So I buy an apple for a buck from you but I sell it back to you for 2 bucks. I Have 2 bucks and you have a 2 buck apple. You sell that to me for 4 bucks and you have 4 bucks and I have a four buck apple. 8 bucks, 16 bucks... We do this a few times until you have just bought a million+ buck apple from me and I can't afford to buy it back for 2 million bucks. So you cut the price to 1.4m and sell me a 50% share in the apple for 700k. So we are now back flat on our cash positions but we both own a 700k share in the apple (example here). Wow. As we have that sort of wealth behind us we needn't be so tight about buying that new Tesla now or that new home cinema or that holiday. So we go and spend some of our cash savings on STUFF. And when we do, that real money will stimulate the real economy.
It would be very topical to suggest that the Twitter IPO pricing is today's apple but TMM's broader concern is that the Fed think the apple scenario is a viable solution for creating growth where the stock market (or more generally risk assets, as we should include housing) is the apple. The Fed isn't mandated to inflate asset prices but it would appear that this is exactly the effect that these academics with their models are prone to produce and those models tend to exclude the negative repercussions that have occured every other time a population ultimately had their quasi-wealth evaporate in front of their eyes (tech stock, property etc). It has been a disaster and more real money has had to be printed to replace its function.
Whereas a reduction in leverage is needed, the Fed is in effect encouraging it. Leveraging at the personal level was what got us into this mess in the first place and to create an environment that is doing nothing to quench credit demand whilst at the same time stifling credit supply through increased bank regulation and balance sheet restriction is similar (and probably as equally short sighted) as most government policies towards drug addiction. They do nothing to alleviate the reasons people crave the narcotic, instead they try to restrict supply. And the result? The addicts go underground and pay way over the odds for bad product and get into a worse predicament which causes yet another outcry. Underground dealers = payday loan companies. Wonga = Whoonga. It's all self inflicted.
There is a huge hypocrisy in the demand for careful lending from banks and a demand for the provision of "social" lending. Perhaps, if governments are really that concerned they should take on the burden themselves. How about raising Fed funds or base rates to 1.5% and allowing the consumer direct access? But that means that the taxpayer is taking risk. Much easier to utilise the bank scapegoat as middleman and fine away excess profits. (It is interesting to note the lack of media noise about malpractice and the huge fines levied on the pharmaceutical industry recently compared to the noise about banks)
But back to this rally. There appears to be a lot of grumbling annoyance that equities are still grinding higher as they "aren't supposed to". If this follows the psychology of grief, we obviously haven't reached the stage of "acceptance" yet which would imply there is a way to go yet.
We have read plenty of research talking about record longs in fund mangement positions together with minimum cash balances all presented with overlay price comparison charts of 1987 and 2000 crashes etc., but we are sceptical. It's a pretty easy game to find visual fits for Price/time overlay charts (especially when you stretch scales) and only the winners tend to be waved as survivor bias results of proof. As for the positional data, though the normal sectors of fund management are captured in much of this data we wonder if the true extent of the flows of reserve managers are showing up. These behomoths of investment only have to swing small fractions of their huge portfolios from bonds to equities to see large responses in price. The big difference this time is the message from the CB's (other than the Bundeathstar) is "go long, stay long". So we will.
We would like to also thank our great friends the Benchmarks for helping us out further. Nothing worse for a fund manager than to under-perform your peers however right you may be in the long term. And nothing worse than under-performing the main equity indices as for some strange reason many consider them the risk free benchmark that you have to be an idiot not to outperform. So, break from the herd and the jackals of fund consultants will snap at your heels, which leaves you with the choice of rejoining the pack and going over the cliff with your peers later or being eaten by the jackals now.
So despite the Central Banks tilling the ground and sowing the seeds for one, we are still a way off this being a bubble. We are invoking our DTTVI (Day Time TV indicator) along with a few other indicators and all suggest this has a good way to run yet as it's not a bubble until -
Daytime TV has shows for the masses dedicated to running portfolios in it.
People give up normal jobs to trade in it.
People mortgage their houses to buy it.
And finally our old favourite.. the 25year old BMW 3 series drivers are bragging about their portfolios in it
P.S. and the ECB have just added their dose of detergent to the bubble solution.