Herd Mentality

Confused by stock bubbles and furious episodes of manic market euphoria? SocGen's Dylan Grice explains it in one brief sentence: "we’re hardwired to overvalue excitement and undervalue boredom."

We have long shown that "investors" whatever that term means in the New Normal - those gullible enough to put their money in Bennie Madoff, pardon Bennie Bernanke Asset Management? - have been not only reluctant to put their money into stocks, but despite week after week of artificial, low volume highs, driven entirely by Primary Dealers (and now European banks post the $1.3 trillion in LTROs, not to mention even foreign Central Banks recently buying high beta stocks) spiking the market ever higher courtesy of record reserves, but in fact continue to pull their cash out of the stock market with every thrust higher. Why, just last week another $1.4 billion in cash was pulled from domestic equity funds, nominal Dow 13,000 be damned. The truth is that the banks are desperate to start offloading their risk exposure to retail investors, and instead of selling, are furiously trying to send the market ever higher just to get that ever elusive "investor" back: just look at how much the market rose by last week, CNBC will say: do you really want to be out of this huge rally? Alas, the damage has been done: between the Great Financial Crisis, the Flash Crash, a massively corrupt regulator, rehypothecating assets that tend to vaporize with no consequences, and a central bank which effectively has admitted to running a Russell 2000 targeting ponzi scheme, the investor is gone. But what if? What if the retail herd does, despite everything, come back into stocks? After all the money is in bonds, or so the conventional wisdom states. What harm could happen if the 10 Year yield goes back from 2% to 3%, if the offset is another 100 S&P points. After all it is good for the velocity of money and all that - so says classical economic theory. Well, this may be one of those "be careful what you wish for." Because while investors have indeed park hundreds of billions out of stocks and into bonds, the real story is elsewhere. And the real story is the real elephant nobody wants to talk about. Presenting: America's combined cash hoard, which between total demand deposits, checkable deposits, savings deposits, and time deposits (source H.6), is at an all time high of $8.1 trillion.

When the VIX is low it’s time to GO.

In his most recent quarterly letter titled appropriately enough "The Longest Quarterly Letter Ever" GMO's Jeremy Grantham literally kills it. Well, maybe not literally but certainly metaphorically.

Michael “Moneyball” Lewis was the first one to, er, expose us to the term Big Swinging Dick. His his first novel, Liar’s Poker, was full of them. The BSDs were the guys on the trading floor who brought more rain than El Niño. But the BSDs have gone a little soft now. Even the famous Wall Street bull has been caged. And some, like number one banking fanboi Dick Bove say that bankers been “castrated” altogether by new regulation. Regulation which many argue does not go far enough. Regardless, the Masters of the Universe suddenly find themselves feeling the pain that many of the rest of us have been feeling for the past four years. Only their ways of coping with it are a little different than what you might expect.