find we just broke the record for the most trading days (395) without a 5% correction in the market.  That record goes back prior to 1929.  Buy-the-dip investors must be frustrated.

DaysWithout

I note that the last record of 394 days occurred just after the last stock market bubble got underway in 1995.  That bubble peaked in 2000 and we never really left bubble land once we entered it except for a brief time at the bottom of the 2009 bear market.

Then the central banks fired up their printing press and dropped trillions on wall street to re-inflate their bubbles in search of the elusive 2% consumer inflation… but that is another long story.

The Charts

So what’s up with the TSP I fund that invests in the MSCI EAFE index – the what?  The MSCI EAFE index or the one that tracks the rest of the developed world’s publicly traded corporations.  After years of under-performance, it looks like it is keeping up with the US equity funds.  What gives?

The narrative is that the rest of the developed world’s economy is picking up and that the central banks may in fact hit (to their great surprise and fear) their 2% consumer inflation target… so jump on in.  Missing from this narrative is that the US dollar has lost about 14% of  value to the rest of the world and this translated into extra gains on top of international stocks over the last year for US investors.

1 year Relative Performance

Sooo… as long as the dollar keeps tanking, the TSP I fund should do well.  After that, who knows.  Meanwhile, the SP500 index has outperformed the MSCI EAFE index by over 100% since 2011.  This has a lot to do with the lack of tech stocks in the rest of the developed world.  Most tech stocks are listed on the US exchanges and are US companies.

And the fact the rest of the world lacks our awesome profitable healthcare sector…

healthcare

If you look at the actual companies outside of the US and in particular the STOXX 600 index which is the European equivalent to the SP500, then you might note it has not gone anywhere recently – up 2% compared to 19% for the SP500 since 8 May 2017.

Since Euroland makes up roughly 40% of the MSCI EAFE index this means the falling dollar has been doing the extra lifting to help the TSP I fund keep up with the US equity fund performance for US investors – not European investors.

Dollar Index 2

Maybe the European stock markets are flat because of their rising currencies, but then again Japan’s markets has kept up with the US.  I am not a currency guy so I am only making the point that the TSP I fund has had *temporary* help from a falling dollar which in the long run will be bad for European exports.

 

3 month relative

And even with the help of the US dollar, the SP500 (TSP C fund) has pulled ahead of the other funds in the last 3 months.  While the TSP I fund made up lost ground since the beginning of 2018, a big part of that gain may have to do with the dollar crashing.

An astute observer may notice that all the funds are up since the beginning of 2018 – a lot!  As a matter of fact, they appear to be accelerating!!  Where are the funds coming from to drive them into their parabolic move?  I addressed this in TSP Charts: Going Parabolic.

The short answer is that retail investors are “all-in” after the central banks and corporations removed copious supply from the financial markets since 2009 driving equities to their highest valuations compared to revenue… highest ever!

Cash

And the finale appears to be the great move out of the US bonds due to rising interest rates and into… drum roll please… chasing the stock market higher and it also appears out of the US (diving dollar).   Then what?

And then the markets will close. Technical difficulties, nothing to see here, move along.

Until then TSP & Vanguard Smart Investor will provide stock market warnings for serious and reluctant investors as we did in 2015…

 

18 August 2015 interim update: “Market internals remain weak and have for some time.  Aversion to risk as measured by credit spreads in the bond market have now reached levels that historically been met with significant market corrections”

14 December 2015 Special Timing Report: “…our risk aversion indicators are indicating a potential market crash anytime in the next few weeks…”

or just stick with wall street…

Wall Street ‘experts’ have missed every stock market crash in 20 years

 

Invest safe, invest smart… better yet join us now