The American consumer is stressed-out, and tapped-out. There are many reasons why Americans have become reluctant shoppers, such as stagnant incomes and rising debt loads, but one of the underappreciated challenges is a distinct change in spending psychology.
"...the madness in the present time may go on. In a manipulated market, it won’t end well... They could essentially monetize everything, and then you have state ownership. And through the central banking system, you introduce socialism and communism, which is state ownership of production and consumption. You would have that, yes, that they can do...I don’t think the central bankers are intelligent and smart enough to understand the consequences of their monetary policies at present."
The market hangs in a virtual stasis. Over the past couple of months, we have continued to drift from one economic report, or Central Bank meeting, to the next. The bulls and the bears have met at the crossroad.
Our entire central bank controlled financial system is based on the premise that unelected, unaccountable bureaucrats should be able to direct individuals’ consumption and production behavior from ivory tower conclaves. And they have abused their authority to the point that two entire asset classes are now poisonous.
As momentum builds in the developing deflationary spiral, we are seeing increasingly desperate measures to keep the global credit ponzi scheme from its inevitable conclusion. Credit bubbles are dynamic - they must grow continually or implode - hence they require ever more money to be lent into existence. As the peak of a credit bubble is reached, all these necessary factors first become problematic and then cease to be available at all. Past a certain point, there are hard limits to financial expansions, and the global economy is set to hit one imminently.
Volumes have been written on behavioral finance and the seemingly “irrational” decisions investors tend to make to avoid straying from the herd. This article examines a current example coined “FOMO” (fear of missing out), in today’s texting parlance. Through a better understanding of the psychological dynamics of bubble mentality, we hope to help investment managers better grasp the complex role they must play when their concern for poor expected returns and higher levels of risk are pitted against their client’s fear of not keeping pace with the market.
In the market, extreme optimism results in price bubbles. One of the real-life manifestations of extremely positive social mood is the construction of enormous buildings. Market tops and skyscrapers often seem to emerge simultaneously, because both phenomena are the result of the illusion of infinite prosperity. But extreme psychological conditions do not last very long...
About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout to new highs should be delivering the required technical signals. All these strategies are more or less automated (essentially they are simply quantitative and/or technical strategies relying on inter-market correlations, volatility measures, and/or momentum). We believe this is an inherently very dangerous situation.