The Acoustics of Market Disruption

So ends the first half of ‘Summer Haze 2019’ – thus far a financial mediapalooza with the sound fidelity of fingernails scrapping down a blackboard, while your neighbour's dog barks incessantly all night at a faulty car alarm.

And we are only now rapidly approaching the deepest part of these doldrums.

Disruption

You’ll hear us use that word a lot as the next decade arrives in just a few short months from now. 

Don't fear the word. Don’t succumb to its negative connotation.

Concentrate instead on the positive side of the effects it brings.

And know that every business will be disrupted and feel, at some point, broken and in need of a fix.

But they won’t be broken at all, just in need of enhancement; of improvement and refashioning, like when an old condominium on Park Avenue gets a remodel/rehab, and most importantly improves its value.

It’s the same process that’s going on across the board now, and for the next 20 years. 

P&G is an old boring example of this refit process. Check what it has done in the last 15 months.  Now, expect all brands to go through the remake - 3M, JNJ, GIS, KMB - all of them.

What’s the Remodel?

It’s Generation Y. 

We’ve been taught that tides rise and then recede on the pull of the moon. 

They change from high to low every six hours.

But this tide is different. It will rise, covering up and changing every old aspect of every business for the next 35 years.

And the favourite tool of this rising tide is technology.

We have spent decades with two words when referencing markets and sectors; "growth" and "value". 

Most have not stopped long enough to recognize these are useless terms in the grander scheme of things. Think about it, no one would ever suggest that they’re buying something that is not of value, right?

The business dependency on the word "growth" will fade. And there will be an extreme and patient focus on rising dividend income over time (as rates stay low and refi benefits drop to the bottom line of the dividend growth engine), and a focus on growth of capital values.

And Now, The Disquieting Bit…

The reference to "growth" ahead will be almost entirely technology-sector driven.

And the masses will conclude that it will be our reliance on the same tech that caused the crash in the dot.com bubble of 2000.

But this is not your father’s technology.

This time "tech" will mean all fashions of technology; Cloud, chips, wireless, SaaS, security, hardware, software, services, delivery, internet, satellite, accounting, retail, medical, etc., etc., etc. 

Heck, don't doubt for a second that some of the largest VC shops will become public entities, and allow everyone to "have a piece" of the next unicorn.

No Money Heaven

Another layer of benefit here is simple, and yet often overlooked.

While many media themes want you to fear that we are all collectively running out of money, the facts speak differently.

The Baby Boomers created more wealth than any generation known to mankind.

And as they age that wealth will trickle down the mountain they climb, seeping into new areas of life; like inheritance, investments, funding, charities, new businesses, new technologies, healthcare advances, etc., etc., etc.

What this means is that the best days are ahead, and alongside them some of the biggest problems.

Yep, it's never a cakewalk, because if it was there would be no benefit available – there’s no payment for no risk.  

In fact, if you ever wake up with no problems to fix, check your pulse. Having problems to fix is a good thing.

70% Don't Like Things

The latest from AAII continues this theme of the doldrums, even peeking into the darkness of new highs and a foggy future.

This latest chart shows the other side of the Bullish Sentiment, and what happens when Bearish and Neutral sentiments are the overwhelming majority of the crowd as they are now:

Your eye needs to focus on the red line. 

It’s extremely rare to see this type of "despondent sentiment" meshed with rising markets in general. 

The levels being reached in recent weeks with the 10-week moving average were last seen when the S&P (the black line on the chart) was nearly 1000 Index points lower.

This, of course, matches the Fund Flows data in the chart below which is emblematic of an extreme level of underlying fear and concern.

Sadly, I would point to the ever-increasing "sensationalizing of financial markets" that we are all witnessing in the aforementioned mediapalooza designed to capture eyeballs.

The summer demands the noise rise higher as the crowd thins, and this rampant abuse of the crowd's emotions is driving particularly bad decisions:

From Bespoke:

√ Earlier this week, the Investment Company Institute released weekly mutual fund flows for the week ending July 10th.

√ Every single category of equity fund flow had outflows this week.

√ With equity fund flows in the bottom quintile of all periods in recent weeks, bond funds have been the complete opposite story.

The Bottom Line?

Equity fund flows have been very large.

More than $320BN has flowed out of equity funds over the past year, more than any other 52-week period in history.

So, why is this a vital time of surprising sentiment with massive surprises to the upside still likely over time?

Because even at the very height of the financial crisis, investors were pulling substantially less from funds.

And look at that percentage flow into Bonds.

My hunch is that this quarter and next quarter will be nothing to write home about.