The year has drawn to a close. And it will be one for the history books. By the end of last week, 50 stock-market records had been broke and now the Dow pushes toward 17,000.
Almost all investment advisors are bullish. Even long-time bears – such as Hugh Hendry, John Grantham and John Hussman – have decided to join the fun. Here’s InvestmentWeek:
“I can no longer say I am bearish,” said Hendry. “When markets become parabolic, the people who exist within them are trend followers, because the guys who are qualitative have got taken out.”
Speaking at the Harrington Cooper conference, Hendry argued that an ongoing currency war between the US and China will continue to force the Federal Reserve to keep monetary policy loose and easy.
“I may be providing a public utility here, as the last bear to capitulate,” he said.
“You are well within your rights to say ‘sell’. The S&P 500 is up 30% over the past year: I wish I had thought this last year.”
Hendry sounded pretty crestfallen. Here’s more from InvestmentWeek:
“I have been prepared to underperform for the fun of being proved right when markets crash. But that could be in three-and-a-half-years’ time.”
“I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends.”
As Hendry said, he is not the first bear to “warn” that stocks are likely to go much higher from here. Here’s a round up of some recent quotes we’ve heard from the long-time bears:
John Hussman: “…we should neither expect, rely or be shocked by a further blowoff…”
Jeremy Grantham, GMO: “My personal guess is that the US market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years…”
Richard Russell: “I continue to think that this bull market will end in an upside explosion.”
Bob Janjuah, Nomura: “I still see end Q4 2013, through to end Q1 2014, as the window in which we see a significant risk-on top before giving way, over the last three quarters of 2014 and through 2015, to what could be a 25% to 50% sell-off in global stock markets.”
Is there no one else?
No one else? What are we, chopped liver?
Bill Bonner on markets, economics & the madness of crowds
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Yes, dear reader, everyone is thinking the same thing. Which means no one is thinking at all.
True, take a look at almost any stock-market chart and you will see something that looks like it wants to up further.
But who knows? We are sailing in uncharted waters. No maps. No GPS. No road signs. No familiar landmarks. Central banks are all engaged in an experimental monetary policy – on an epic scale. And now the financial markets – and perhaps the economy too – are hooked on it.
Two weeks ago, the Fed announced that it would begin pulling back. Instead of supporting the asset markets with $85bn in new cash each month, the Fed will only print up $75bn. It was like an alcoholic who tells his wife that he is cutting back on his drinking: “Henceforth, instead of a quart of Jameson per day, I will only drink a fifth of Wild Turkey,” he says.
There was something insincere too about the Fed’s additional note – that it would keep interest rates near zero as long as it damned well pleased.
Whatever comes of this, our guess is that the drinking spree is not over. And in the meantime, anything can happen.
So what do you do? “Stay on the sidelines”, we urge.
“But wait”, protests a member of our own family, perhaps speaking for the majority of dear readers. “Staying on the sidelines has been very costly. I don’t know if I want to stay on the sidelines while this stock market continues to go up.”
More and more people are asking the question. And more and more are sure of the answer: no, which makes us wonder if there really are any buyers left or whether the only buying comes from the Fed’s new money.
But as far as we know, as long as the Fed keeps pumping, prices for stocks, Andy Warhols doodles, and Manhattan apartments will keep going up. That, however, doesn’t mean any of them are good investments.
Stocks, for example, are an option on a bigger Fed-induced bubble. But they’re not cheap. Price/earnings (p/e) ratios are high – above 20. And both ‘p’ and ‘e’ have been inflated by the Fed itself. Low interest rates flatter earnings, while making stocks – compared to fixed-interest investment – look good.
Could this continue? Yes, of course. Or, it could blow sky-high.
Yes, 2013 was one for the history books. 2014 almost surely will be too.
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