A “market” that needs $1 trillion in panic-money-printing by the Fed to stave off a karmic-overdue implosion is not a market: a legitimate market enables price discovery. What is price discovery? The decisions and actions of buyers and sellers set the price of everything: assets, goods, services, risk and the price of borrowing money, i.e. interest rates and the availability of credit.
The U.S. has not had legitimate market in 12 years. What we call “the market” is a crude simulation that obscures the Federal Reserve’s Socialism for the Super-Wealthy: the vast majority of the income-producing assets are owned by the super-wealthy, and so all the Fed money-printing that’s been needed to inflate asset bubbles to new extremes only serves to further enrich the already-super-wealthy.
The apologists claim the bubbles must be inflated to “help” the average American, but that claim is absurdly specious. The majority of Americans “own” near-zero assets that earn income; at best they own rapidly-depreciating vehicles, a home that doesn’t generate any income and a life insurance policy that pays off only when they pass away.
The psychology of blowoff tops in asset bubbles is fascinating: let’s start with the first requirement of a move qualifying as a blowoff top, which is the vast majority of participants deny the move is a blowoff top.
Exhibit 1: a chart of the Dow Jones Industrial Average (DJ-30):
Is there any other description of this parabolic ascent other than “blowoff top” that isn’t absurdly misleading? Can anyone claim this is just a typical Bull market? There is nothing even remotely typical about the record RSI (relative strength index), record Bull-Bear ratio, and so on, especially after a near-record run of 9 years.
Now that almost every asset class is in a bubble, the question of where to invest one’s capital has become particularly vexing. The ashes of wealth consumed by the 2008-09 Global Financial Meltdown are still warm, at least to those who never recovered, and so buying assets at nosebleed valuations in the hopes of earning another 5% aren’t very compelling to anyone pursuing common-sense risk management.
As it happens, I wrote a whole book on this vexing question, An Unconventional Guide to Investing in Troubled Times.
I can’t summarize all the ideas presented in the book in one brief blog entry, but some basic principles will serve us well when bubbles abound.
In the event you haven’t heard about the stock bubble currently inflating in China, please take a quick look at these two charts of the Shenzhen Composite:
Many commentators believe that the central banks and regulators have become captive to political and specific industry interests, we would agree. What is even more troubling is the degree to which the markets themselves have become centralised in their outlook. For example, In the last number of years an enormous amount of the world’s capital market asset basis is increasingly be managed by ONE single company and or directed by the services provided by Blackrock’s “Alladin” system. Indeed The Economist magazine believes that “Alladin” monitors and supports upwards of 30,000 investment portfolios and assists in the direction of over 17 Trillion dollars in assets. That is 7% of the worlds total. This is sheer lunacy.
Which appears more likely–a straight-line extension of the past two years’ rise in stocks, or another “impossible” decline to complete the megaphone pattern?
There are dozens of charts and data points supporting the case for a continuation of the Bull market in stocks or a reversal into a Bear market. For the sake of brevity I’ve distilled the two arguments into two charts, one for the Bull case and one for the Bear case.
The Bull case is easy: the economy has reached self-sustaining expansion, a.k.a. escape velocity; hotel occupancy rates are high, home valuations are rising, stocks are fairly valued based on forward earnings, debt has been paid down/written off, and the Fed has tapered its quantitative easing (QE) bond and mortgage buying with no ill effect.
Tagged with: Bear market
, Bull market
, confirmation bias
, escape velocity
, Federal Reserve
, recency bias
, reverse repos
, self-sustaining growth
, stock market
Is the New Normal of ever-higher stock valuations sustainable, or will low volatility lead to higher volatility, and intervention to instability?
Though we’re constantly reassured by financial pundits and the Federal Reserve that the stock market is not a bubble and that valuations are fair, there is substantial evidence that suggests the contrary.
The market is dangerously stretched in terms of valuation and sentiment, and it does not accurately reflect fundamentals such as earnings and sales growth.
Tagged with: bubble
, central bank intervention
, corporate profits
, Federal Reserve
, fundamental analysis
, New Normal
, stock market
, technical analysis
Those who see the current era as the New Normal also have one logical action: sell now at the top and wait for the smoke to clear in 2016.
In The Generational Short: Banks, Wall Street, Housing and Luxury Retail Are Doomed, I addressed how generational changes in values could affect the stock market. That values change over time is common sense, and so is the idea that values drive choices about purchases, debt and investments that ultimately influence stock valuations.
The implicit conclusion: the Baby Boomers won’t have anyone to sell their stocks, real estate and bonds to.
Tagged with: Baby Boomers
, generational wealth
, New Normal