I've been a bullish bear on most markets on and off for some years now. By that I mean that I remain pretty convinced that the underlying condition of most markets (and economies, for that matter) is horrible, and that almost everything is overpriced.
But like many other investors, since I figured out how quantitative easing (QE)would affect markets (print money and it has to go somewhere), I have had to accept that fundamentals don't matter.
It seems a long time ago now, but if you look back to the late 1990s and the various crises then Russia, Asia (I watched this from the SBC dealing floor in Tokyo, that was exciting) and Long-Term Capital Management you will see that they kicked off our current era of extreme monetary policy.
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Since then, every crisis has been met by the world's central banks with easier and easier monetary policy and eventually with quantitative easing. That has given us a rolling series of fascinating bubbles the dotcom bubble, the housing bubble, the debt bubble in Europe, the Chinese credit bubble (I'll come back to this again in a few weeks), and now, the global bond bubble.
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Inside that we also have some local stockmarket and sector valuation extremes. Look at the US market. The cyclically adjusted price/earnings ratio (one of the few measures that seems to work over the long term) tells us it's rarely been as expensive as it is now.
The same goes for median price to cash flow for US non-financial stocks, says Andrew Lapthorne of Socit Gnrale. It "has only ever been this high for two months in the past 334. That's twice in nearly 28 years. Neither was a great time to be buying US equities".
The market is also at the top of its historical ranges on most other valuation measures (I say most, because I know someone will have invented a new one that 'proves' it is cheap).
As long as the QE money keeps coming in, that's just fine. But what about when it stops? To see just what might happen, we need to look at how QE pushes markets up. The simplest way is just to look at it in money flows.
The Federal Reserve prints up some money, takes it into the market and buys something. The recipient of the money buys something else and so does the recipient of this money. The money is now in the system, sprinkling a little bubble magic as it does the rounds of the asset classes.
The other mechanism is buybacks. QE gives companies very cheap debt, which they have been more than happy to borrow and to use to buy back their own shares in the market (again injecting cash). I am not a fan of these at all.
When I last wrote about them, I said that their very existence as a possibility has the trying effect of encouraging chief executives to waste their time manipulating share prices in order to bump up their bonuses rather than creating and paying out a tangible income to shareholders.
That stands. Nonetheless, buybacks driven by QE (and chief executive greed) have been one of the biggest factors behind the recent rise in the US market they accounted for some $500bn of purchases last year.
The end of QE means the end of much of that. And it's already happening. According to Mr Lapthorne, share buybacks fell by over 20% in the second quarter of 2014 and are now lower than in the second quarter of 2013. Something for the bulls to worry about.
To these short-term concerns about QE in the US, worriers need to add long-term concerns about geopolitics: protests in Hong Kong and the EU, trouble in the Middle East, China's territorial spats with Japan and the rise of extremist Islamic militants.
The analysts at Deutsche Bank aren't convinced that this is temporary. In their recent Long Term Asset Return Study, they argue that we are "in the midst of an extremely rare political event". The US is losing its place as the sole dominant geopolitical superpower and "history suggests that during such shifts, geopolitical tensions structurally increase".
That suggests that the rise of global geopolitical tensions in the past five years, and "most notably in the past year", may prove not temporary, but structural in the current world system.
If so, "the world may continue to experience more frequent, longer lasting and more far-reaching geopolitical stresses than it has in at least two decades. If this is indeed the case, then markets might have to price in a higher degree of geopolitical risk in the years ahead."
That's definitely not priced into today's markets (except perhaps in Russia). But to this slightly disturbing sweep of historical argument I would also add something less rare, but of great medium-term importance.
I wrote a few years ago (too far in advance to be useful, I'm afraid) that anyone investing in very cash-rich companies with offshore operations should remember that broke governments look for money where the money is. This month is a good reminder of that.
Western governments are still just as broke as they were in 2008 and companies have just as much money. The difference now is that the rise and rise of the inequality debate means that voters are as keen as tax collectors for states to go after corporates for that money. That's why the US is clamping down on inversions and why Apple is finding itself the subject of some uncomfortable scrutiny over its arrangements with Ireland.
You may think the attempt to collect corporate tax at any level is just silly. In a globalised world, we might as well accept that we can't collect serious money directly from powerful companies. We need to try and make them employ our residents so we can collect income tax and VAT instead. However, the US and EU governments clearly don't agree with you.
That's a very clear geopolitical risk which is only just beginning to be priced in to cash-rich multinationals and their hard-to-defend tax arrangements.
Falling and sometimes voluntary tax rates have been a huge part of the benign environment they have been operating in for the last decade (along with falling interest rates and rising globalisation).
Change is here. What does it all mean? It is still hard to be a firm, medium-term bear on US stock markets (which usually have knock-on effects elsewhere). There is likely to be short-term correction and in the long term, everything must come back to earth.
But in the medium term? If there is trouble ahead there may be more QE ahead too. But private investors have choices. We should use them to stick to markets that offer more hope of good, long-term returns.
There's value in China, Russia and Brazil. But in Japan and in some of Europe, there is both value and the certainty of more QE. Not a bad mix under the circumstances.
This article was first published in the Financial Times.
