Soft landing

December 26, 2019

by Jean-Manuel Rozan

Everyone; pundits, economists, journalists, all kinds of people who are in the business of giving their opinion about the stock market are almost unanimous: the next crack is just around the corner. I think this position is essentially wrong for many reasons. The first one of course is that, since March 2009 the stock market has sky-rocketed to the biggest bull market in the history of mankind and all major stocks have reached new highs, while those mentioned earlier, the specialists, the economists, the pundits, the journalists paid to give their opinion on the stock market have all consistently predicted the next downfall every day for the past 10 years. In other words, they have completely missed the big picture, have not understood the bull market that we are in and have no clue as to what is going on, therefore they have no clue what will happen next.

An object of marvel, indeed. In my lifetime as an investor and trader, which started in 1983, I have never seen such a unanimous consent that things are going to get worse every day and no one understands why stocks are going up and give a false reason. What they say is that stocks are going up because of the increase in liquidity due to the monetary policy of central banks (QE). Therefore, they deduct that when liquidity will stop stocks will crash.

If that was so simple and if markets would work in such a simple way everyone would understand what is going on and everyone would be rich. Those who give their opinion, by the way, should be reminded of the following; if their opinion was worth something why they would give it? Those who have an opinion that is worth something either they don’t give it or they sell it. So, all the free advice is to not be considered and to be trashed. I want to remind our readers today that for instance a company which is not an internet start-up, such as steady and predictable LVMH, traded at about 60 euros 10 years ago in March 2009, and now it’s worth 400 euros.  So, should you do something as simple as buying LVMH and hold it you would have made 7 times or 8 times your money. Everyone who thought the next crack may happen tomorrow would have stopped you either from buying LVMH at 60 euros or from holding it all the way.

So, the way to get rich in the past 10 years was to invest in stock market and to stay invested and you shouldn’t listen to what people are telling you now; that the way to get rich now is to go short the stock market.

There is a very old saying: a bull market escalates a wall of worry and anxiety, and a bear market descends a wall of confidence. Hence discard the anxiety about central bank liquidity.

I think disaster is not ready to happen. That doesn’t mean that we will continue to see capital gains and stock market gains at the pace of the past 10 years because that is not sustainable. So, between a crack and the end of bull market there is another scenario which I favour and that scenario is a soft landing.

Soft landing is possible because what created the bull market is still in full swing but cannot continue with such strength as it has in the past.

What created the bull market of the last 10 years is an incredible technological breakthrough, often called a paleontological disruption that has affected every corner of the economy and every person in the world. This digital transformation is really a transverse way to improve the productivity of companies and people around the world thanks to digital tools. It has reached the depths of Africa where people now make transactions on their cell-phones, it has reached all the civilized world, it has reached people who do multi-tasks from work and home, it has reached everyone in the world.

A Wall Street sign is displayed in front of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Feb. 9, 2018. The convulsions rocking U.S. equity markets continued Friday, with major indexes headed for the worst week in almost seven years after falling back from early gains. Treasury declines eased as investors sought havens from gold to the yen. Photographer: Michael Nagle/Bloomberg

This transformation that started 10 years ago is not slowing down, it’s accelerating. The pace of innovation everywhere in the world is like a sea that would start to bubble everywhere and the gain in productivity, the gain in awareness, the gain in knowledge, the gain in consumer spending, because of the ability you have to consume, all of that is snowballing, and this is what has transformed companies and economies. This is what explains the bull market. This bull market is much longer than in the past because we are in the middle of this very historical paleoethological disruption. It’s not about to stop. Technology that first changed the internet is now changing the production of electricity, the production of plastic, mobility, ecology, the production of food, and new protein. It has so many aspects and so many wings and it’s going on everywhere in the world.

There are pockets of innovation everywhere in France, in Germany, in England, China, Asia, obviously everywhere in America, you don’t have just one Silicon Valley anymore that dominates, you have pools of innovation everywhere in the world. Of course many, many start-ups will fail, but the innovation of start-ups is now being transmitted to very large companies, much faster than before. This still has some time to run, maybe 10-20 years. It will also of course affect healthcare, medicine, biotechs and it’s making individuals healthier for a longer time. Because it is a truly global phenomenon that has a phenomenal strength, it cannot be stopped so soon, this is a bull market that still has time to run.

Snowballing innovation will create new modes of consumption and that will in turn create new stock market leaders. There is a good chance that the stock market leaders in this cycle, the GAFAs have run most of their course and their prices cannot go up much more. Maybe they could even go down. So, the most likely scenario is the stock market will churn until new leaders emerge.

It will take a while before we identify the leaders of this new cycle. Therefore, during that time of hesitation and churn the market will go up and down, some groups of stocks could go down, others could go up a little bit and there could be a few years (3-4-5-10 years) of hesitation where you don’t have a bull market anymore but you have a rotating group of stocks that go up and down. This rotating soft landing, to come at some time in the future (2-5 years), seems to me the most likely scenario.

Technology and innovation are not about to disappear and there is one thing that we can say for sure; tomorrow will be much better than today, today is better than yesterday, and that’s called progress. Progress is not about to stop.