Investors in Wonderland – Euphoria Psychology
One of the most pressing and urgent questions in most investors minds is “how and when will this move end?”. Many analysts and researchers have postulated the end of this move and we’ve event attempted to time it to some degree. Picking tops and bottoms is always a risky process. It is rarely an exact science and often leaves many variables unanswered.
Today’s ActivetradingPartners.com article is based on the “Wonderland” concept of debt driven US Fed and Central Bank policies as well as recent news items. The biggest being that China shocked the world with slower growth recently and that GE’s earnings announcement opened up a “shadow accountability” issues with many. Additionally, recent news has mentioned that the US markets are outperforming nearly all other markets by multiple metrics.
A few months back, we discussed Capital as being a living and breathing entity that continually sources the best environments for growth and opportunity (ROI). We strongly believe the US market, in addition to a few others like Canada and Australia, may have been a euphoric, central bank fueled, goofy and hallucinogenic world of debt driven capital advancement over the past 8+ years. The concerted efforts to “save the world” from capital contagion has allowed central banks and governments to inject nearly $20+ Trillion USD into the global markets and has resulted in asset growth metrics that far exceed anything we have ever seen in the most recent 60+ years. Is this a wonderland of limitless central bank debt and an endless bull-run where consumers will continue to gobble up anything and everything at any price?
Evidence of this Wonderland can be found from many sources. This, the CAPE/VIX Ratio chart, clearly shows the extended levels of asset valuations in relation to previous bubble economies. The expansion of this ration from the 2009 lows is massive.
Additionally, this expansion correlates directly with the US Fed’s QE and easing activities. We can see that a majority of this move has been backed by Fed policies to drive economic and asset valuation levels higher resulting in what could possibly be one of the biggest bubble economies ever created.
The most interesting component of this last chart is the move higher after the US Elections. This move was made without a Fed based QE effort and we believe it was the optimism of a “change” that created this economic “relief rally”. By comparing this recent move to the previous chart, you will see the increase in the CAPE/VIX Ratio also shot higher after the US elections.
In other words, we don’t expect anything massive to disrupt this rally currently, but we are cautious and urge all investors to remain cautious. When something massive, be it the consumers, corporations, global economic events or other massive events (like war) happen, all bets are off. This market appears to be in a EUPHORIC “wonderland” moment driven by the fact that the global central banks have created a waterfall event of cheap money that is driving all of this asset valuation recovery. And, as capital is continually searching for the best environment for ROI, it is consolidating into the best areas of the global economy for survival purposes.
What does this mean for investors and global markets? In our opinion, it means that optimism is outpacing actual production on a global basis and when reality hits, we may be in for a bumpy ride. Until then, we should continue to be very cautiously bullish and try to ride this out as long as it continues. We can’t stand in front of a freight train and expect to stop it. This move may continue for another few weeks or months, but at some point it will “pop” when realty does not match expectations – hence the “Wonderland” reference.
Lastly, this graph of the CPI Mean Rate shows that the entire economic recovery has, for the length of the recovery, failed to result in mean CPI levels reaching above 2%. In previous economic advancements, the mean CPI levels have continued to rotate to levels above 2% while recessions have shown dramatic and extended drops in the CPI ratio. Yet, the current recovery, briefly, rose above 2% after bottoming and has rotated below 2% for the last 6+ years. Even though global Central Banks and the US Fed has injected trillions of dollars of capital in an attempt to create inflation, the markets are simply not responding. The only things that are responding to this effort is the creation of debt (student loans, auto loans, residential and commercial RE loans and corporate financing debt). The actual consumer economy has been on life support for nearly 8+ years.
The Wonderland economy we are witnessing may be the biggest shell game since the South Sea Company collapse near 1720. I would suggest all investors do a little research into this event and the processes that were in place to all it to happen (bribery, collusion, criminal activities and governmental cooperation). Interesting facts in history are often relived at some points in the future.
In short, as long as the capital continues to flow into the strongest and most dynamic economies, those economies will likely continue to see growth and rallies related to this capital activity. Still, stay cautious because when the markets turn, it could be very quick and violent. Additionally, as we’ve shown with these charts and graphs today, we are entering a frothy period in the markets and I would urge all investors to be critically aware of the risks involved in being blind to these facets of the current bubble.
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Chris Vermeulen
