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Of Fact-Checkers And Dreamers

By March 19, 2024April 16th, 2024No Comments

From November, US financial markets and beyond began dancing to the tune of the US Federal Reserve, who hinted that collapsing inflation would allow interest rates to be cut sharply and soon.  With the bleary dawn of 2024 the rhythm became more a stagger and a wobble, with bursts of exuberance, almost exclusively in technology.  Let’s look at the detail.


It’s Not All Bad News!

Last time we highlighted a number of positives, and here is a brief update:

  • The UK stock market has shown signs of life in recent months, but remain on your guard.
  • Japan has finally begun to catch the attention of global investors (34 years after the last peak!).
  • Government bonds have bounced since the Autumn, after a torrid couple of years.
  • China might be stirring after going sideways and down for 17 years, but it is early days.
  • To a large extent commodities rely on China, though gold is already grabbing some headlines at a new peak.

These are all undoubted positives, but not sufficient in themselves to assuage a significant pool of thinking money managers and analysts, who were frustrated in 2023 and doubting in 2024.


Widespread Money Manager Frustration

Following our last market comment (They Think It’s All Over) we received a flurry of introspective 2023 reviews from some very smart investment managers.

Let’s start with the worlds most famous investor, Warren Buffet, in his 2024 letter to shareholders:


“Today’s active investors are neither more emotionally stable

nor better taught than when I was in school.

For whatever reasons, markets now exhibit far more

casino-like behaviour than they did when I was young.

The casino now resides in many homes and daily tempts the occupants.”


“Our company holds a cash and U.S. Treasury bill position

far in excess of what conventional wisdom deems necessary.”


This is Buffett-speak for the world’s gone mad, he’s not playing, and is sitting on loads of cash.

Our latest TopFunds Guide* sets out similarly frustrated-cum-disbelieving sentiments from a range of other very experienced, high quality money managers from around the globe.

One ordinarily accomplished manager of $3 billion told us:


“Too many of the things which were meant to go down went up,

and a few of the things which were meant to go up went down.”


Another managing $2 billion expressed his frustration thus:


“What worked yesterday isn’t working today and probably won’t work tomorrow.”


Ok, so this last one probably needs to think a bit more constructively!

So if there was widespread frustration from those sidestepping the self-evidently historical extremes in the US, who was it that was buying and pushing those US financial markets higher?


Believers Are Without Hesitation

The latter are frustrated because they think objectively not emotionally, they check the facts not social media, and have a good feel for the history of financial markets.  But not everyone is frustrated. The dominant US financial markets have been driven upwards by “believers”, investors who are seldom distracted by facts or guided by history, and who are flush with certainty on the easy pickings to be had.

They would certainly give short shrift to Voltaire’s warning, “Uncertainty is uncomfortable. But certainty is absurd”.

These believers are typically joined in eras of over-exuberance by those being driven emotionally, for whom the FOMO label is very apt – they feel the uncontrollable urge to invest driven by Fear Of Missing Out.

It has always been thus when inflated financial markets linger around their peaks.


The Evolving Hooks

Such believers are not stupid, and they don’t buy randomly.  They seek out hooks to justify their over-enthusiasm.

From November the hook was falling inflation which in turn held out the prospect of interest rates heading lower, the fuel for financial markets to head higher.  Comments from the US Federal Reserve added fuel to the flames of positivity.

By Christmas some hesitation set in, and with the bleary dawn of 2024 the rhythm became more a stagger and a wobble, with bursts of exuberance, almost exclusively in technology.  Let’s look at the detail.

It was now being whispered that US inflation might stay stubbornly high, and even the possibility of interest rates going up, which would really put the cat amongst the manic pigeons.  But the US inflation numbers so far in 2024 have been mixed rather than scary.

Bond investment specialist PIMCO had to admit to a range of unanswered questions – in their words there are “complex and evolving scenarios with many crosscurrents”.  This is code for “right now we haven’t a clue”.  This kind of honesty is a lot more useful to investors than the dangerous dogma emanating from some quarters, or the entrenched complacency of others in our industry.

You might think this would dampen the spirits of the believers, but it was not to be so.  They were already being baited by another hook – Artificial Intelligence or AI.  As AI develops it will enable a new layer of efficiency into a wide range of tasks – just as the invention of the wheel meant you didn’t have to carry everything on your back, and you could sell stuff to villages further afield.  But these changes didn’t occur overnight.  In the case of AI, it got going in 1956-1973, as you can read here.

You will likely have heard of Nvidia.  This company is currently the darling of investors seeking super profits from the dream of AI, as they sell the powerful chips which enable the application of AI.

They are making super profits just now as wealthy governments and companies jostle for these super expensive chips, afraid of missing out.  They aren’t sure precisely what they might miss – but they just can’t take the risk.  Sound a bit flakey?

Think of Nvidia like the guys selling picks and shovels to the gold prospectors in the California Gold Rush of 1849.  The pick seller makes a stack of money very quickly as prospectors rush in.  Then the gold runs out, or there isn’t any.  The pick seller then goes home or goes bust.

How quickly will those chip buyers find gold in those hills?  Unless the results emerge quite quickly, will they be buying more of the same next year?  It is easy to see how the dream might turn to fantasy, and the latest blast of hot air which has pushed the US market higher will evaporate.

The vulnerability is obvious.


That Vulnerability Issue… Again

To give you a sense that something does not smell right, the market value of Nvidia is equal to the whole of the Chinese stock market.  In the first 6 weeks of this year its market value increased by $600 billion, which is bigger than the size of each of these economies – Sweden, Belgium, Nigeria, Singapore, Vietnam.

The smartest guys at the tech party booked a taxi earlier than most.  Mark Zuckerberg, boss of Facebook parent Meta, began selling his own shares in November.  Amazon’s Jeff Bezos has also sold $4 billion of his shares, his first sales since 2021.

There was a similarly extreme landmark on 2nd February.  Since 1926 the two main US stock markets have never both hit new peaks on a day when the number of stocks going down was twice as great as the number going up.

These are just two of the numerous indicators highlighting that we are midst a valuation bubble in the US and an investor mania.  The bubble is defined by the maths, and the mania is observable from investor behaviour, the believers.  If you take these as a given, as we do, then you also have to accept that they tell you nothing of when it will burst – there is no magic point when it ends – nor what event will trigger that ending.  Yet we know from history that when such bubbles go pop, invariably losses exceed 50%.

This means that investing now is a paradox, and more complex than usual.  There might still be a great opportunity to make decent money in the short term.  On the other hand, some investors might be on the verge of losing 50% of their accumulated life savings!  It could be both.

As the UKs Jonathan Ruffer put it (his firm manages £26 billion, 330 staff):


“The extraordinarily long bull market in equities

has not prepared investors for the battles ahead…

This is not an intellectual exercise, it is a battleground.”


In Summary

All of our experience and research stretching back decades gives us great confidence in what will be achieved in the years ahead.

But right now we must focus on navigating the uncertainties of the waters in which we now sail.

We seek to strike the right balance between the opportunities we highlighted at the beginning, and the self-evident vulnerability derived from the US bubble and a mountain of poor-quality debt around the globe.

We stand ready for what comes next, as events can move fast, and undoubtedly will.



* If you haven’t received your copy of the 44th edition of the TopFunds Guide, please email to request a copy.



Dennehy Wealth