“Maybe this time is different. Those words, supposedly the most dangerous to utter in the investing realm, came to mind amid the frenzied pops in the highly anticipated initial public offerings recently.” That quote was from Randall Forsyth discussing why the current market mania reminds him of the “Shades of 1999.”
There are certainly many similarities between today and 1999. From exceedingly high valuations to a rush by private equity investors to IPO overly priced companies as quickly as possible, prices are high. Of course, such is not possible without an underlying “Fear Of Missing Out, or F.O.M.O.” by retail investors.
As discussed previously, “valuations” are a representation of market excesses. In other words, psychology is key to the formation, and inflation, of a financial bubble. However, it requires a supportive underlying narrative, a “siren’s song” to lure “sailors onto the rocks.”
Price measures the current “psychology” of the “herd” and is the clearest representation of the behavioral dynamics of the living organism we call “the market.”
The Bull Case
My colleague, and always a good read, Greg Feirman at Top Gun Financial Planning, recently had a great post.
“I discovered what I believe to be the strongest bull case yesterday in an article by Rothko Research on Seeking Alpha. I can do no better than to quote from “Letter To Equity Bears: Do Not Underestimate The Force Of Liquidity”
- In the past cycle, the Fed has become very sensitive to a sudden tightening in financial conditions, especially when equities start to fall aggressively
- Another $5 trillion USD is expected to resume in the coming months.
- Such would send US equities to new all-time highs
- Any bear retracement in the near term is a good opportunity to “buy the dip.”
- It is not a good time to try to short equities
One crucial thing that we have learned over the past 12 years is that the Fed has become very sensitive to a sudden tightening in financial conditions, especially when equities start to fall aggressively.”
The chart below certainly makes his point.
Variant Perception also chimed in with “It’s The Most Wonder-Bull Time Of The Year.”
“Reflation narratives are becoming consensus, but there is little reason to be contrarian for contrarian’s sake.”
Of course, this certainly brings us to Bob Farrell’s Rule #9:
“When all the experts and forecasts agree – something else is going to happen.”
The Beatings Will Continue
As noted, the “psychology” of a “mania” requires a narrative. In this case, it is the “Fed Put.” As Greg noted:
“Why did investors underestimate the force of monetary liquidity after 10 years of sample data? We mentioned previously that stocks could diverge quite significantly from fundamentals amid the massive Fed intervention and the strength of the FANG stocks in the COVID-19 environment. We can notice the titanic rise in central bank assets has ‘perfectly’ matched the strong rebound in the mega-cap growth stocks in the past 8 months.”
In other words, the Fed’s primary goal has been to allow the “beatings to continue until morale improves.”
The repeated rounds of liquidity, interventions, and accommodative policies have trained investors to take on more “risk.” Such was the point we recently discussed in “Moral Hazard.”
“What exactly is the definition of ‘moral hazard.’ It is the lack of incentive to guard against risk where one is protected from its consequences, e.g., by insurance.”