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Irrational Exuberance – Descriptive Superlatives Exhaustion Point Is Reached
Submitted by Pater Tenebrarum via Acting-Man blog,
Positioning Indicators at new Extremes
We are updating our suite of sentiment data again, mainly because it is so fascinating that a historically rarely seen bullish consensus has emerged – after a rally that has taken the SPX up by slightly over 210% from its low. Admittedly, a slew of such records has occurred in the course of the past year or so, and so far has not managed to derail the market in the slightest– in fact, since 2012, only a single correction has occurred that even deserves the designation “correction” (as opposed to “barely noticeable dip”).
While a number of positioning and survey data show a bullish consensus that easily dwarfs anything that has been seen before, this consensus is not reflected in expressions of exuberance by the broader public. “Anecdotal” sentiment seems more cautious and skeptical than the quantitatively measurable kind. Most likely this is because the vast bulk of the middle class has been so thoroughly fleeced in the last two boom-bust sequences that it finds itself in dire straits in spite of the reemergence of major asset bubbles across a wide swathe of assets. This includes by the way an astonishing revival of the bubble in real estate prices – see e.g. this 330 square foot shack in San Francisco, which recently sold for $765,000:
Yes, that tiny dark-brown thingy situated on a steep road sold for $765,000. The real estate bubble is back.
(Photo credit: SFARMLS)
Moreover, with the broad US money supply (TMS-2) having nearly doubled since 2008 and other major central banks inflating their money supply as well at breakneck speed, there has been more than enough “tinder” provided the world over to drive asset prices higher. This by the way makes a complete mockery of the constant refrain of central bankers that we are allegedly threatened by “deflation”. The inflationary effects of their monetary pumping are simply showing up in asset prices rather than consumer goods prices – ceteris paribus, a rapid inflation of the money supply always leads to prices rising somewhere in the economy.
Bubble Trouble
There is of course a “danger” that this asset price bubble will burst rather spectacularly once monetary inflation slows down sufficiently (it will probably never be reversed again in our lifetime, but a slowdown is already underway). In light of the current rare extremes in positioning, sentiment and leverage, the eventual denouement of the current bubble should be a real doozy. Note that in every respect one can possibly think of – with the sole exception of household debt – systemic leverage is at new all time highs (not only in absolute terms, but relative to everything, including the size of the known universe), and is likewise positively dwarfing anything that has occurred before.
Specifically relevant for financial markets are record highs in margin debt, record highs in hedge fund leverage, as well as record issuance of junk debt in recent years, which in turn has given rise to systemic leverage once again vastly increasing in the credit markets on the part of investors as well. To the latter point, note that financial engineering that is specifically aimed at enabling the taking of extremely leveraged positions is back with a vengeance as well – however, at the same time, the markets for the underlying debt instruments have become quite illiquid due to new banking regulations that hinder proprietary trading activities by banks (for a more detailed discussion of these topics see “A Dangerous Boom in Unsound Corporate Debt” and “Comforting Myths About High Yield Debt”).
In light of all these considerations, it is truly remarkable how little concern there is. Even former skeptic Hugh Hendry is these days talking about the alleged “omnipotence of central banks” which money managers are forced to surrender to (this view strikes us actually as an example of the “potent directors fallacy” – see also this comment by EWI on the topic). While we certainly have some understanding for his perspective – after all, as a fund manager, he cannot afford to “miss” an asset boom, or he will soon be out of a job – we do think he may be underestimating the potential for a capsizing of the happy ship that could well happen in an unseemly hurry, for currently unanticipated reasons. With “reasons” we actually mean “triggers” – the reasons are already discernible and perfectly clear: we listed most of them above. All that is still needed is a trigger that alters the perceptions of a critical mass of observer-participants.
In short, bubbles don’t burst because of a “black swan”: rather the swan – often a combination of events that makes it impossible to identify a single trigger – is a diffuse trigger mechanism that sets into motion what is already preordained. It is the famous “one grain too many” that is put atop a giant sand pile – however, it is the sand pile that is the problem, not the one grain. This is also why precise timing of a bubble’s demise is so difficult – it is unknowable what exactly will actually lead to the change in perceptions that ultimately provokes the unwinding of the leverage that has been built up.
At some point down the road, a Zimbabwe or Venezuela type very rapid devaluation of money may emerge. In this case asset prices would become solely a function of monetary debasement. It is important though to keep in mind that things don’t just move from the present state to the Venezuela type state from one day to the next – not to mention that it may not happen at all, if central banks in developed nations alter their policies in time. Assuming for argument’s sake though that it does eventually happen, there will still be an interim phase during which monetary debasement will e.g. alter the perceptions of stock market investors regarding the multiples they should pay for corporate earnings. This is what happened e.g. in the 1970s: multiples contracted into single digit territory, because market participants decided that the future stream of earnings would be less valuable in real terms, and thus deserved a commensurate discount.
Sentiment Data
Let us move on now to our suite of data. We have on purpose decided to follow a number of data points that relatively few people usually look at, in the hope that they may therefore be slightly more meaningful. Below we show three different views of Rydex data. The first chart shows the Rydex ratio in the form (bear+money market fund assets)/bull assets, as well as the disaggregated bear, MM fund and bull assets. It is noteworthy that the ratio of bears plus fence sitters to bulls has now also declined to a new all time low (the chart is inverted).
The second chart shows a more detailed view of money market and bear assets, plus the “pure” bull/bear asset ratio. The latter has made a remarkable move in recent weeks – it has gone straight up without even the slightest correction, as assets deployed in bull funds have exploded higher. In terms of this data series it represents the most extreme expression of a bullish consensus ever.
Next comes the leveraged bull/bear fund ratio, which compares assets in Rydex funds that employ leverage. Almost needless to say, it is at an all time high as well, but what is most remarkable about it is that it has spent more than a year in “excessive optimism” territory. This by the way goes to show that these data are not very useful for timing purposes. What they are useful for is this: the more time they spend in extreme territory, the more profound the move in the opposite direction is likely to be once it gets going.
Similar considerations apply to the Investor’s Intelligence survey and the mutual fund cash-to-assets ratio which come next. We show a very long term chart of the latter – what is noteworthy is the big difference in fund manager positioning and sentiment during the period beginning in 2000 compared to the secular bear market that lasted from 1968 to 1982. The latter was characterized by extreme fear and caution, while the period since the 2000 tech mania peak shows a remarkable degree of complacency (again, we think this is quite meaningful for the long term outlook).
Lastly we also update the still growing divergences between junk debt ETFs and credit spreads versus the SPX.
Rydex: the (bear + MM funds)/bull funds asset ratio has now also hit a new all time low. This was mainly due to a huge surge in bull assets (which have increased roughly by one third in the 6 weeks since the October correction low) – click to enlarge.
A closer look at money market funds, bear assets and the “pure” bull/bear asset ratio. The latter has just made a truly stunning move. Nothing comparable has ever happened before – click to enlarge.
The leveraged Rydex bull/bear asset ratio – in “extreme optimism” territory for more than a year, and currently at a new all time high – click to enlarge.
The Investor’s Intelligence survey. The bull/bear ratio has failed to return to the 27 year high hit earlier this year twice in succession, but the bear percentage has fallen back to 14.9% – only slightly above the all time low of 13.3% recorded earlier this year – click to enlarge.
The mutual fund cash-to-assets ratio. Compare the secular bear market of 1968-1982 with the period since the year 2000 tech bubble peak. Fear and caution have been replaced by utter complacency. This is likely telling us something about what to expect in the long term – click to enlarge.
Junk debt (represented by the JNK ETF) compared to government debt and the SPX. Credit spreads are widening and the divergence with the stock market keeps growing – click to enlarge.
Conclusion – Real Wealth Undermined:
As noted in the title to this post, in some respects we’re in danger of running out of appropriate descriptive superlatives for the current bout of “irrational exuberance” (we’re open for suggestions). The current asset bubble is in many respects reminiscent of the late 1990s tech bubble, but it also differs from it in a number of ways. One of the major differences is that the exuberance recorded in the data is largely confined to professional investors, while the broader public is still licking its wounds from the demise of the previous two asset bubbles and remains largely disengaged (although this has actually changed a bit this year).
A few additional remarks regarding the alleged “omnipotence” of central banks: monetary pumping certainly has the power to distort prices across the economy, which includes inflating the prices of titles to capital. However, at some point there will be a stark choice – either the pumping is abandoned voluntarily, or one risks the destruction of the underlying currency system.
Moreover, there is another limiting factor in play, which doesn’t get as much attention as it probably deserves. Monetary pumping merely redistributes existing real wealth (no additional wealth can be created by money printing) and falsifies economic calculation. This in turn distorts the economy’s production structure and leads to capital consumption, thus the foundation of real wealth that allows the policy to seemingly “work” is consistently undermined. At some point, the economy’s pool of real funding will be in grave trouble (in fact, there are a number of signs that this is already the case). Widespread recognition of such a development can lead to the demise of an asset bubble as well.
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Superlatives
https://www.youtube.com/watch?v=g2M4ilVaAmI
As the Good Gunny Sargent Harmon said; "I'll betchu you're the kind of person who'd fuck somebody in the ass and not even give him the common courtesy of a reach around"
My vote is "Ludicrous Maximus"
Hartman...
But everybody wants to live in San Francisco.
Peak Lies
Peak Manipulation
Peak Bullshit
They may have missed one. "Peak Credit".
Ponzi. Theft. Lies. Propaganda.
That is what happens when Central Banksters keep intervening in markets. Nothing makes sense and irrational exuberance is transformed into demented exuberance. If you are not demented enough to buy assets at insane levels, you will miss all the easy money sloshing around. But every dementia ends badly no matter how fervently you hope and pray.
The dead (bears) know only one thing: it is better to be alive. [/Private Joker, Full Metal Jacket]
A place full of politically correct fagots.
A place susceptible to earthquakes.
A radioactive place thanks to Fukushima.
A state full of frills when it comes to taxes.
A State that has no water.
A state full of illegal immigrants.
In my understanding, a place not to establish.
Best return this crap from California to Mexico and apologize for the damage.
hehe.
But we have a distribution problem.
The industrial economy continues to produce huge amount of wealth.
The problem is of course that the economy requires or to be more accurate was designed to produce / waste a huge amount of capital goods before the remaining surplus can finally be consumed.
You really are a great commenter and a smart guy.
"The problem with production is produce." This is why Karl Marx is so important and why you're spot on. "The problem the British Empire faced was surplus production." They made too much...often times too well. This did not go unnoticed in these "United States" either. Demand being a given (just the act of making something creates demand) the question becomes one of marketing and distribution in order to enhance "value." (Meaning value added)
In short any QUALITATIVE improvement in an economy (fracking expertise) can yield stupendous results. And of course this can now be seen in the data: capital inflows, huge decline in the deficit, awesome amount of "banking power."
This is straight up data too. No "enhancements" using leverage, options, hedging, etc..
So now go read Piketty !
Suggestion for appropriate descriptive superlative:
Supernankewealtheffectusmiddleclassexplodus!
(It's even longer in German)
+++++++
I regret that I have but one up arrow to give. May many more find their way to you wonderful post.
Even though the sound of it is something quite atrocious.
I'm planning on saying it loud enough so I can sound precocious.
If I remember correctly without using Google, the value of Pi is 3.1416 to infinity, a Japanese managed to reach insane pages.
A teacher taught me that Pi is the ratio of human or any living thing because it's redundant, is the mathematical way of life.
This same teacher said that there is not square the circle and that these Americans stupid to quantify all in the numbers have forgotten that we are human, living beings.
The Goia Master as we called him was a Japanese physician, physicist, worked with x-ray and radiotherapy equipment, was of people with cancer.
I studied the second and third year of physics with him, died without giving us notes, died of cancer in 1979.
I dedicate this review to him and his daughter, Akemi.
:-)
Take it from me - a deflation in a debt money system is much worse.
What matters most to people without savings is cashflow.
Deflation in a debt money system is theft.
But this time it's ok because it's planned irrational exuberance
Thus rational exuberance... I can live with that
You must deal directly with the distribution problem.
This means you must give purchasing power from the bottom up.
In the current model allmost all
the capital is wasted in the act of distribution so as to maintain profits.
Putz!
Você é um gênio!
Excelente Advogado!
?
At this moment the central bankers have 100% control of everything. There is no inflation, oil is plummeting, Millions are loving the stock market. The Fed had removed all risk. 401K's are soaring. Millionaires are now billionaires. There is so much money and loose credit that any weakness in any asset class is bought violently; shorts have their faces ripped off. Yes, it may all collapse, but when, in 20 years? Are you going to fight them for two decades? They are now certain they are in control and can print to infinity if they need to. They are worshipped, and Faith in Fed has never been stronger. You may find more people now believe in the Fed than in God. It is not irrational at all, with implicit and explicit guarantees, who would sell? The Fed enables the government to keep spending money it doesn’t have. They will buy the futures, ETFs, etc…Perfect situation.
all the reason for us peons to get with the program
we should all get on this train, ride it for as long as possible and get off before the last stop
when's the last stop coming? nobody knows, but I don't think we are close to the end yet, so we might as well ride it for now
When is the last stop? The current Fed board is composed of Obama appointees. If a Republican wins the Presidency in Nov 2016, Janet Yellen will pull the plug. If a Democrat wins, they keep the party going until something external kills it - such as the Islamic State conquering enough territory to control the oil price, or Russia invading Eastern Europe..
The Irish model is. Classic case that proves the social creditors were 100% correct.
You have a surplus of houses but also a homeless crisis as people don't have the purchasing power to buy existing capacity.
A breakdown of the supposes law of supply and demand.
The Fabian socialist solution is for the state to produce more social houses for the homeless but this adds to real costs for everybody as increased investment without additional credit merely adds to costs.
The solution is of course to give people free money so that they can purchase existing capacity.
The solution is to try and protect your wealth as the current system starts to implode under its own weight, and then invest when fundamentals are apparent on the horizon.
Giving cash to the people assumes they would:
1. Use it to buy productive capacity.
2. Won't spend too much too fast.
Your solution would see rampant inflation in the m1 money supply which, let's be honest, is going to hit home soon anyway and more crucially, it assumes people would actually buy productive assets, rather than another flat screen TV, a cruise to the Bahamas, or the latest iJizz gadget.
Edit: I half agree with you, by the way, in that the system is rigging wealth distributions which probably have to narrow. I just disagree on the means of "solving" the problems.
Isn't that what the Keynesians propose?
But cannot do until they shut down the previous construct of Neo-con Oligarchy casino and redistribute some of that stashed wealth to the needy !
Cumulative errors is a bitch in a world that heads to monopoly plays and resultant overcapacity.
Even the Keynesians don't know how to debt jubilee as the Oligarchs would rather blow the world up than suffer that!
So, this is not a bubble because it's not technically a bubble? It seems to me it's just another (3rd) "sub bubble" within the overall dollar bubble that began in 1971.
.
This belongs in every face, every day.
http://patrick.net/forum/?p=1223928
BS not!
Yesterday you were concerned that you would run out of hyperbolic adjectives.
Today you're whinging that you're in danger of running out of appropriate descriptive superlatives for the current bout of "irrational exuberance".
It sounds to me like you're planning to pass the hat to help the neediest cases of ZH writers this Christmas. I might be able to scrape up a buck or two.
irrational exuberance has one historical precondition that allowed it to fester : exorbitant privilege!
Thats what started the ball rolling down the debt hill from 1971 to this day.
Now how about the new superlative of this age : fracked to oblivion ?
....(after drill baby drill !)
I think the Sauds are singing that song in RIyadh today !
"At some point, the economy’s pool of real funding will be in grave trouble (in fact, there are a number of signs that this is already the case)."
How useful would it have been to everyone to list the signs - even if there was no space to elaborate? Ya think?
"It is the famous “one grain too many” that is put atop a giant sand pile – however, it is the sand pile that is the problem, not the one grain. This is also why precise timing of a bubble’s demise is so difficult – it is unknowable what exactly will actually lead to the change in perceptions that ultimately provokes the unwinding of the leverage that has been built up."
Ding! Ding! Ding! We have a winner! The one grain too many often leads to the reveal of a black swan. Inconceivable! [Cue the Princess Bride outtake]