What's Behind the Market's Rise? 15 comments
-
Font Size:
-
Print
- TweetThis
I saw an article in the Financial Times a few days ago about how the Fed is considering discarding Greenspan's philosophy of not targeting bubbles before they pop. That is probably a good idea, in my opinion. But if the Fed does change its view on its ability to identify bubbles, such a change in policy is unlikely to occur anytime soon.
(As an aside, the thinking at the Fed has been that it is impossible to identify a bubble, that the proper response was to act only after the bubble burst, and even if they could identify bubbles, raising interest rates could damage the real economy. However, for such a course of action to be the best course of action, one must assume that the Fed can identify the secondary and tertiary unintended consequences of responding to the aftermath of the bubble, and that not reacting to the bubble before it gets out of hand creates less damage to the real economy than acting to stop it. Its hard to say, but the creation of the housing bubble, the mess in the credit markets today and the nascent inflation that is brewing all have their seeds in the policy responses, or lack thereof, of the Greenspan Fed, despite Easy Al's protests to the contrary. But I digress.)
In the meantime, however, its same-old, same-old at the Federal Reserve Board, with the government willing to bail out excessive risk taking by financial institutions that pay their employees ungodly amounts of money. One might say that the Fed had no alternative to bail out the financial system. However, there can be no doubt that the $900 billion of liquidity the central bank has created over the past several months is now working its way primarily into the assets that need it the least.
Consider this week:
On the day that Research in Motion (RIMM) announces its new super-cool product to compete with Apple's iPhone, Apple's (AAPL) stock rises. The moment CPI is announced as coming in less than expected, both stocks AND gold ticked up. Stocks wound up having a good day thereafter whereas gold gave back a few points. However, one minute after the CPI was released, gold was trading $5 an ounce higher than it was just moments prior. On days that oil goes higher, the Toronto Stock Exchange goes higher. On days that oil goes lower, the Toronto Stock Exchange goes higher.
As is usually the case, the main benefactors of the creation of excess liquidity are not the asset classes which were targeted for improvement. Yes, credit spreads have come in, but most spreads are still higher than normal. In the mean time, Research in Motion hits a new high, Apple nears a new high, oil hits a new high, the solar stocks hit highs, etc.
Many commodities are off their highs and have not been moving. However, I think that is in reaction to the dollar moving higher. My guess is that when the dollar levels off, the oceans of liquidity will find their way back into commodities.
Right now, however, while the shorts are covering madly and all the hedge funds whose long-term horizon is tomorrow jack up the stocks, we have a market that cannot stay down.
It should be noted that over the past two years, we have experienced tremendous credit problems that prominent economists have described as the worst since the Great Depression, nearly $300 billion in financial write-offs, a collapse in profits, rising unemployment, a collapse in the housing market, a corporate community that has been leveraging up its balance sheets to buy back stocks, an implosion of the private equity market, the disappearance of the CDO market, a consumer tapped out with records amount of debt, rising inflation, the collapse of a venerable Wall Street firm, and stocks are up. The S&P 500 was at 1280 two years ago. Today it sits at 1420, an increase of 11%.
Nor are stocks cheap, as I will demonstrate in a few days. They are not overly expensive either, but Wall Street is spinning valuation in the best light when, in fact, valuation is not particularly compelling.
As Jim Cramer stated: The fix is in. The Federal Reserve has been flooding liquidity into the system for some time, and the market is rising on that liquidity, and not, in my opinion, on fundamentals.
But for now, the path of least resistance is higher.
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 15 comments:
David White,
The gist of the article is that markets are going higher no matter what due to excess liquidity, so according to the context the author wrote what he meant - in other words it should mimic oil but it doesn't - just up all the time.
Saul Sterman
CrossProfit
The excess liquidity of 2001-2003 which followed the Tech Bubble and 9/11 went into residential real estate.
I think this time it will be commodities, not stocks, that turns out to be the bubble, although the crash may come from a much higher level.
Maybe that is because the 'bold' is a sad joke, and shows RIM running scared.
hasn't progressed made it possible for the modern day "trusts" to now be financed with public monies via the fed?
and so it will continue until trust itself is so broken, when the big money beasts will have to burp and lick themselves clean til the next chance they get
yikes, can't believe i've gotten so cynical :-)
This is a very important observation. The creation of money and the creation of value are entirely unrelated. Collapses in prices of a particular asset class are usually due both to past overvaluation of those assets and a trigger event demonstrating for the market that the value of those assets has fallen materially. In other words, value is declining and the assets were overpriced. Creating liquidity does not make the assets more valuable, so it is unlikely to make them more desirable (and thus more expensive), either. Instead, excess liquidity will flow to whatever assets are growing in value or perceived to hold their value best. Hence the big run-ups in gold and crude and, perversely, Treasuries - over the past 6 months, the market has believed that those assets provide the greatest value. That would always mean their prices would rise, but they rose much faster than they otherwise would have because of all the excess money looking for a home.
The corollary to this is that flooding the market with liquidity is always the wrong response to a bursting bubble. It will *never* slow the bursting of that bubble and *always* begin inflating another one elsewhere. The problem is value, not prices, and central banks cannot and do not create value. If the Fed wants house prices to rise, they should shut off the printing press, grab tool belts, and start renovating homes. Giving more money to people who want to borrow (while destroying the assets of savers) isn't going to achieve that because they're going to buy what they want, not what you want them to buy - probably for good reason.
It seems that we are in a "don't fight the fed" type of mood/market.
Let's ride the wave with an hedgy feeling. How long is it going to last is difficult to say, of course.
I am looking for the following signs; great optimism of the masses and pundits and cautious articles like this one and "don't believe Paulson" by Reggie this day.
Investor psychology Vs. economic reality will cause stocks to go up and down over the next 3 years as it ultimitely comes down at least 50% in my opinion.