The party has got out of hand

The Dow rose 100 points yesterday. Gold was up one lousy dollar.

We’ll take the gold, thank you very much. Because our guess is that this stock market is living not only on borrowed money, but on borrowed time.

With the addition of Alibaba, there are now 44 start-ups preparing to enter the public markets. Each of these has a valuation of more than $1bn.

The last time there was this kind of action in the initial public offering (IPO) market was 2000, just before the dotcom bubble blew up. And the last time stocks were this expensive was 2007, when the subprime/finance bubble blew up.

That was also the last time corporate stock buybacks passed the $600bn mark, which they will do again this year.

Yes, dear reader, the party has got out of hand – thanks to all the free booze supplied by Ben Bernanke and Janet Yellen. It’s time to look for the car keys.

This is not to say that it won’t go on longer. And it is not to say that it won’t get wilder, too. There are already people with lampshades on their heads. And girls are dancing on the tables.

But at least no one has called the cops… yet. You don’t want to be there when they do.

What might make stocks go up further? Well, the Fed might decide to hold off more quantitative easing (QE) cuts, for example. The economy is not recovering and the Fed knows it. A shock or two in the stock market or very bad employment numbers would probably convince Yellen & Co to stop their ‘tapering off’ programme… at least for now.

Or, like their counterpart Mario Draghi at the European Central Bank, they could announce a new scheme of unspecified interventions. Then, the markets could surprise everyone. Instead of the higher interest rates everybody expects, US interest rates could go lower, and it would be ‘party on’ again, with higher stock prices to boot.

Thanks to Draghi, Italy is now able to borrow at 13 basis points lower than the US. Lenders are giving money to France at a yield 114 basis points lower. Are France and Italy that much better credits than the USA?

Well, that’s just the thing – when it’s party time, people stop doing the maths. The eyeshades, pencils and calculators are put away. As long as the music plays, speculators will dance. The IPOs don’t have any earnings? So what? Italy can’t pay back its debt? Who cares?

Call us an old fuddy duddy. We’ll sit this one out.

Recently we have been talking about investment theory and application. We have found ourselves coming dangerously close to the one thing we can’t tolerate: positive thinking.

In economics – at least at a public policy level – positive thinking is a trap. Every intervention is a mistake. Small ones are nuisances. Big ones are disasters.

Earnest economists – who believe they can improve the world with laws and policies – are a constant threat to human happiness and progress.

But what about investing? Does positive thinking pay off?

You, dear reader, have watched this infection develop, first as a minor scrape on our cynical Efficient Market Hypothesis (EMH), and then as a serious case of ‘Buffettitis’.

That’s right, we were beginning to think the man from Omaha was right all along; the EMH is nonsense and serious investors, who are willing to do the hard work, can beat the market.

It seems obvious. The ‘market’– especially when prices are high and the music is loud – is made of up people who are not serious and who are not willing to do the hard work. If you can put on your positive thinking cap and do a better job of figuring out how much a stock is really worth, you’ll probably do better than the average investor.

And if you don’t want to do the hard work yourself, find someone who does.


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