Complacency and Confidence Soar as Central Banks Ignore Surging Asset Bubbles
By the Curmudgeon with Victor Sperandeo
Stock market sentiment, complacency and confidence has remained elevated for a very long time. That’s the subject of this week’s Curmudgeon post.
We don’t know when excessive bullishness will diminish, but we’ve never seen anything like it before. Victor and I don’t think it will end as long as the Fed keeps its “printing press” rolling.
Our End Quote from GMO’s Jeremy Grantham sums up our thesis on the Fed persistently ignoring asset bubbles.
A Rising Tide Lifts All Boats:
The Wall Street Journal notes (emphasis added):
"The frenzied stock-buying activity that may have saved AMC Entertainment Holdings Inc. from bankruptcy is opening up a potential escape hatch for other troubled borrowers as well.
More companies with steep financial challenges are seeking a lifeline from equity markets, eager to capitalize on the surge of interest in stock buying from nonprofessional investors.
But equity markets now are more open to supporting troubled issuers, in large part because of risk-hungry individual investors eager to speculate, according to bankers and investors following the trend."
According to Bloomberg data, there have been 254 profitable companies issuing secondary or add-on shares over the past 12 months. But there have been 748 unprofitable companies doing the same, for a net differential of more than 500 companies. That’s a 3 to 1 ratio in favor of money losing companies!
This chart, courtesy of Sentiment Trader says it all:
All of this issuance amounted to more than $27 billion worth of offerings that have been priced. That, too, is a record amount dating back 40 years.
Bullishness in Spades:
We have never seen market sentiment so BULLISH for so long. The extraordinary amount of BULLISH exuberance can be visualized by record margin debt levels as per this Exhibit 1 chart from Real Investment Advice:
Exhibit 2 is a new survey from Natixis which shows a clear example of “recency bias” at work. Here are a few excerpts:
“Despite the economic impact of the pandemic, investors report average investment returns of 12.5% above inflation in 2020. Now, with the reality of effective vaccines and unmasked economies, investors expect to revel in a long run almost three times what financial professionals say are realistic.”
“Wealthy Americans are pretty optimistic about their long-term investment returns, expecting to earn average annual returns of 17.5% above inflation from their portfolios. That’s according to a new survey from Natixis that surveyed households that have over $100,000 in investable assets in March and April of 2021.”
There’s also a “moral hazard” factor with the belief the Fed will continue to support markets indefinitely.
Complacency and Confidence:
With respect to “investor” complacency, the CBOE Volatility Index (the VIX), tumbled to pre-pandemic levels this week. It closed Friday at 15.62 vs a 52-week high of 41.16.
Let’s look at the Bespoke “irrational exuberance” indicator. It subtracts the “Valuation Confidence “from the “One Year Confidence” survey data. Recently, this reading has exploded higher for both institutional and individual investors.
When the reading is positive, it means confidence that the market will be higher one year from now is higher than confidence in the valuation of the market. The opposite is the case when the reading is in negative territory.” – Bespoke
The key takeaway is that “investors simultaneously believe the market is over-valued but likely to keep climbing.” Why? Because the “Fed has investor’s backs.”
Once again, this week, Sentiment Trader’s Dumb Money Confidence index is very optimistic and Smart Money Confidence is neutral.
Sentiment Trader concludes by saying:
“We've been in the Enthusiasm phase of a Typical Sentiment Cycle for more than six months now. The phase usually exhibits all of these factors:
· High optimism
· Easy credit (too easy, with loose terms)
· A rush of initial and secondary offerings
· Risky stocks outperforming
· Stretched valuations
We need to be on the lookout for internal divergences and warnings among technical indicators during and after these phases.”
Sky High Valuations:
The 52-week trailing P/E of the S&P 500 at 45.48 is now greater than the 2000 Dotcom bubble peak and the second highest of all time. That’s depicted in this chart:
The Buffett Indicator (named after Warren Buffett, who claims this is his favorite macroeconomic indicator) is the ratio of total U.S. stock market valuation to GDP. It is currently at 236%, which is 89% (~2.9 standard deviations) higher than its historical trend line, indicating the market is currently Strongly Overvalued.
Equity markets around the world are in uptrends, because central banks, acting in unison as a globalist entity, have shown a willingness to “print” an unlimited amount of paper/fiat currency to keep this counterfeit, fictitious game going.
The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money. Fiat money gives central banks greater control over the economy because they can control how much money is printed.
In this recent Curmudgeon post we noted that all fiat currencies have lost all their value over time due to inflation. In particular, we wrote:
The statistics of paper currencies are like that of Socialist Countries --they ALL lose. Since 1900 to the end of 2010 — 450 paper currencies — DIED! Some like zombies, return in another name, then die again. The Brazilian Real paper (monopoly game) currency has been reborn eight times, with a small valuation change each time.
Governments/global central banks will always use budget deficits and printing presses (aka “keystroke entries”) rather than go bankrupt. The bureaucrats want to save their careers. As long as they can spend more than what they take in, and “print” fiat currency, the public does not object and the financial spin game goes on.
In the U.S. it’s a recirculating Ponzi scheme: 1) federal government runs huge budget deficits, 2) U.S. Treasury Dept auctions more bonds and notes to finance the budget shortfalls, 3) Fed buys most of those bonds/notes from its dealer banks, 4) those Fed member banks then deposit some of the proceeds back at the Fed where they earn 10bps of interest. However, most of the money created by the Fed flows into financial assets rather than the real economy.
Today, U.S. stock market valuations are worthless as a standard of measure, when the goal seems to be to overturn the Constitutional Republic towards a Marxist/Socialist government with excessive money creation and free handouts. So, if nothing changes, expect stocks and inflation to continue to higher levels. (Victor)
End Quote (emphasis added):
“All four chairmen post-Volcker have underestimated the potential economic damage from inflated asset prices, particularly housing, deflating rapidly. The role of higher asset prices on increasing inequality also hasn’t been considered. Asset bubbles are extremely dangerous.
This current event is particularly dangerous because bonds, stocks and real estate are all inflated together. Even commodities have surged. That perfecta and a half has never happened before, anywhere.
The pain from loss of perceived value will only get more intense as prices rise from here. In short, the Fed since Volcker has been pretty clueless and remains so. What has been more remarkable, though, is the persistent confidence shown towards all of these four Fed bosses despite the demonstrable ineptness in dealing with asset bubbles.”
Jeremy Grantham, financial historian and co-founder of the investment firm GMO in an interview with Bloomberg.
Celebrate a return to normal and take advantage of the many places reopening. Stay healthy, take care of yourself and each other, and till next time……
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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