Prepare for Another Market Face Pounding
Prepare for Another Market Face Pounding by MN Gordon – Acting-Man
“Better than Goldilocks”
“Markets make opinions,” goes the old Wall Street adage. Indeed, this sounds like a nifty thing to say. But what does it really mean?
The bears discover Mrs. Locks in their bed and it seems they are less than happy. [PT]
Perhaps this means that after a long period of rising stocks prices otherwise intelligent people conceive of clever explanations for why the good times will carry on. Moreover, if the market goes up for long enough, the opinions become so engrained they seek to explain why stock prices will go up forever.
After nine years of near uninterrupted stock market gains, new opinions are being offered to explain why the stock market will be bathed in sunshine indefinitely. For example, the late-1990s term Goldilocks is again being used to describe why the slow growth, low unemployment, economy is good for stocks. Apparently, if an economy is not-too-cold, but not-too-hot, stocks can go up lots and lots.
What’s more, these days everything is so perfect that Goldilocks is no longer a good enough descriptor. This was the conclusion that JP Morgan’s Jan Loeys recently reached, no doubt after peering at a 5-year S&P 500 index chart:
“We nicknamed this world ‘Better than Goldilocks’ two weeks ago. With global growth breaking out from its 7-year range and inflation still surprisingly down, we are graduating from a not-too-hot, not-too-cold Goldilocks world to an even better one for risk assets. It will not last forever, but could easily last long enough, given past momentum in growth and inflation forecasts changes, to have a positive impact on all assets with risky ones outperforming.”
A recent update of the median price-to-sales ratio of SPX component stocks via John Hussman. What could possibly go wrong? If this chart were used in an economics course, it would probably be introduced with the words “assume perfection…”, which is what investors appear to be assuming. The “Goldilocks” argument is not entirely without merit – a weak, but not recessionary real economy and low CPI rates of change leave more “free liquidity” to be deployed in the markets – but with the recent downturn in money supply growth, free liquidity in the domestic US economy has actually turned outright negative (admittedly, we have grave reservations with respect to “measurements” of economic output and price inflation, so take this with a grain of salt). Moreover, one would think that even a perfect world will at some point be priced in. The chart above suggests that at the current juncture, a perfect world and then some has been priced in. At the same time the by far most important fundamental driver of the bubble (i.e., the pace of monetary inflation) has actually turned hostile. [PT] – click to enlarge.
Burnout, Sloth, and Apathy
Yet while Loey concedes stocks won’t go up forever, Jim Paulsen of Leuthold Group has a different market-made opinion:
“We’ve got a fully employed economy, rising real wages. We restarted the corporate earnings cycle. We’ve got strong confidence among business and consumers. The kick is we can do all of this without aggravating inflation and interest rates. If that’s going to continue, I think the bull market could continue to forever.”
Forever, as we understand it, is a very long time. Without question, Paulsen’s opinion has been molded by the market’s long running win streak. Still, a forever bull market, like an endless summer, is not without its detractions.
It’s actually pretty simple. If Mr. Grassbinder cannot live forever, then neither can the bull market. [PT]
Jay Adams, who pioneered pool skateboarding in the mid-1970s, once commented that he “was on summer vacation for 20 years.” This, alas, turned out to be more of a curse than a blessing. By the time Jay turned 40 year’s old he looked exhausted. And at just 53 his heart ran out of gas.