Stocks hit new records last week as central banks around the world continued writing checks to prop up still struggling economies, the price of oil stabilized, Vladimir Putin lured the West into a phony truce in the Ukraine, and Athens and the EU tried to pretend that Greece isn't hopelessly insolvent or that it even matters if it is or isn't.
In other words, investors were once again all too willing to ignore economic reality and drink the Kool Aid being served by central bankers and politicians.
We might as well call this the "Jonestown Market" because the cult leader Jim Jones could just as easily be handing out paper cups filled with colored water and investors would be swilling it down…
A Planet of Debt
Investors no longer require good news to cause them to bid up the prices of grossly overpriced equities. All they need is the promise that central banks will keep printing funny money to send them running to call their brokers.
And why not? This formula has worked great for the past six years. Why shouldn't it work again?
I will tell you why. Six years ago the world has much less debt than it does today. It was also much more stable geopolitically than it is today. It also had yet to create a bubble in the energy sector, the social media sector or the biotech sector.
Stocks were trading at rock bottom valuations and credit instruments were trading as though the world were about to go out of business.
Today, the world is home to more than $100 trillion of debt that can never be repaid and $700 trillion of derivatives whose risks very few people understand. There is massive overcapacity in global commodities. Stocks and bonds are grossly overvalued and priced for perfection.
So that is why central banks incessantly printing paper money to cover over the inability of governments to create sustainable economic growth is not going to work this time.
And why investors who keep buying stocks indiscriminately rather than hedging their heroic gains of the past six years and focusing on select, undervalued stocks are going to get their heads handed to them sooner or later.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.