September 11, 2018

All bull markets climb a “wall of worry,” but last week CNBC reported that JPMorgan’s top quantitative analyst, Marko Kolanovic, is predicting a “Great Liquidity Crisis,” triggered by flash crashes and social unrest. Kolanovic said that the trillion-dollar shift to passive investments, computerized trading strategies, and electronic trading desks would cause and then exacerbate a series of sudden, severe price drops.

Kolanovic has a PhD in theoretical physics and is essentially an algorithm expert. He said, “Right now, you have large groups of investors who are purely mechanical…. They sell on certain signals and not necessarily on fundamental developments, such as increases in the VIX, or a change in the bond-equity correlation, or simple price action. Meaning if the market goes down 2%, then they need to sell.”

Frankly, I agree with part of what Kolanovic is saying. My white paper (co-authored with Jason Bodner) discusses the contagion risk from all the RoboAdvisors trying to sell at the same time. Check out this link to our report, “How the Robo Advisor Revolution May Be Leading Up to an Impending Disaster.”

Where I disagree with Kolanovic is on his comments on social unrest. Specifically, Kolanovic said, “The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968.”  That was the peak year in the Vietnam War as well as the assassinations of Dr. Martin Luther King Jr. and Senator Robert Kennedy, plus the protests at the Democratic National Convention, a truly horrible year.

Kolanovic talked about how the internet and social media are radicalizing Americans and said, “If they (central banks) don’t manage to (stabilize asset prices), then you’re spiraling into depression, social unrest and a lot more disruptive changes that can negatively affect returns for a very long time.”

Fortunately, the overall situation today is a lot different than in 1968. The upcoming mid-term elections will be a big test of whether American voters care more about economic prosperity or the social unrest Kolanovic is talking about. Since most of TV news is dominated by pundits and talking heads rather than real news, I suspect the media may be wrong in their predictions for the second election in a row. Much of the outrage that you see on TV is that of the media itself, including CNBC, trying to distract you from the economic prosperity and the biggest surge in GDP in decades. In conclusion, Kolanovic may be a very smart math guy, but I suspect that his social views have nothing to do with his algorithm expertise.

If anything, market cycles are being increasingly compressed. As the flash crash on August 24, 2015 proved, investors can lose 35% intraday in big liquid ETFs even though prices can be close to unchanged by the end of the day. The real risk to the stock market is that ETFs can trade at big discounts to net asset value (NAV) during flash crashes (as I have documented in multiple articles and white papers), but these NAV discounts on ETFs can also trigger buying pressure to quickly emerge, pushing the market back up.

Unlike 2008, We’re Nowhere Near a Recession Now

Unlike 2008, the economic statistics tell us we’re nowhere near a recession. On Tuesday, the Institute of Supply Management (ISM) announced that its manufacturing index surged to a 14-year high of 61.3 in August, up from 58.1 in July. This was a big surprise, since economists expected a decline to 57.9. The new orders component surged 3.2 points to 65.1 and the employment component rose two points to 58.5.

On Thursday, ISM announced that its non-manufacturing (service) sector index rose sharply to 58.5 in August, up from 55.7 in July. A surge in the components for new orders, production, and employment were largely responsible for the rise. All but one of the 17 industries improved in August. Overall, the robust ISM manufacturing and service sector indices bode well for robust third-quarter GDP growth.

The biggest news was Friday’s announcement that 201,000 payroll jobs were created in August, better than economists’ consensus estimate of 192,000. Average hourly earnings rose 0.4% (10 cents) to $27.16 per hour. In the past 12 months, average hourly earnings are up 2.9%. The unemployment rate remained unchanged at 3.9%. The average work week was revised lower to 34.5 hours. Due to rising wages, the Fed is now certain to raise rates 0.25% at its Federal Open Market Committee meeting on September 26.

I should add that on Wednesday, ADP reported that 163,000 private payroll jobs were created in August, led largely by mid-sized businesses adding 111,000 new payroll jobs. The service sector added 139,000 jobs. Overall, the labor market remains healthy and there continues to a shortage of qualified workers.

Finally, there was shocking news last Thursday that Tesla’s CEO Elon Musk was videotaped on the “Joe Rogan Experience” podcast smoking pot and drinking whisky. Another big problem is that Tesla’s new chief financial officer, David Morton, resigned within a month of starting, raising questions about the company’s financial situation. But the biggest long-term problem for Tesla is its competition.

On Tuesday, Mercedes revealed its electric SUV, the EQC, which will be sold in the U.S. in 2020. On September 17th, Audi will reveal its electric SUV, the e-tron, in San Francisco. Jaguar has already announced its electric SUV, the I-Pace, and is accepting orders, plus Porsche’s “Tesla killer,” the Taycan, is also accepting orders. Since the competition is becoming formidable, I expect Tesla’s stock price will continue to collapse. I predict that within 18 months Tesla will be removed from the Nasdaq 100 (QQQ). I then expect that Geely, which owns Volvo, could buy what is left of Tesla after the stock price collapse.

(Please note: Louie Navellier does not currently hold a position in Tesla. Navellier & Associates does not currently own a position in Tesla for client portfolios)

About The Author

Louis Navellier

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