«We see all the signs of a massive speculative bubble in US technology stocks and are extremely worried about a potential crash in equity markets»

22.07.2020

Mr. Mechelany, in the interview on 11.05.2020 (in German) you gave us a deep insight into your impressive career. How is the crisis in Dubai’s business world going - is your business also affected?

In the amazing world of the Covid-19 pandemic, Dubai and the United Arab Emi­rates have suffered consi­derably consi­dering the heavy reliance of the economy on tourism, travel, hospi­tality and real estate. However, the health crisis was well managed by the Govern­ment with their proverbial effi­ciency and pragma­tism and the economy is proving more resilient than many anti­cipated for now. In the financial sector, the government has the resources to handle any systemic risk and as far as our business of research and advisory, we have not been really affected. In fact, as always, in difficult times there are opportu­nities for expansion and we are currently exploring such oppor­tu­nities.

Is your main customer base locally based or inter­national?

Our customer base is both local and inter­na­tional, but our services are global by nature so the focus is not necessarily the local market for now, even if we see great oppor­tu­nities locally for the long term.

What are currently the highlights of your research?

We were amongst the few analysts and commen­tators to warn about the looming correction in February 2020, and, like most ana­lysts and commen­tators, we are currently amazed by the total disconnect between the exube­rance of US investors and the bubble in the US techno­logy sector and the reality of the under­lying eco­nomies. To tell the truth, having lived through the Japa­nese bubble of the 1980’s, the Asian crisis of the 1990s, the dotcom bubble of 2000 and the Great Financial crisis of 2007, we see all the signs of a massive specu­lative bubble in US techno­logy stocks and are extre­mely worried about a potential crash in equity markets. Many commen­tators are seeing the signs but very few are actually acting upon them. This reminds us clearly of the Japa­nese equity bubble of the 1980s and unfortu­na­tely, we also see the same back­ground of over­leve­rage of the corpo­rate sector that led to the subsequent two decades of debt-deflation that plagued Japan in the 1990s and 2000s. We are clearly long-term nega­tive on the US economy, the Dollar and US equities.

At the same time, we had rightly predicted and are currently witnessing the beginning of a secular asset allo­cation shift out of the US and into Chinese assets and the Chinese currency. China is pulling out of the Covid recession much faster, in a more cohesive manner and from a much more under­valued base than the rest of the world.

We have been advising our clients to increase substan­tially their allo­cation to China and the Yuan.

Where do you see the «big picture» in the coming months?

Fundamentals always come back to the fore at some point and the current disconnect between the valuation of equity markets and the lasting negative impact of Covid will even­tually end. As high­lighted above, the main feature of the current big picture is the specu­lative bubble that is prevailing in the US techno­logy mega caps, testified by the irra­tional rise in these stocks in the second quarter and the behavior of stocks like Tesla that we started to short last week. With hind­sight, investors will look back at this excep­tional rebound in equities, fueled by a specu­lative frenzy of indi­vidual investors, and will wonder how they did not take this unique oppor­tunity to bail out of these hyped stocks.

From an economic stand­point, the reco­very from Covid will be long and arduous in countries like the US where record high unemployment and record high debt will keep a lid on consumption for years, as was the case in Japan of the 1990s. Corporate profits have stopped growing in 2012 and are now going to decline for an extended period of time, something that is not yet factored in by the community of analysts.

From the political stand­point, the damage caused to the world by the Donald Trump’s Presi­dency will be lasting and China has taken a new, and much more asser­tive course for its next deve­lopment phase, as testified by the clamp­down and profound reforming of the status of Hong Kong. But far from being a threat, we see these deve­lopments as posi­tive in the long term as China will finally rise to eco­nomic - and even­tually poli­tical domi­nance - in the next decade. Once again, strate­gically, investors should sell high - the US markets and currencies - and buy low - the Chinese assets and currencies.

This change of world leader­ship goes in fact much further than a simple game of eco­nomic dominance. It is a real questioning of the respec­tive successes of the Western demo­cracies’ models of gover­nance and society and the Chinese, Singa­porean, UAE or Vietna­mese models of Gover­nance where politics is left to profes­sionals - as is the case in the Western private corpo­rations models of gover­nance - instead of asking unin­formed citizens to choose little expe­rienced leaders on the basis of money, dema­gogy and promises that can never be fulfilled by the term limi­tations of our demo­cracies. The world is moving to a new world order, but it could well prove more efficient than the free-wheeling US capi­talism that has bred all kind of excesses ranging from poverty, inequa­lities, crimi­nality to unem­ployment, specu­lation, debt accumu­lation and derelict infra­structure.

How can one subscribe to your well-known research?

Our general research is available by subscription through our website mechelanyadvisors.com and we also provide specific advisory services to insti­tutions through direct consul­tancy agreements.

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