Wednesday, September 29, 2010

Irrational Exuberance Never Lasts

I had to just chuckle when I looked at the tape today:

My Take:
What is there to analyze when you see a tape like this?

Folks, the market trades irrationally at times and now is clearly one of those moments. 

It's almost as if there is an imaginary floor and ceiling in the markets.  The news doesn't seem to matter anymore unless your name is David Tepper.

 he whole week has been been one giant "nothingburger":

I sometimes wonder if there is a trading algorithm that signals "buy" and "sell" every time the S&P drops or rises 5 or 6 handles from where it closed the day before.

Watching the market is like watching tape dry at this point.  The only thing that seems to consistently rise anymore is gold.  The only thing consistently falling at this point is the dollar. 

Huh!...OMG...Wait a second!...:  I think we finally have a correlation here that makes sense:  Lower dollar=Higher gold!

Hallelujah!  There is a god!  The market just made sense!

I hate to be so scarcastic here but what else can you really say at this point?

We have seen insanity like this before(I'm sorry about this Henry, I love the "tech ticker" but you were one of the tech bubble catalysts!)

My Take:

It's always nice to see old reminders of how irrational the market can get at times.  The AOL/Time Warner merger ended up NOT being the most compelling media conglomerate.  In fact, it ended up being an unmitigated disaster.  AOL is  a laughing stock at this point!

Two years following this interview the NASDAQ found itself 75% down from the highs.

I don't mean to throw Henry Blodget under the bus here.  In fact, some of his tech plays like Amazon actually worked out.  However, most of the winners still find themselves far below where they stood at their tech bubble highs.

I only bring this stuff up as a reminder of how bubbles work.  They can mesmerize you and make you believe that they are real.

The Fed is trying to recreate this image as they keep interest rates at zero.  This policy decision if forcing the market to create numerous financial "illusions".

The problem with "illusions" is that they are not real.  They are temporary and the almost always end up leaving you in tears.

The zero rates policy has potentially created multiple bubbles this go around:

  • Gold.
  • Housing.
  • Bonds.
  • Equities.
Take your pick above folks.  Any or all of these irrationally priced assets could pop at one point or another. 

The way I see it, they could all come tumbling down OR one of them could cannibalize the other. 

For example: 

If interest rates rates rise then I see all four of these potential bubbles popping all at once.  This means more expensive lending(bye bye housing and equities),  a stronger dollar(bye bye gold), and a collapse in the values of treasuries(bye bye current bondholders).

If the Fed does a QE then gold will rise and bonds will follow at least for the short term.  Housing and equities however may find themselves with fewer buyers as investors sense signs of desperation from the Fed and begin chasing bonds and gold out of fear..

If the economy turns around....Wait a second....Let me stop laughing so I can type...Ok..Thanks I'm back!

Let me start again:  If the economy turns around then gold and bonds could collapse as investors regain their "animal spirits" and pile into equities.  Heck, who knows, maybe a few would even buy a home or two under such a scenario.

When it comes to housing I honestly don't see any scenario where prices ever come back.  I still call this a bubble because the Fed has taken such drastic actions to prop up housing prices.

The housing bubble only partially popped.  We will have to wait a generation or so before this asset finds any buyers.  People can scream bull**** on this reality all they want as they continue to hold onto their real estate dreams. 

It's a virtual certainty at this point when you look at foreclosures, inventories, and current home sales.

Folks it's simple:  If houses can't be sold at current prices with interest rates at 4% then they simply aren't gonna sell until the prices capitulate to a level where they find buyers.

The only areas that we have seen anything close to capitulation are in places like AZ and FL where prices dropped 80% in many areas.   What's scary is there are very few buyers in these two areas at these levels despite the massive price drops.

We still haven't seen capitulation in the majority of the "bubble" markets in the Northeast but you can be assured that it's only a matter of time before we do. 

The reason we haven't gotten there yet in many markets is because many houses in AZ and FL are "second" homes.

These homes are much easier to walk away from because they aren't primary residences.  Also, the inventories in these two markets were also much larger due to excessive speculation in housing as the bubble inflated.

Think about it:

If you were a housing speculator in the early 2000's wouldn't you want to build in the most desired areas?  That's exactly what happened.  When bubbles pop they usually hit in the areas that saw the most speculation first. 

The Bottom Line

I write this post as a warning to anyone that's getting infatuated with their bubbles. 

It's easy to get caught up in them.  They are fun for awhile because they make you lots of money in the beginning.

I am certainly not immune to them.  I currently own two of them myself(gold and bonds).  I own a few equities as well but it's a small part relative to my other holdings.

Despite all of the pain bubbles have caused me they are still fun to watch.  I sit here in front of my computer screen quite often and watch gold go up and up and up and up.  At times I find myself wanting to yell:  "Wow, look at my gold go!".

Other times I want to give Bill Gross a huge hug as I watch my PTTRX bond fund rise on an almost daily basis.

When I find myself feeling like this I always try and take a step back in order to put things into perspective because I have seen these games before. 

Earlier in my investing life my account was usually left in ruins soon after I felt such powerful emotions when it came to my investments.

I have come to accept the fact that these painful lessons will never end because the market is impossible to master.  Stanley Druckenmiller would have never hung up the gloves if it was possible.

However, these "growing pains" have taught me to always stay diversified and take profits because pigs always get slaughtered when they become infatuated with bubbles.

Disclosure:  No new holdings at the time of publication.


Anonymous said...

Reminds me of a great quote:

"There is no spoon"

I've thought all along the gov't is just going to inflate their way out of their problems.. Looks like that's precisely what they're doing.

Jeff said...


I think so too. Dollar down again today and I bet the fed is happy as long as it doesn't happen too quickly.