The best year financial markets have ever had? We end this year with another massive liquidity impulse by central banks around the globe! Beware of buying tops! 

 

There is a clear separation between reality and fiction. Yet in the financial world, everything is one. Real dollars you can touch and feel but their value is elusive. It’s a mystery. What holds it in place? What could make it more or less valuable and in relation to what? The central bank prints money at the rate they believe is best, hands out currency far and wide and manipulates interest rates. Their actions are extremely important because currency is born out of debt in this system, giving them an absolute monopoly. But what is this fairy tale?

Leveraged Loan Market Size Doubles in Ten Years, Private Credit Explodes

It was December 2010, in the aftermath of the financial crisis when the US government was forced to approve a US$700bn rescue package slated to avert the collapse of the country’s financial system.

Buying Tops And Trump’s Race For Stock Market History

We want to add to our last post because we believe the topic is of immense importance to the younger generations starting to save and plan for their retirements.   Note, we had a slight error in the post,  Keeping Stock Market Returns In Perspective, on the annualized return for President Obama’s S&P due to the wrong start date.  We have made and noted the correction.

We doubt many caught it but glad we did before say, Fox News, as they may accuse us of searching and cooking up fake market conspiracies to hurt President Trump politically.  God forbid that ever happens in this great country.

Beware Of Buying Tops 

Let of preface our post by saying that we do not, nor does anyone else know the future or can say if stocks are topping or have high valuation levels with absolute certainty.  We have no idea if stocks are going to go down 50 percent over the next few years or rise by 1,000 percent over the next ten years.  We can only look to past history, logic, and time tested valuation metrics to try and estimate probabilities.

Moreover,  there is always a possibility that “this time may be different.”  After all, the magnetic north pole is heading south at an unprecedented rate.   Noth pole elves morphing into south pole elves can’t be a good thing.

If you have been reading GMM over the past few years, you know we come from a trading background and our brains are not wired like long-term investors, who work, save and allocate their hard-earned savings to, say, a 60/40 percent diversified portfolio of stocks and bonds and live out their lives, watching the markets only occasionally.   Trading and analyzing the markets and the global economy has been our life, 23/5 for most of our professional career.

It’s ironic the cable financial networks, who profess to be all-in for the long-term investor spew so much market noise, conferring very little value-added to long-term holders, even if only the Top 10 percent of households directly hold 86 percent of all stocks.

We do recognize, however,  there are very few exceptions in an investor’s life that should deviate from the 60/40 allocation discipline and believe the current environment is one of these times.  That is, it’s time to pare back on some risk and move into a higher cash position.

Valuations 

Almost by any metric,  the U.S. stock market is extremely overvalued by any historical measure.

S&P_November_2

 

Dot.com Giddiness

We are also starting to see the same sort of giddiness experienced at the top of the dot.com boom, canonized by President Trump’s current chief economic advisor, Larry Kudlow’s infamous quote in February 2000,

“This correction will run its course until the middle of the year. Then things will pick up again, because not even Greenspan can stop the Internet economy.”  — Larry Kudlow, Feb 2000