Modern gaming stocks have never seen a secular bear market. Sounds crazy right? It’s true. They’ve certainly seen cyclical bear markets. Vicious ones that’ll make you sick and destroy your finances if you’re leveraged. The crash of ‘08 was certainly a cyclical bear market. The Macau crash of 2014 was, too. But for long term holders they’re just aberrations of one kind or another on a long term uptrend.
The oldest of modern gaming stocks have only been around since the late 1980’s. MGM, among the oldest, went public in May 1988, only 30 years ago. Secular market trends span longer periods than that. Bonds were in a secular bull market from 1981 to 2016 for example. Since its IPO, MGM has been in a secular bull market along with most other large cap gaming stocks.
The oldest and most veteran UK gaming companies have only been public in their modern incarnations since the late 1990’s. There have been great years and there have been horrible years, but buy and hold still hasn’t failed. Even Las Vegas Sands, which suffered a 99% collapse from 2007 to 2009, is still above its 2004 IPO. Wynn’s long term chart looks like riding an especially enraged mechanical bull, but the secular bull trend is clearly intact nonetheless. Macau stocks are way too young to even be on the time scale of anything secular. These casinos spent their adolescence in a time of extreme global monetary stimulus. It’s like being surrounded as a child by a bunch of cocaine addicts and thinking it’s totally normal. Modern gaming companies simply don’t know any other type of environment.
Right now we are clearly in the midst of yet another cyclical bear. The question is will it turn into a secular trend. The bellwether Macau gaming stocks are collapsing faster than they did in 2014 without a clear catalyst that affects fundamentals like an attack on the VIP sector. Galaxy is down 45% in 7 months. Back in 2014 that degree of collapse took 10 months. Las Vegas Sands is down 38% in 4 months. That level of decline took 10 months to materialize from the 2014 top. Wynn is down 53.5%. The same decline took over a year in 2014.
These rates of decline are rivaling those of 2008, and they are pointing to something more worrying than just another cyclical bear. They could be the beginning of a secular bear, something more similar to the US stock market between 1966 and 1982 when the Dow Jones just oscillated back and forth for 16 years as price inflation kept eating into real returns. We have become accustomed to more violent spurts lasting a year or two and then quick recoveries, but this sort of situation is only possible when you can abuse the debt markets in order to reinflate equities. Once price inflation becomes obvious, you can’t do that anymore, which is precisely why we had a secular bear market in the 1960’s and 1970’s. The Federal Reserve was fighting inflation instead of inflating bubbles back then, which is why bonds were in a bear market. The Fed was selling debt, not buying.
If this is the beginning of a secular bear market, here’s what should happen from here in broad strokes. First, we should start seeing confirmation of softening volumes in upcoming earnings from Melco, MGM, Penn, and others. Earnings and revenues themselves may not be affected yet. Let’s give that another quarter or two, but volume growth should be starting to level off. Over the next few months, the general downtrend should continue as stocks respond overly negatively to bad news and only tepidly to positive developments and fall down the proverbial slope of hope. We’ll see enormous up days here and there amid calls for a bottom that will keep investors in the game but they won’t hold.
At a certain point, central banks, China’s PBOC, the Fed, the ECB and whoever else, will be called in to act in a concerted effort to reflate the bubble one more time. When they do, we’ll have a short term bottom and that will be the time to buy for a short to medium-term trade. But when that happens and they flood the world with liquidity once again, price inflation all over the world is going to break loose. Just like in the late 1960’s and throughout the 70’s, stocks will bounce up and down nominally as real earnings, income, and standards of living fall.
I fear this cake is already baked. The money supply in the US has been faltering for two years now as stocks have climbed briskly, both in Macau and in the US. Fuel is running out. Since October 2016, the dollar supply has only expanded at an average annual rate of 4.6%, from $12.97 trillion to $14.19 trillion. This is lower than 2007-2008, which saw liquidity expand by 5.5% from October to October and that still led to a crash, a crash that began in gaming stocks about a year before the rest of the market was infected.
The average monetary growth rate from 2009 to 2016 has been 6.7%. There have been years since 2000 where it’s been lower than it is now without a crash, but in those years equity markets were far below their highs. Now they’re not. The liquidity crunch is coming. Gaming stocks are sounding the warning bell just like they did 11 years ago. The 2014 gaming crash was artificial, caused by government policy, not a systemic liquidity crunch. This is something different. 2019 is going to be a bad year. Best be prepared now.
