Mining Stocks

Have We Finally Hit Peak Liquidity?

The behavioural and psychological changes spurred by Covid-19 are behind the increased liquidity and once unimaginable valuations on North American stock exchanges. Market sentiment is now at the highest levels ever due to a combination of factors.

In this report, we’ll explain four reasons why the pandemic, and retail investors at large, are responsible for the incredibly bullish movements seen in the markets as of late:

  • Increased Screen Time Leads to Speculation
  • Negative Real Interest Rates / Increasing Inflation
  • Soaring Savings and Disposable Income
  • New Class of Investors Entering Market

Increased Screen Time Contributes to Speculation

A report released by Qustodio shows a dramatic spike in screen time since the onset of the pandemic in March 2020. According to Qustodio,

“In the U.S., where there is a partial lockdown and social distancing methods differ on regional level, Qustodio analysis shows a 95% increase in screen time since the first school closures in the nation on March 16.”

Qustodio chart showing the evolution of U.S. online activity
Source: Qustodio

 

An eMarketer article from July of 2020 titled, “The Pandemic Is Accelerating Time Spent with Mobile Video and Gaming,” further highlights the increasing use of screens:

“We expect that the average US adult will watch more than 2 hours of digital video [per day] in 2020, up 19 minutes from 2019.”

The article goes on,

“Jun Group, a mobile ad firm that places 85% of its ads within mobile games, saw in-app audience ad requests jump 98% between March 12 and April 5. Although this doesn’t necessarily indicate a doubling of time spent among mobile gamers, it does signify a substantial increase in mobile gaming.”

Now, you may be asking yourself: what does increased screen time have to do with investor speculation?

Well, a critical factor driving Canadian stock valuations is the digital news cycle. Once occupied with their work, sports, and social life, people with disposable income are now without those activities and have substituted them with learning about assets such as US equities and Bitcoin online – both of which are at or near all-time highs. For millions of Canadians spending more time online, financial market headlines create a super variant of FOMO or “fear of missing out.”

Chart of Bitcoin’s Value from 2014 to 2020 (USD)

Chart of Bitcoin's value from 2014 to 2020
Source: Coindesk

 

Widely publicized, parabolic surges in value like that of Bitcoin’s contribute to an investment culture that prioritizes fast gains above all else. With stories about Bitcoin and Tesla dominating the digital press, we are seeing rampant speculation in multiple sectors in search of similar returns.

Negative Real Interest Rates / Inflation Drives Home Prices to Record Highs in Canada

As interest rates fail to outpace inflation and the value of Canadian real estate sits at record highs, many investors feel the stock market is where opportunity lies.

According to the Financial Post,

“Toronto’s real estate board reported last week that the average price for homes sold in Canada’s largest city hit $930,000 (US$734,000) last year, the highest on record and up 13.5 per cent from 2019.”

The wealth effect — driven by record-low interest rates and inflation — gives many homeowners an extra sense of prosperity. So, as homeowners get richer on paper, they may be incentivized to pour excess capital into the markets in search of yield.

Soaring Savings and Disposable Income = Speculation

The third factor that could be driving Canadian markets to multi-year highs is the record amount of cash being hoarded amid the pandemic.

Towards the end of last year, the Financial Post published an article that highlighted this phenomenon, writing,

“Frugal Canadian households and businesses have accumulated a minimum of $170 billion in excess cash throughout COVID-19 and are currently sitting on the largest cash hoard in recorded history, according to CIBC.”

Fianncial Post Chart Showing Canadian Savings from 2010 to 2020
Source: Financial Post

Liquidity on TSX Venture and CSE Soar

We believe some of this excess capital is pouring into Canada’s junior markets (TSX Venture and CSE).

In December of 2019, the Venture saw 2.70 billion total shares traded — in December 2020, a whopping 6.58 billion shares changed hands. The value of all shares traded back in December 2019 totalled $828 million, while in December of 2020, the total value eclipsed $4 billion.

In other words, the TSX Venture saw a 4X increase in liquidity for December 2020 when compared to the same month in 2019.

TSX Venture Exchange Chart for December 2020Source: TMX Group

Liquidity and valuations also soared on the CSE, Canada’s other junior market.

CSE Composite Index Chart – 1-Year Chart

CSE Composite Index (1-Year Chart)
According to CNSX Markets, CSE-listed issuers raised $3.6 billion in approximately 1,200 financing deals over the course of 2020. Source: CNSX Markets

New Class of Investors Takes Venture Higher

The final potential factor driving valuations in the US and Canada is the influx of new investors. These are investors who began speculating on the markets during the pandemic for one reason or another, whether it was the opportunity to profit from the economic downturn or a remedy for quarantine boredom. This theory offers a possible explanation for the wide distribution of capital across multiple sectors, including psychedelics, gaming, cryptocurrency, cannabis, health and wellness, tech, and, of course, mining.

One possible problem, however, is the fact that hundreds of thousands of these investors (many of which are aged between 20 and 40) have never experienced a true bear market. After all, how could they? US equities have been in a bull market since early 2009. This suggests that any prolonged decline in the markets may result in a rapid loss of confidence and/or significant financial hardship for these investors. We can only hope they are not playing on margin.

Stay Cautious, Despite Record High Valuations & Soaring Market Sentiment

According to a recent Citi Panic/Euphoria model shared by Zerohedge, positive market sentiment is at its highest level ever recorded. While the below graph does not include data from the roaring 1920s, it’s safe to say today’s investors are in an unprecedently euphoric state.

Citi Panic/Euphoria Model for 2020

 

With Biden touting a near US$2 trillion stimulus plan and central banks and other governments remaining accommodative, it seems positive market sentiment will remain in place, enabling the market to continue its rise.

Read The Globe & Mail’s recent report, titled, “Governments must ‘spend as much as you can’ to revive economies, IMF chief urges”

However, when everyone seems to think something is inevitable, it usually isn’t… or at the very least, is on borrowed time.

All the best with your investments,

 

PINNACLEDIGEST.COM

 

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