Time to Trump audit your portfolio and eliminate any bubble trouble

Did you dump Bitcoin and buy the tech Fang stocks of Facebook, Apple, Amazon, Netflix and Google at the start of the year? Have you recently bought cryptocurrencies hoping for another price surge?

If so, I urge you to consider how long your luck is likely to last. Donald Trump is on the rampage whacking up tariffs on trade and it appears lowering US interest rates is next on his agenda. He shows no sign of taking a summer vacation.

With the Nasdaq in record territory this month, your Fangs have gained more than 50 per cent in value in the past year. Meanwhile, Bitcoin peaked at $20,000 last December and struggles to keep its losses in 2018 above the 70 per cent mark.

Bubble investments certainly can be highly profitable for those in and out at the right time. But Bitcoin, for example, has been a big loser for those jumping on the bandwagon too late.

For now, Wall Street is backing Trump and share prices are up. But you only have to consider the plunging stock price of Moller–Maersk, the world’s biggest shipping line, to see what comes next for global trade - and US multinationals will be the biggest losers here.

So, will the gravity-defying Fangs be the next bubble to pop? Amazon, for example, commands a market capitalisation that is enough to make its founder Jeff Bezos the richest man in the world and yet its main operation remains barely in profit despite killing off vast swathes of traditional retailing.

We have seen investment behaviour like this before in the high-tech Nasdaq stock market. The epic Nasdaq or dot-com Crash of 2000 is not mere folklore; many older market players can remember the huge dive in tech company valuations and the hundreds of me-too dot-com companies that died in the process.

The huge price spike by the top company stocks, like the Fangs, in the first half of 2018, is an absolute classic red warning flag to any sane investor.

What has happened to the oil price is also very similar. Before last week’s correction oil prices were up more than 60 per cent year-on-year. Anyone in the Middle East with a long memory will remember the big spike in oil prices to $145 in July 2008 that preceded the autumn market crash that saw prices plunge to $30 a barrel.

Autumn 2008 also saw the Global Financial Crisis and the last great stock market crash. A decade later and the bull market for US stocks has been extraordinarily long, resulting in record valuations for shares. What could possibly go wrong?

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Serious investors are almost never totally out of the markets, but they do quietly sell out to raise cash when the madness of crowds is at its height. They will later buy up the best-in-class when the market goes belly up.

Why is it Warren Buffett always springs to mind at this point? Poor Mr Buffett was displaced as the world’s third richest man last month by none other than Marc Zuckerberg, the 34-year-old Facebook founder.

Still, Mr Buffett may still soon be top dog again. His record cash pile of more than $106 billion is ready to snap up quality on a discount when the Nasdaq bubble pops.

As he is one of the largest shareholders of Apple, it is not hard to predict where at least some of this massive cash surplus will end up, when the time and price are right.

Only recently Mr Buffett’s older business partner Charlie Munger hinted they would like to own more of Apple.

Mr Munger,94, has also been one of the biggest critics of cryptocurrencies, calling them ‘rat poison’.  Indeed, the 70 per cent losses on Bitcoin this year have been nothing in comparison to the 100 per cent losses on the thousand or so ‘dead coins’ that have failed completely.

And yet speculators continue to buy into so-called Initial Coin Offerings for new coins - a record $13.9 billion in the first half of this year on one count. They are not considering what they are actually buying, who they are giving their money to or how they might get it back.

It’s a human nature defect where greed replaces reason.

I’ve been reading some of the ICO prospectus statements and can see why so few seasoned financial professionals like cryptocurrencies.

They are thick on bogus technological claims and the desirability of creating currencies outside of government supervision, as if that is not a dangerous thing to do. Make sure your portfolio does not contain some of the ‘dead coins’ we will see before the end of the year.

Are there any assets where it might be relatively safe to stay invested a while longer?

Fears of higher interest rates are not being overdone. Donald Trump’s Twitter remarks last Friday certainly suggested so and he appoints the Federal Reserve committee that decides them. However, any stock market correction or crash would instantly put a cap on such rate rises and probably send them into reverse.

That would make buying treasuries at current yields a good idea, and it could also encourage a flow of money released from equities into property, a thought possibly not lost on the real estate billionaire who occupies the White House.

I’ve noted in the past in this column that Dubai property is at a cyclical low with relatively strong rental yields, so that might make it a good investment. The same could be said of UAE bonds too.

As for other bubbles, I would highlight art and classic cars and any sector where Chinese buyers are important. Donald Trump’s trade war is bad news for China, which is now deeply over borrowed and very vulnerable in a major financial crisis.

Other traditional safe havens, such as the Japanese Yen, Swiss Franc or precious metals would also gain in a major upset in global financial markets; the euro is also too low.

My guess would be that as in 2010 to 2011, gold and silver would offer the greatest returns for investors in the aftermath of a second global financial crisis, with the inflationary effect of trade wars and a weaker dollar adding to the attraction of precious metals this time around.

Don’t take too long getting your portfolio into shape this summer. You are unlikely to be alone in receiving the message that the bubble trouble first alerted by crypto crashes and failures is spreading. Chinese stocks are already in a bear market this year. Who’s next?

Peter Cooper has been writing about finance in the Gulf for more than 20 years