A few things: 1) Blow off tops are rare and therefore unlikely. 2) There is still a wall of money on the sidelines. We aren't near euphoria even with valuations as high as they are 3) U.S. ain't Europe. That's why the money is pouring in here instead. TINA.
The art of printing money without actually printing it... The Central Bank can create any money they want, they could just arbitrarily pick any number they want from zero to infinity and say that is the amount of money owned by the Central Bank. Actually, when the Central Banks spends money to purchase a debt obligation (a bond) then as soon as the money is issued it suddenly exists and becomes part of the money supply Since the Central Bank can issue as much money as it wants by buying a T Bond, or it can reacquire and thus eliminate money any time it wants by selling T bonds. There is no obligation on the part of the Central Bank to match their buying to previous selling. The Central Bank does not have to have acquired money at some point in the past, to be able to have money now to spend. A ledger entry is all that's required, put pen to paper on the ledger and money is created.
The last few US sessions saw constant volatility of 300 to 400 pts (DOW) to then sell-off at the close to create a flat-line on closing prices. The Eurozone, in comparison, has had a few up sessions. Valuations for the EU & JP are giving a PE of around 20, compared to the 30+ for the US. Perhaps TINA or FOMO are driving up the technicals in the US, however, fundamentals tend to show that players are gambling rather than investing, a view also expressed by Alpha One's Dan Niles and Mohamed A. El-Erian who say that NABAF seems to give players a memory deficit... thinking that better than expected numbers trump the numbers themselves.
This week we had no compromise on further stimulus, the Fed pouring cold water on the economic outlook and the Thu jobless claims adding another 1m people loosing their job in one week. I thought to myself... If this does not phase markets then nothing will... I guess, for now, it's nothing, both the S&P and the NQ made new highs. There has been over $3t in stimulus pumped into the economy and the top 10 companies in the US are growing at lightning pace and are dominating the indices, so, one must say the index prices are justified... much of the $3t is going into stocks and mainly in the tech companies. But there are two caveat... 1. All the companies pushing the Indices higher are Tech, and tech is not a job creator, in fact, most of their success in tech is due to its ability to replace humans with machines or software. 2. This new type of stimulus is in the form of QE, Helicopter money and other barely comprehensible ways. The old style stimulus was to create jobs by building infrastructure which added to the GDP, the new style stimulus is just adding debt and adding to inflation by printing money. How is all this going to end? I suspect badly.
Here is the comparative GDP v. S&P chart (the Buffet Indicator). It is of interest to note that from 2000 to 2015, the average relationship roughly remained 1:1. The main point of interest is the comparison of the relationship of the 2009 recession and the 2020 recession. In 2009 total market cap of the S&P fell considerably more than the GDP and it took 4 years for market cap to return to the GDP value. In 2020 it is the opposite but on steroid... The S&P total market cap is currently 80% grater than the GDP and a good 40% above the average of the last 5 years. These figures frighten me but not as much as the "experts" coming on media saying that the stock market is "fairly valued"... it clearly isn't.
This Wed & Thu we get Consumer Confidence numbers, housing numbers, Durable goods numbers, another WoW jobless claims number, a read on the GDP and, just before Thu open, the Fed Chair Powell will Speak. Will markets be paying attention? We will need to see. Excessive speculation in Internet-related companies in the late 1990s caused the .com bubble which burst, this time around, the tech stocks again are having a strong run driving all else up, the difference is that the "all else" is what's showing Excessive speculation. The sectors might be different but the excess is the same... the .com bubble popped when markets realized that the valuations put on the high flyers might take a decade or more to be realized and by the time that point is reached, a lot of them would have been displaced by new-comers... A lesson that needs to be remembered
Here's something interesting, while the S&P500 was making new highs on Wed, the VIX surged 9% and is still going up during Asian sessions. Such an inverse move is seldom seen, in fact I never seen a 9% magnitude during rising equities. Perhaps someone has an insight on what the Fed will say today? I think any plans to buy today should be put on hold till we hear what Powell has to say.
Continuing with Wed observation of the VIX, during the Fed's speech, the VIX surged a further 4 units again while the S&P broke the 3,500 mark. Most analyst dismiss Powell's words as saying something we all knew already i.e. neither adding nor subtracting the market's expectations, so, markets rallied while the VIX spiked, meaning that no one wanted to sell but smart money was taking insurance against a sell-off. However, economist are not happy with the Fed's shift of putting employment at a higher priority than inflation as a policy driver, they think this is likely to end in a repeat of the 2018 4th quarter taper-tantrum when the Fed will be forced to return to it's mandate. Most economists are saying that inflation is out there but the Fed is choosing to ignore it for political reasons. Thu also gave us a further +1m number of unemployed, bringing the total number to 27m, double what it was during the grate depression on the 30's.
If one needed proof that the retail trader using the likes of RobbinHood are currently dominating prices then just look at today's price action on TESLA (+12%) and APPLE (+5%) on no news other than the stock-split kicking-in. TESLA is now 1000% up since Musk's $420 price forecast, not bad for a company running 2 plants which produce 1/20th of the 38m cars TOYOTA produces in its 14 plants, never mind that TESLA is yet to show profits. On the other side, smart money is scratching its head to explain current stock prices but not willing to short the market, it is, however, continuing to buy insurance, the VIX was +12% while the VIX futures were a full 6 units above that, and, Buffett is still not buying the US, in fact, he went outside his comfort zone and bought Japan stocks.