Markets get overheated, and then a stumble and fall becomes almost a necessity. When the market is climbing and climbing and climbing, as long as the punch bowl is available, people will feast and gorge themsevles.
The punch bowl refers to the easy money policies of the Fed. Right now, the Feb has been buying government bonds, mortgage-backed securities, more government bonds, stocks, and bond ETFs.
When the Fed buys, the result is that the markets are being propped up. It is a fantasy that the party can go on indefinitely. Sooner or later, however, some event will occur and then the prices of these instruments will inevitably decline.
Speculation
When the Fed does all its buying, it aggravates and seemingly encourages speculation. What is the direct connection between Fed buying and other financial instruments? It may be hard to say, as speculation is endemic to capitalist systems. However, it may be appropriate to note that there are stocks with PEs of over 1,000, such as Tesla. (As of this writing, Tesla’s PE is now over 1,600.) Tesla is not the highest PE stock available however, as some are over 4,000 to over 6,000. However, it is unlikely that these stratospheric valuations can be sustained: substantially increasing asset prices is implausible. (Witness substantial insider selling of Tesla.) As the saying goes, trees do not grow to the sky.
Euphoria
With a giddily-rising market, increasing prices attract more speculation and prices continue to increase further. Having the Fed buy financial products gives an ever-rising floor from which prices rise. The result is that prices no longer are based on fundamentals, but on an artificially supported market.
No Figs
Isaac Newton, who first scientifically described gravity, fell victim to a stock market bubble. He invested in the South Sea Company in 1720. He doubled his money when he sold in the midst of the euphoria. However, he was further swept up in the continuing mania and later invested even more of his money, which was lost when the price of the shares crashed.
Cycles?
It is the nature of stock markets to experience booms and then crashes. Increases and then declines. “Boom, Crash, Boom, Crash, Boom, Crash, Crash” is an effort to put the entire range of market experiences into one phrase. It might also be usable as the chorus to a song. The past year has seen much volatility both economically as well as politically, emotionally, socially. We are due for a correction (such a euphemistically dainty term).
Are you ready for the inevitable correction? Let me know here.
The news item is from the San Leandro (California) Times, December 24, 2020, page 1.
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