Thursday, September 18, 2014

Dancing on Tables with Lampshades on Their Heads …

by Bill Bonner

Dancing on Tables with Lampshades on Their Heads …

The Dow rose 100 points on Tuesday. 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 also on borrowed time.

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

The last time there was this kind of action in the IPO market was 2000, just before the dot-com bubble blew up. And the last time stocks were this expensive was 2007, when the sub-prime/finance bubble blew up.

That was also the last time share buybacks by US corporations passed the $600 billion mark, which they will do again this year. Yes, dear reader, the party has gotten 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.

Q2 buybacks

Share buybacks per quarter, via Capital IQ and Zero Hedge. If you didn’t know whether stocks are expensive or not, you only would have to look at this chart…when buybacks approach the zero line, stocks are cheap and it would actually make sense to buy them back. It sure makes no sense now. This is another example of how the monetary bureaucrats distort markets and perceptions with their policies. Those who think this is not going to end badly are deluding themselves (chart comment by PT) – click to enlarge.

Party On!

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 on more QE cuts, for example. The economy is not recovering and the Fed knows it. A shock or two in the stock market or bad employment numbers would probably convince Yellen & Co. to stop their “tapering” of QE… at least for now.

Or, like the European Central Bank, the Fed could announce a new scheme of unspecified interventions. 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 the ECB, 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 more creditworthy than the US?

Well, that’s just the thing: When it’s party time, people stop doing the math. The eye-shades, 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.

France, 10 yr. yield
France, 10 year OAT yield (which stands for obligations assimilables du trésor in case you were wondering…)– 1.43% at present. That makes just as much sense as record share buybacks – click to enlarge.


We have been talking about investment theory… and practice. Long-term readers will find this unusual. We’ve been writing about money for the last 15 years. Never before have we shown much interest in investing it. What happened?

Friend and colleague Porter Stansberry (the founder of Stansberry & Associates) persuaded us to write a paid monthly investment letter. All of a sudden, we had to think not about economics and politics but about investing! And then, when we got into the subject matter we 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, having watched this infection develop… first as a minor scrape on our cynical Efficient Market Hypothesis… and then as a serious case of “Buffett-itis.”

That’s right, we were beginning to think the man from Omaha was right all along: The EMH is seriously flawed. 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 up of 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…

positive thinking

The unexpected perils of positive thinking….

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