Have we entered another era of the stock market?  A permanent plateau or recently a  permanent melt up up slope?

Sometime after Alan Greenspan took over the Fed we entered the Bubble era.  In the bubble era the bubbles did pop although it took longer than many expected.  After the financial crisis, not only did the Fed re-inflate the bubbles, the central banks developed monetary “tools” to ensure the bubble would not pop again.  They call this “financial stability”.  I call them pre-bailouts.

I doubt it will work forever.  Credit bubbles are anything but stable and they did manage to create the greatest credit bubble of all time.  And this has led to many others – stocks, bonds, houses, art, bitcoin, etc.

In Doug Noland’s recent post he takes a look at the third quarters flow of funds.  We see the current era of values relative to the economy has exceeded the last two market tops.  We know how those periods ended.

Equity (stocks) to GDP:  202% (2000), 181%  (2007) 224% (today)

Total Securities to GDP: 359% (2000), 379% (2007), 441% (today, 56% higher than 2007)

We can thank the central banks for not managing the most unstable part of the money supply – credit.  Scratch that, they did manage it and they blew it up with massive financial asset purchases to usurp the free-markets.  Now some of them say they want to end their 10 years of “emergency” operations.  Well at least that’s what they say.

So we watch the price action of the markets to see how the markets are reacting.  Credit Suisse provided a chart that got my attention.  It seems the different sectors in the stock market are not moving together anymore similar to 2000 when the last stock market bubble popped.  It’s called market dispersion.  I’m sure its nothing.

So what happens if the central banks try to turn asset pricing back over to free-markets.  I think they will get a taste of it in 2018.  I don’t think they will like it. Then what…

Negative US interest rates by 2020? More QE to bail out the over-leveraged US corporations?  Who will bail out the rest-of-the-world that has loaned out 12 trillion in US dollars – how did that happen?

So far, our indicators are in the green.  And maybe we will get the Santa Rally to boot.  But defensiveness is still warranted in your allocations at these levels. Return of capital outweighs return on capital today.

Invest safe, invest smart.

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Categories: Perspectives, TSP Charts