5 Things To Ponder: The Everything Boom
Submitted by Lance Roberts of STA Wealth Management,
Earlier this week I posted an article discussing signs of "market exuberance" which including a link to a Neil Irwin, NYT, article entitled "Welcome To The Everything Boom." The article is well worth reading, but Neil asks the right questions.
"'We’re in a world where there are very few unambiguously cheap assets,' said Russ Koesterich, chief investment strategist at BlackRock. 'If you ask me to give you the one big bargain out there, I’m not sure there is one.'
But frustrating as the situation can be for investors hoping for better returns, the bigger question for the global economy is what happens next. How long will this low-return environment last? And what risks are being created that might be realized only if and when the Everything Boom ends?"
This weekend's reading list of "5 Things" is a point/counter point focused on this central idea of the "everything boom." Bubbles are a very interesting phenomenon. When "bubbles" are seen they do not exist, when disbelieved they burst.
Therefore, is the "everything boom" a realization of economic nirvana, or is it the next financial "bubble" quietly waiting to be ignored so that it "pop?"
1) Another Sign The Bull Market Is Nearing Its End? By Mark Hulbert via WSJ MarketWatch
"Here’s another sign the bull market in stocks may be nearing an end: Companies have dramatically reduced share repurchases.
New stock buybacks fell to $23.2 billion in June, the lowest level in a year and a half, according to fund tracker TrimTabs Investment Research. In May, the total was just $24.8 billion, and the monthly average in 2013 was $56 billion.
That’s worrisome, according to TrimTabs CEO David Santschi, because 'buyback volume has a high positive correlation with stock prices.'”
2) The Muddled Truths About The Market by John Kimelman via Barron's
"If you're thoroughly confused about whether stocks are cheap or expensive, you're in good company.
Another topic that resembles a Rorschach diagram, rather than a clear set of facts, is market sentiment. Though a low VIX suggests that investors have grown complacent and fearless, other investors and pundits take solace from the fact that fund flow data suggest that investors still haven't fully bought into the notion that stocks are great."
3) Market Bubble? Not Even Close by John Gustafson via Minyanville
"Global stock and bond markets all seem to be acting in a manner that's almost exactly the opposite of what you'd expect if you were paying attention to the media. Every article, talking head, and investor letter has been preaching caution for the past six to 12 or more months. However, the flow of money continues to be toward investing, not saving. It isn't the same as 2006 or 1999, where all you heard was cheerleading and exuberance toward anything and everything rising.
Currently, we all recall the burn marks from 2008, which seems to be keeping a lid on the enthusiasm.
There are no big, flashy warning signs that we saw prior to the last big falls -- probably because there are still so many things wrong economically and politically around the globe to forestall such overconfidence."
4) Artificially High Asset Prices by Gavyn Davies via Financial Times
"In a full macroeconomic equilibrium, this is clearly impossible, since all markets must clear simultaneously, now and in the future. But New Keynesian models might not allow for excessive risk-taking in the financial markets, because they usually do not contain a fully developed financial sector. Furthermore, the interest rate that is appropriate for the US might not be appropriate for the world as a whole. Extensions of Wicksell’s theory, outlined by Claudio Borio, the head of economics at the BIS (most recently here with Piti Disyatat), are based on this assumption.
Borio is essentially arguing that the Fed is underestimating the true natural interest rate in the global economy. He says that credit bubbles can develop, along with excessively high asset prices, if interest rates remain at present levels. On this view, the banking and shadow banking sectors can take on a life of their own, in the context of a long-term financial cycle driven by rising risk appetites among borrowers and lenders.
The resulting increase in credit and debt may not give any inflationary signals to the central bank. It could instead be felt in the demand for financial assets, in which case the price of assets may rise, without any immediate effect on the real economy or inflation."
5) Is The Fed Going To Attempt A Controlled Collapse by NotQuant.com via Zero Hedge
"As most Fed watchers know, last week was interesting because Janet Yellen, speaking at IMF came out and said something quite surprising. In a nutshell, she said, 'It’s not the Fed’s job to pop bubbles.' While many market participants immediately took this to mean, 'To the moon, Alice!' and started buying equities hand over fist, there’s another possible explanation for Mrs. Yellen’s proclamation of unwillingness: The Fed could be preparing to do exactly what it said it wouldn’t.
So just maybe the Fed fully intends on heeding the advice of the BIS, and is strategically positioning itself as a stalwart dove to shield itself from the public fallout of its orchestrated financial calamity. A particularly sound play from a political perspective in the event that things don’t go as smoothly as planned.
One thing is certain at this point: An intentionally orchestrated crash is the direct recommendation of the BIS, per its annual report. That this action exists as a potential policy measure is now confirmed."
Do I think there is an asset bubble? It's quite probable when considering the current extremely low yield spreads between "quality" and "junk" assets.
However, let me pose another idea. What if "bubbles" really aren't about asset valuations, volatility or price levels? Rather, what if they are all about "psychology" instead. If we look back in history, we can clearly see that valuations in 2007 were substantially lower than in 2000, yet the markets crashed anyway. The same is true for 1929 which was even lower still.
Yet, what all "bubbles" have in common is a "psychological" factor. A "belief" that the current trend, either positive or negative, will not end. It is at during these times that "everyone is on the same side of the boat" and what causes the rapid deflation is the rush to the other side.
In other words, whatever "trigger event" occurs that creates a "rush for exits" will have nothing to do with fundamentals, valuations, volatility, or prices. It will be a psychological "panic" that spreads through the financial markets like a pandemic which causes financial instability, increases volatility and destroys prices.
For now, there is no visible sign that the current bullish trend is ending. However, when it does, questions will be asked, fingers pointed, and blame laid. The answer will simply be; "no one could have seen it coming."
"If everyone is thinking alike, then no one is thinking." Benjamin Franklin
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