So What Happens When The Music Stops?
In a note released earlier by Raymond James, the author Jeffrey Saut does all in his power to explain not only why Treasuries are a bad bet (inflation is a-coming), and why the market will continue ramping higher, but ironically, why, even as the author submits by calling his piece "When the music stops" that all equity market participants have entered into a bubble frenzy, the market will simply continue going higher, period. As a reminder, comparable notes were a dime a dozen just before the dot com bubble popped. Of course, nobody will care to stake their reputation on calling when this bubble, which everyone now acknowledges it for what it is, will end. However, Saut does provide some astute observations on the career risk that has gripped most portfolio managers, the majority of which have, not surprisngly, not participated at all in the current rally. We would add, a comparable career risk now permeates among the analyst community which has all now gotten on the bull bandwagon, as nobody is willing to call a spade a spade, for fear of angering some of the larger accounts or superiors, for being a contrarian in a market that swiftly silences all objecting voices as it pursues new irrational highs.
And, last week stocks continued to “creep higher” with all of the indices we follow trading higher for the holiday-shortened week. That action left most of those indices at new rally reaction “highs,” putting even more pressure on underinvested money managers. A case in point was an article from a few weeks ago whereby a money manager disclosed that he still has 80% of his $850 million under management in cash. I read the article with both amazement and amusement. Amazement because I was surprised that any portfolio manager would admit he had that huge of a hoard of cash after more than a 50% rally from the March lows. Amusement because he probably allowed himself to be quoted believing that the September 1st Dow Downer, of 185 points, was the beginning of the long anticipated correction.
And here is the punchline of how speculative frenzy coupled with job preservation will continue dislocating a market from any possible connection to an underlying economy that has yet to approach anything remotely resembling a bottom, and as we grind slowly toward the 2011-2012 cliff, likely to see another major leg down when the Commercial Real Estate threat will be the next "black swan" that nobody could have possible anticipated. Emphasis ours:
According to Jeremy Grantham, “In markets, where investors hand over their money to professionals, the major inefficiency becomes career risk. Everyone’s ultimate job description becomes – keep your job. . . . Refusing, on value principal, to buy into a bubble will, in contrast, look dangerously eccentric. And when your timing is wrong, which is inevitable sooner or later, you will, in Keynes’ words – not receive much mercy.” Indeed, performance risk, bonus risk, and ultimately job risk.
And there you have it: everyone knows the market is a bubble, however if you want to keep that seat by your desk on January 2, you have no choice but to buy: after all Obama said it is safe to do so. In the meantime, Main Street, largely ignorant of the motivations behind the small minority that determines the bulk of market movement, will part with their hard earned savings, and chase whatever stocks it thinks will make it the next slot machine millionaire. Of course, the dislocations between the market and the deteriorating economy will continue becoming more acute. And once the inevitable end of the music occurs, the overshoot to the downside (just as the current upside overshoot) will be unprecedented. But at least all those who managed to placate their LPs for one more year will have a job which will allow them to hopefully repeat the entire spin/rinse cycle once again. But that is a mind boggling 3 months into the future: an enternity when careers are now made and killed with each tick of the SPY.
In conclusion, it is wise to provide the same John Keynes pieces that Saut used to begin his piece with, confirming that there is nothing really unique or "this time its different" about this market move:
“The actual private object of most skilled investment today is to ‘beat the gun.’ As Americans so well express it, to outwit the crowd and to pass the bad, or depreciating halfcrown, to the other. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs – a pastime in which he is the victor who plays ‘snap’ neither too soon nor too late, who passes the old maid to his neighbor before the game is over, who secures a chair for himself when the music stops. Or to change the metaphor slightly, professional investment may be likened to those newspaper competitors in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors, as a whole; so that each competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. We have reached the third degree where we devote our intelligences to anticipating what the average opinion expects the average opinion to be. And there are some, I believe, who practice the
fourth, fifth and higher degrees.”
John Maynard Keynes, "The General Theory Of Employment, Interest and Money" - 1935
hat tip John