"Everyone's In The Pool"

Tyler Durden's picture

Authored by Lance Roberts via RealInvestmentAdvice.com,

With the market breaking out to all-time highs, the media has started to once again reach for their party hats as headlines suggest clear sailing for investors ahead.

After all, why not?  We have run one of the longest stretches in history without a 5%, much less a 10% decline. Threats of nuclear war, hurricanes, disaster, fires, earthquakes, and civil unrest have failed to unnerve investors. It seems all that has been missed was famine and pestilence.

Nonetheless, the breakout is indeed bullish, and signals the continuation of the bullish trend. However, such does not mean there are more than sufficient reasons to remain cautious. As noted on Tuesday, earnings growth remains weak outside of share buybacks, along with top line revenue. There is scant evidence of economic resurgence outside of a restocking cycle bounce, and inflationary pressures globally remain nascent. But such concerns, and I am not even sure the “4-horseman of the apocalypse” would make a difference, are “trumped,” by the ongoing global central bank interventions.

Not surprisingly, while it took individuals time to develop their “Pavlovian” response to the ringing of the “BTFD” bell, they have now fully complied as measured by the Investment Company Institute (ICI).

As shown in the chart above, as asset prices have escalated, so have individuals appetite to chase risk. The herding into equity ETF’s suggest that investors have simply thrown caution to the wind.

The same can be seen for the American Association of Individual Investors as shown below.

While the ICI chart above shows “net flows,” the AAII chart shows percentage allocated to stocks versus cash. With cash levels at the lowest level since 1997, and equity allocations near the highest levels since 1999 and 2007, it also suggests investors are now functionally “all in.” 

With net exposure to equity risk by individuals at historically high levels, it suggests two things:

  1. There is little buying left from individuals to push markets marginally higher, and;
  2. The stock/cash ratio, shown below, is at levels normally coincident with more important market peaks.

Here is the point, despite ongoing commentary about mountains of cash on the sidelines, this is far from the case. This leaves the current advance in the markets almost solely in the realm of Central Bank activity.

Of course, there is nothing wrong with that…until there is.

Which brings us to the ONE question everyone should be asking.

“If the markets are rising because of expectations of improving economic conditions and earnings, then why are Central Banks pumping liquidity like crazy?”

Despite the best of intentions, Central Bank interventions, while boosting asset prices may seem like a good idea in the short-term, in the long-term has had a negative impact on economic growth. As such, it leads to the repetitive cycle of monetary policy.

  1. Using monetary policy to drag forward future consumption leaves a larger void in the future that must be continually refilled.
  2. Monetary policy does not create self-sustaining economic growth and therefore requires ever larger amounts of monetary policy to maintain the same level of activity.
  3. The filling of the “gap” between fundamentals and reality leads to consumer contraction and ultimately a recession as economic activity recedes.
  4. Job losses rise, wealth effect diminishes and real wealth is destroyed. 
  5. Middle class shrinks further.
  6. Central banks act to provide more liquidity to offset recessionary drag and restart economic growth by dragging forward future consumption. 
  7. Wash, Rinse, Repeat.

If you don’t believe me, here is the evidence.

The stock market has returned more than 60% since 2007 peak, which is more than three times the growth in corporate sales growth and 30% more than GDP. The all-time highs in the stock market have been driven by the $4.5 trillion increase in the Fed’s balance sheet, hundreds of billions in stock buybacks, PE expansion, and ZIRP.

In turn, this has driven the average valuation of stocks to the highest ratio in history.

Which, as noted, has been driven by a debt-driven binge of share repurchases to boost bottom line earnings.

What could possibly go wrong?

However, whenever there is a discussion of valuations, it is invariably stated that “low rates justify higher valuations.” 

Maybe. But the argument suggests rates are low BECAUSE the economy is healthy and operating near full capacity. However, the reality is quite different as the always insightful Dr. John Hussman pointed out this past week:

“Make no mistake: the main contributors to the illusion of permanent prosperity have been decidedly cyclical factors.

Again, when interest rates are low because growth is also low, no valuation premium is ‘justified’ at all. In the present environment, investors are inviting disastrous losses by paying the highest S&P 500 price/revenue ratio in history (outside of the single week of the 2000 market high) and the highest median price/revenue ratio in history across S&P 500 component stocks (more than 50% beyond the 2000 peak, because extreme valuations in that episode were focused on much narrower subset of stocks than at present). Glorious past returns and record valuations are a Potemkin Village with a barren field behind it.”

There are virtually no measures of valuation which suggest making investments today, and holding them for the next 20-30 years, will work to any great degree.

That is just the math.

Which brings me to something Michael Sincere’s once penned:

“At market tops, it is common to see what I call the ‘high-five effect’ — that is, investors giving high-fives to each other because they are making so much paper money. It is happening now. I am also suspicious when amateurs come out of the woodwork to insult other investors.”

Michael’s point is very apropos, particularly today. It is interesting that prior to the election the majority of analysts, media and investors were “certain” the market would crash if Trump was elected. Since the election, it’s “high-fives and pats on the back.” 

While nothing has changed, the confidence of individuals and investors has surged. Of course, as the markets continue their relentless rise, investors begin to feel “bullet proof” as investment success breeds over-confidence.

The reality is that strongly rising asset prices, particularly when driven by emotional exuberance, “hides” investment mistakes in the short term. Poor, or deteriorating, fundamentals, excessive valuations and/or rising credit risk is often ignored as prices increase. Unfortunately, it is only after the damage is done that the realization of those “risks” occurs.

As Michael stated:

“Most investors believe the Fed will protect their investments from any and all harm, but that cannot go on forever. When the Fed attempts to extricate itself from the market one day, that is when the music stops, and the blame game begins.”

In the end, it is crucially important to understand that markets run in full cycles (up and down). While the bullish “up” cycle lasts twice as long as the bearish “down” cycle, the damage to investors is not a result of lagging markets as they rise, but in capturing the inevitable reversion. This is something I discussed in “Bulls And Bears Are Both Broken Clocks:”

“In the end, it does not matter IF you are ‘bullish’ or ‘bearish.’  The reality is that both ‘bulls’ and ‘bears’ are owned by the ‘broken clock’ syndrome during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being ‘right’ during the first half of the cycle, but by not being ‘wrong’ during the second half.

The markets are indeed in a liquidity-driven up cycle currently. With margin debt near peaks, stock prices in a near vertical rise and “junk bond yields” near record lows, the bullish media continues to suggest there is no reason for concern.

The support of liquidity is being extracted by the Federal Reserve as they simultaneously tighten monetary policy by raising interest rates. Those combined actions, combined with excessive exuberance and risk taking, have NEVER been good for investors over the long term.

At market peaks – “everyone’s in the pool.”

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Cash2Riches's picture

We are looking at the peak of this fiat system that we have built around us. It is a prison and people have become complacent to this fact. A massive collapse in the system as we know it is on route.

The Alarmist's picture

Nah, it's time to party like it's 1999!

Shemp 4 Victory's picture

 

When the Fed attempts to extricate itself from the market one day, that is when the music stops, and the blame game begins.

What could possibly go wrong at the Chuck Prince Dance Hall?

The Alarmist's picture

Seriously dude, you're harshing the buzz!

rmopf2010's picture

also

 

print baby print !

aloha_snakbar's picture

LOL... only eight more shopping days until the end of the world...

https://yourcountdown.to/the-end-of-the-world

 

Just a matter of what gets us first, something natural, or do we do it to ourselves...

Clock Crasher's picture

The equity markets are exactly like Bitcoin.  It has equal chances of exploding higher or imploding where she stands.  Both make equal sense.

The Alarmist's picture

How cute is that? A normal distribution assumes the system isn't biased. Rethink your thesis and try again. A

Dr. Engali's picture

Cute. He's still using fundamentals and technicals to understand a centrally planned eCONomy. All you need to know is that to central planners the print button can fix everything.

Consuelo's picture

 

Ah but...  

Annual management $$$Fees...

You gotta get some kinda window dressing for your money, right...?

serotonindumptruck's picture

I fear even news of an imminent Extinction Level Event would be bullish and send global stock markets into the stratosphere.

MillionDollarButter's picture

Pool's closed due to AIDS.

Consuelo's picture

 

 

Little chlorine in the gene pool never hurt anyone.

Philo Beddoe's picture

Too many retards (retail shmucks with the IQ barely above a lamp post)making easy money for years. Way too many years.

Losers always lose. 

What troubles me is they have not lost yet. 

Maybe this time is different or they will find some other way to take it up the ass. 

 

J J Pettigrew's picture

Robotics in the workplace?

What are algorithims if not "software" robotics?

Automatons .... sans common sense and concerns over geopolitical risks

The door isnt big enough to handle all the market orders IF it ever happens

Ban KKiller's picture

PRINT TO THE MOON.  Solved.

1777's picture

Have a demonic day!

 

Quivering Lip's picture

Centralized Confiscation and Consolidation the Counterfeiting.

Everything else is mental masturbaion. What's to stop "The" Central Bank from creating more ones and zero? They'll do it until they want to pull the rug on the "markets" then they'll do it again.

Racer's picture

There are no "investors" left, all that is left in  this "market" is machines playing hot potatoes for fractions of a nanosecond at a time

buzzsaw99's picture

research is so 2006

The Alarmist's picture

You know you've passed peak research when the banks think they can charge for theirs.

me123me's picture

Nice article. 

Gobble D. Goop's picture

"Nonetheless, the breakout is indeed bullish, and signals the continuation of the bullish trend. However, such does not mean there are more than sufficient reasons to remain cautious."

Does 1929 ring a bell?

Those who forget history are doomed to repeat it.

Wait, they don't teach real history anymore.

Carry on...

Lt. Frank Drebin's picture

But what about all that cash on the sidelines that Cramer keeps spouting off on? </sarc>

Jtrillian's picture

Is this a sign that the next bubble to pop is HUMANITY ITSELF???

Dode415's picture

But Goldman said there's no exuiberance at all - it's all fear sarc

Reaper's picture

When everyone thinks alike, none are thinking.

venturen's picture

90% of the country could DIE and wall street WOULDN'T CARE! This is all about global printed money...swiss, chinese, japanese, european, american...DEBT BASED STOCK MARKET BUBBLE!

The middle class are fodder at this point.

 

venturen's picture

 

Who wants in on my ETF that just buys all other ETFs? Anyone?

“so that EVERYONE will be Super! And when everyone is Super (chuckle) no one is.”

moorewasthebestbond's picture

Marco Rubio's "pool" is full of foam-dancing gay boys.

 

It's the popular place to be.

Emptykoolaidcup's picture

Not everyone is in the pool. I'm drinking mojitos over at the bar, fuck the pool!

Blankfuck's picture

FED RESERVE FUCKER KOOL AID! WHAT THEY DID THEY SHOULD BE LINED UP AND EXICUTED! WHAT TILL THE NEXT FORCLOSURE FUCKING. SO WHO WILL BAIL THE BANKER FUCKERS OUT AGAIN?

surf@jm's picture

Well, since there is no middle class left to own equities, I guess the central banks  A.K.A, the governments, don`t wish to sell at this time.....

But, it should be obvious to anybody with eyeballs by now, that stock markets no longer indicate economic trends.....

They have become another form of government propaganda.....

runnymede's picture

Like my mom always says--- BTFD