What is a Melt Up?
A melt-up is a sustained and often unexpected improvement in the investment performance of an asset or asset class, driven partly by a stampede of investors who don't want to miss out on its rise, rather than by fundamental improvements in the economy.
Gains that melt-up are considered to be unreliable indications of the direction the market is ultimately headed.
What could happen?
Stock market melt ups present a risk to investors since they are not caused by any fundamental improvements in the economy. In most cases, melt ups share similar characteristics with panic buying since both are driven by a momentum that may not last in the long term.
Although most investors may be tempted to profit from the rising positions in the stock market, they should also understand that such movements last in the short term and the rising performance would be followed by a meltdown. Investors who let melt ups influence their decision are driven by emotions, and it is best to focus on doing due diligence to understand the actual value of an investment.
What would it look like?
What happens after?
The scary bit comes after a melt up as every man and his dog have piled in, buying stocks like candy as they think the market has turned and is off to the moon.
Below is what is likely to play out in some fashion, with time being the altering/unknown factor.
The above example is a drawdown of -60% in the SPX (500 largest US companies tracker) which is feasible if we get a melt up then a global credit bust. This would be very bad for global economies and would likely usher in a depression and some truly testing and worrying times for countries, governments and business.
What can be done?
Well here comes the other bit of the story that we here at The Wealth Gap consistently focus on, Money Printing! What will likely happen in an above scenario is that periodically the markets would be halted (trading stopped) to try cool investor heads and panic and at the same time Central Banks around the world would use a mirage of new words and reasons to essentially pump vast ( we mean VAST ) amounts of liquidity (currency) into the market.
They become the bidder of last resort, aiming to buy to stabilise! Think of a patient that has just lost a leg and is in the ambulance, the central banks are the blood transfusion to keep the patient alive long enough to get into a stable condition and corrective surgery.
Sounds good right? So nice of them…
The problem?
This huge debasement of the currency (money printing) is destroying the value of our medium of exchange while at the same time making the underlying problems worse (expansion of debt). By stepping in all the time (2000, 2008, 2020, next…) and every time increasing the levels of liquidity they are essentially kicking the can down the street and simultaneously making a Very Big problem for a future time.
They know this and this is why you keep hearing about The Great Reset, we will be frank here as our reader expect that of us… we believe the reset is primarily about trying to default on this global debt issue and reset the currency position of the G20. The disguise is Climate Change and Decarbonisation.
Solution?
Well I think you know what we do to protect ourselves from this inevitability. Bitcoin as a protection against a currency reset but one could also look towards the precious metals (Gold & Silver) as they are globally recognised as Money as well.
Till Next Time
The Wealth Gap Team