Weekend Reading: Sagacious Discombobulation

AAA-Discombobulated

I noted in yesterday’s post that individuals, while still fully invested in the financial markets, are saying they are extremely bearish on the market. To wit:

“Speaking of the Fed, the surge in the market over the last couple of days have many scratching their heads despite deteriorating economics, weak earnings and poor geopolitical news. Of course, given the series of emergency Fed meetings, the markets are currently beating on a much longer time frame to the next, if ever, rate hike. 

Most interesting is what investor sentiment, both individual and professional, has recently accomplished.”

AAII-IINV-NetBullish-Sentiment-041416

“Accordingly, the chart above, investor sentiment suggests the market has just completed a recessionary ‘bear market’ with virtually no substantial losses.”

The problem, of course, is that while prices are rising back towards previous highs the fundamental and longer-term technical backdrop has deteriorated markedly. The answer, to why this is happening, of course, lies with Central Bankers. With the ECB, BOJ and BOC all pushing liquidity directly into the global markets, the only bankers talking about “tightening monetary policy” was the Fed. Of course, the reality is with the Federal Reserve now visibly trapped at the zero-bound, the playing field remains clear for the chase for yield.

As has been often repeated:

“With interest rates at zero, there is simply no other choice available. So, buy stocks.”

As Danielle DiMartino-Booth penned:

“No, perhaps what she [Yellen] is now realizing is the deep trap she is in. Her cabal of economists have long since assured her that government, corporate and household debt service is so low that history itself has been rewritten. But therein lies the mother of all Catch 22’s, wrought by nearly 30 years of central bankers encouraging, enticing and imploring debt-financed spending while punishing, penalizing and all but outlawing saving.

Yes, the debt service is at record lows, but the mountain of debt that’s been accumulated dictates that the only thing the economy can withstand is low rates in perpetuity. The alternative is simply unimaginable. There would be widespread ruin and perhaps even the bankrupting of a great nation.”

And there you have it – completely rational confusion. 

Stocks can’t be allowed to go down as the negative “wealth effect” will cripple economic consumption leading to recession. Therefore, Central Banks must keep the “hamsters” on the wheel while they hope the economy will eventually play catch up.

So what do you do? Play the short-term chase the market game or the longer-term wealth devastation game. The choice is yours to make, the consequences will be for all to share.

However, as I discussed earlier this week, markets are made by dissenting views. This weekend’s reading list continues in that fashion.

CENTRAL BANKING

THE MARKET – BULL vs BEAR

ECONOMY & OIL 

MUST READS

“I will tell you my secret: I never but at the bottom and I always sell too soon.” – Baron Nathan Rothschild

Questions, comments, suggestions – please email me.

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Lance Roberts

Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report”. Follow Lance on Facebook, Twitter, and Linked-In