Registered: Feb 2002
03-16-12 11:19 PM
Quote from Specterx:
Portugal, Spain, and China come to mind. The market even appears to realize Portugal is headed for trouble as their yields are the only ones in the EMU which didn't decline the last few months.
The central thesis being tested here is that a free lunch is available - central banks can cause stock indices to rise at a 45-degree angle forever, regardless of valuations, and without any obviously negative side-effects. It has never been the case in the past, otherwise SPX wouldn't have gone sideways for eleven years. I don't think they'll be successful but we can sure make a go of extracting plenty of excess returns from the interim volatility...
Except, to continue playing devil's advocate, the bulls argue it's not about CB support, but rather solid earnings and a creeping U.S. recovery, plus stocks as a better inflation hedge than the alternatives (when inflation is mild at least).
Portugal and Spain are the defaults that cried wolf, and China has been on the edge of its crash seat for a while now... as has Japan -- what is it for Japan now, 20 years?
Agree there are no free lunches, but there is also the question of who pays and how.
It is not implausible to me, for example, to imagine a scenario in which the poor and indebted middle class are the ones that pay through the nose for bad CB policies -- in the form of stealth inflation and real wage erosion -- even as paper assets stay elevated for years.
The "who pays the piper" argument is tricky because there are many backdoor ways for the piper to potentially get paid. One of those ways is to perpetually screw an underclass that doesn't understand what's happening -- what all those nominal Dow points actually cost in real purchasing power loss.
Another counter to the free lunch challenge is the Minsky paradigm: The idea that stability begets instability and central bankers like their volatility all at once. This argument says CBs will pay bigtime, but not for a while yet, i.e. continued irrational optimism, on into crack-up boom, on into 2008 redux or even worse...
And so, again, it comes down to timing. Unlike those who take a while to turn the ship, I'm happy to change in an instant. For now though the free lunch crowd is toasting Big Ben.