American stock markets have been disconnected from events for too long and a reckoning, which may come soon, is likely to burn those ordinary investors simply trying to grow their nest eggs.
It is a dangerous time. Despite the volatile and uncertain environment, US stock market indexes continued to climb following a short and sharp blip in February. After that, shares had their best period in more than 20 years in the second quarter.
Money is pouring into growth stocks like the big technology companies, a New York hedge fund owner told me, with little going the way of the "old economy". The millions of people in the US using the Robinhood app to invest for the first time in shares have also skewed the market.
All of this is related to the actions of the Federal Reserve, the central bank of the US, which has since March pumped trillions of dollars into securities to ensure that borrowing rates remain low and that there is enough liquidity in the financial system to give confidence to businesses and people to keep spending.
It seems, however, as if the rally has finally lost some momentum as the coronavirus pandemic has been gathering steam in the US with a spike in new infections. According to some opinion polls, Americans' confidence in the government's ability to handle the crisis - in areas such as getting children back to school - and the Fed's ability to handle the economy is weakening. The price of gold is up nearly 30 per cent this year, hitting another record this week. An investor friend of mine explained to me that this can be viewed as a sign of waning confidence in governments.
Still, a reckoning has been coming for some time, even before the coronavirus hit.
Under Jerome Powell, the Federal Reserve has pumped trillions of dollars into securities to ensure that borrowing rates remain low. Reuters
Nearly a year ago, Michael Burry, who made a fortune predicting the last financial crisis, as depicted in the film The Big Short, warned that the $4 trillion or so of passive money tracking American stock markets was creating a new bubble. The principles behind passive investing – which are sensible – are that over a long period of time you will get better returns by tracking an index, or an entire sector, rather than by trying to pick individual stocks. This strategy tries to account for the boom and bust cycle of markets.
But Mr Burry said in August 2019 that those people investing in tracker funds were not doing so based on the kind of "analysis that is required for true price discovery”; such analysis is based on using the future cash flow or current assets of a company to place a value on it.
Mr Burry warned that this was no longer happening and, as a result, huge amounts of money have been flowing into funds in an unsustainable manner, echoing what happened more than a decade ago when very risky assets became outlandishly popular with investors who didn't fully understand them.
When it came to light that they weren’t worth anywhere near the levels they had reached, it was a swift and brutal ride to the bottom for anyone holding the securities these assets were backing. Confidence evaporated.
Nearly a year ago, Michael Burry warned that the $4 trillion or so of passive money tracking US stock markets was creating a new bubble. AFP
Michael Burry has warned that huge amounts of money have been flowing into funds in an unsustainable manner, echoing what happened more than a decade ago
Today, the investors who use these low-cost and highly efficient passive strategies now make up nearly half of the money in US stocks and have become a risk to the system in recent years.
Yet the concern right now isn't just about how passive investors might impact markets. The broader worry is why American stocks remain attractive during the worst crisis in a century. It is frightening to consider that so much money is being put at risk like this when it is so obvious that there is a disconnect.
Yet, we are even more in the dark about what the true value of financial assets should be in July 2020 than we even were in 2008. The risk profile of US stocks cannot be accurately measured. There are too many unknowns about how the pandemic will unfold and what the actual impact will be on businesses and economies. What the share price of a company should be right now will be not much more than a guess. There should be a deep discount on share prices, not a premium.
At some point, investors will realise that current valuations do not match reality and the race for the exit will be far uglier than what we saw in the last financial crisis.
That awakening could come very soon too, with earnings season under way. We will gain some much-needed clarity about the scale of the damage that was wrought by the coronavirus on corporations in April, May and June, as well as receive some guidance about what the rest of the year could look like.
Confidence is a fragile thing. Once it is lost, getting it back is expensive and time-consuming.
The experience since the last financial crisis a decade ago is ample evidence of that, with central banks around the world unable to wind down their support without severe consequences.
Perhaps that is what many investors currently believe too, that they can always rely on the backing of the US government, no matter the events playing out on the ground, to keep stock markets chugging along.
Yet can the Fed step up its support from these already heady levels if there is another market crash? How long can it continue to pour trillions of dollars into the system after having done so for much of the past decade?
Even if it can meet such expectations, it might be too late by then for badly wounded investors.
Mustafa Alrawi is an assistant editor-in-chief at The National
1. Domestic VAT refund amendments: request your refund within five years
If a business does not apply for the refund on time, they lose their credit.
2. E-invoicing in the UAE
Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.
3. More tax audits
Tax authorities are increasingly using data already available across multiple filings to identify audit risks.
4. More beneficial VAT and excise tax penalty regime
Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.
5. Greater emphasis on statutory audit
There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.
6. Further transfer pricing enforcement
Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.
7. Limited time periods for audits
Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.
8. Pillar 2 implementation
Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.
9. Reduced compliance obligations for imported goods and services
Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.
10. Substance and CbC reporting focus
Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.
Contributed by Thomas Vanhee and Hend Rashwan, Aurifer
Where to submit a sample
Volunteers of all ages can submit DNA samples at centres across Abu Dhabi, including: Abu Dhabi National Exhibition Centre (Adnec), Biogenix Labs in Masdar City, NMC Royal Hospital in Khalifa City, NMC Royal Medical Centre, Abu Dhabi, NMC Royal Women's Hospital, Bareen International Hospital, Al Towayya in Al Ain, NMC Specialty Hospital, Al Ain
The schedule
December 5 - 23: Shooting competition, Al Dhafra Shooting Club
December 9 - 24: Handicrafts competition, from 4pm until 10pm, Heritage Souq
December 11 - 20: Dates competition, from 4pm
December 12 - 20: Sour milk competition
December 13: Falcon beauty competition
December 14 and 20: Saluki races
December 15: Arabian horse races, from 4pm
December 16 - 19: Falconry competition
December 18: Camel milk competition, from 7.30 - 9.30 am
December 20 and 21: Sheep beauty competition, from 10am
December 22: The best herd of 30 camels
The Bio
Favourite vegetable: “I really like the taste of the beetroot, the potatoes and the eggplant we are producing.”
Holiday destination: “I like Paris very much, it’s a city very close to my heart.”
Book: “Das Kapital, by Karl Marx. I am not a communist, but there are a lot of lessons for the capitalist system, if you let it get out of control, and humanity.”
Musician: “I like very much Fairuz, the Lebanese singer, and the other is Umm Kulthum. Fairuz is for listening to in the morning, Umm Kulthum for the night.”
The biog
Name: Greg Heinricks
From: Alberta, western Canada
Record fish: 56kg sailfish
Member of: International Game Fish Association
Company: Arabian Divers and Sportfishing Charters
The Facility’s Versatility
Between the start of the 2020 IPL on September 20, and the end of the Pakistan Super League this coming Thursday, the Zayed Cricket Stadium has had an unprecedented amount of traffic.
Never before has a ground in this country – or perhaps anywhere in the world – had such a volume of major-match cricket.
And yet scoring has remained high, and Abu Dhabi has seen some classic encounters in every format of the game.
October 18, IPL, Kolkata Knight Riders tied with Sunrisers Hyderabad
The two playoff-chasing sides put on 163 apiece, before Kolkata went on to win the Super Over
January 8, ODI, UAE beat Ireland by six wickets
A century by CP Rizwan underpinned one of UAE’s greatest ever wins, as they chased 270 to win with an over to spare
February 6, T10, Northern Warriors beat Delhi Bulls by eight wickets
The final of the T10 was chiefly memorable for a ferocious over of fast bowling from Fidel Edwards to Nicholas Pooran
March 14, Test, Afghanistan beat Zimbabwe by six wickets
Eleven wickets for Rashid Khan, 1,305 runs scored in five days, and a last session finish
June 17, PSL, Islamabad United beat Peshawar Zalmi by 15 runs
Usman Khawaja scored a hundred as Islamabad posted the highest score ever by a Pakistan team in T20 cricket
Direct flights from the UAE to the Nepalese capital, Kathmandu, are available with Air Arabia, (www.airarabia.com) Fly Dubai (www.flydubai.com) or Etihad (www.etihad.com) from Dh1,200 return including taxes. The trek described here started from Jomson, but there are many other start and end point variations depending on how you tailor your trek. To get to Jomson from Kathmandu you must first fly to the lake-side resort town of Pokhara with either Buddha Air (www.buddhaair.com) or Yeti Airlines (www.yetiairlines.com). Both charge around US$240 (Dh880) return. From Pokhara there are early morning flights to Jomson with Yeti Airlines or Simrik Airlines (www.simrikairlines.com) for around US$220 (Dh800) return.
The trek
Restricted area permits (US$500 per person) are required for trekking in the Upper Mustang area. The challenging Meso Kanto pass between Tilcho Lake and Jomson should not be attempted by those without a lot of mountain experience and a good support team. An excellent trekking company with good knowledge of Upper Mustang, the Annaurpuna Circuit and Tilcho Lake area and who can help organise a version of the trek described here is the Nepal-UK run Snow Cat Travel (www.snowcattravel.com). Prices vary widely depending on accommodation types and the level of assistance required.
UAE currency: the story behind the money in your pockets
