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Fed's New Paradigm Adds Helium to the Stock Bubble Valuation are not only high, they are among the highest on record. The Laws of Investing The Wall Street Journal asks Has the Fed Rewritten the Laws of Investing?
Stocks vs Interest Rates Some suggest stocks may not be as expensive as they seem because that interest rates are extremely low. John Hussman has pointed out the fallacy of that theory many times. The Journal explains the fallacy this way.
Stocks vs Bonds Some argue that stocks are cheap compared to bonds. But that is like saying truffles are cheap compared to moon rocks. It sounds good on the surface but makes little sense if you think about it for more than a few seconds. TINA Then there's TINA: There Is No Alternative. The idea behind TINA is people have to invest somewhere, they want to be liquid, so they pick stocks and bonds making bubbles out of both. The problem with TINA is that it is based on the discredited sideline cash theory, all this cash on the sidelines has to go somewhere. No it doesn't. Someone has to hold every dollar, every stock, every bond, every bitcoin, every Euro, and every ounce of gold 100% of the time. It is impossible for money to flow into any of those instruments. If I take $100,000 and buy Bitcoin, gold, stocks, bonds or even real estate, I have whatever I bought and someone else has $100,000. All that has occurred is a swap. I have an asset and someone else has cash. Thus, it is possible for individuals to reduce cash levels, but impossible for cash levels to drop in aggregate as a result of asset purchases. Fed's Commitment Let's circle back to the WSJ for a new theory.
Valuations Stretched For Years That explanation might help explain the quick recovery this year, but valuations have been stretched for years. For example, the Shiller PE was 33.31 on January 1, 2018. It's only a tad higher today at 33.74. Not Hyperinflation It's not a function of the US dollar either, and please do not bring up the ridiculous notion of hyperinflation. The US dollar is not going to zero vs the Yen, Euro, Gold, etc. etc. etc. Do You Understand the Ramifications of Passive Investing? Please consider Do You Understand the Ramifications of Passive Investing? I post some excellent video clips thanks to @TheBondFreak @GratkeWealth @DiMartinoBooth and @profplum99 and others. In regards to passive investing, there is one case in which sideline cash can matter. That is cash on hand at mutual funds. The bulk of cash on sidelines is either active players or players who do not want to be in the markets for whatever reason. These people are price sensitive, or at least sensitive to something. Mutual funds, largely representing buy and hold passive investors, have no cash on the sidelines. They get money in and have a mad rush to put it in play. Simply put, the Mutual Funds buy and someone else has the cash. But what happens when people panic? Stocks drop, then again, then again. Redemption requests come in. The funds have to sell, but to who? Not One Thing So, take the Fed, free money from Congress, Robin Hood day traders who have never seen a bear market, etc. and you have this massive sentiment that stocks will never go down. Passive investing and the Fed fuel the sentiment that nothing can go wrong. These factors are all in play. And it is impossible to figure out in real time precisely why people react the way they do. But bubbles by definition burst. Don't ask me or anyone else when. This has gone on far longer than I thought would happen. Finally, please note that stocks do not crash from valuations or in overbought scenarios. There are too many dip buyers waiting on the sidelines. Stocks crash in oversold setups in which redemption requests come in and the pool of dip buyers has dried up. Party on. Mish
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