“IRRATIONAL EXUBERANCE” part 2

 

The recent market action reminds me of the “Irrational Exuberance” of the Greenspan era. This exuberance fueled by extremely low rates for an extended period of time was in part  responsible for the disaster we have experienced over the past 9 months. This recent irrational behavior displayed by the market will not, in my opinion, end well for retail investors. By all accounts the economy is not out of the woods. Jobs are still being lost at an alarming rate and the consumer, although optimistic, does not have the same buying power as before and probably won’t for an extended period of time. 

The positives displayed so far in this recovery have been tremendously overdone by the market, possibly to a larger extent than the down spiral move that led to the March 9^th lows in the S&P 500. The Obama administration initially seemed to be doing a good job of setting realistic expectations for the economy but as of the last 2 months, the administration has adopted a much different approach. When was the last time you heard President Obama make comments that the economy would take time to recover as he did in the early days of his administration? The truth is that right now the administration needs the markets to rally to give the appearance that the “green shoots” are indeed for real. The saying goes that the stockmarket has a short memory but these days it is increasingly looking more like amnesia…

 There is no doubt that the medicine deployed to stimulate the economy is having an effect. How could it not?? The amount of cash pumped into this economy since the inception of this crisis is staggering…Much like a cancer patient who is treated with strong chemotherapy to curtail the growth of a tumor, the U.S. has deployed an all out effort to stop the spread of the financial meltdown. Now this is not to say that this action was unwarranted. In my opinion it was medicine that had to be taken. What concerns me is that there is a tremendous amount of complacency in the market place as to the risks ahead and to the real monetary value of the so called “green shoots” we are presently seeing. There has been some stabilization of the financial system as credit has begun to flow and companies have been able to access the capital markets once again. What many forget to mention is that these improvements are a function of government intervention via the myriad of programs. The market has not discounted that very important fact in this rally and although we are in better shape than the S&P 666 of March 9th, we are no where near a justifiable 1000.

 As always in these situations, greed and the fear of “being left out” wins out over better judgment. As a result funds have been pouring back into the market via long only mutual fund and 401K buying. Fund managers have to put this cash to work, sometimes against their better judgment, and what you have is a lot of smoke and mirrors. The “free” market in my opinion is still the best mechanism we have to price assets. I highlight “free” because a free market is one supposedly free from manipulation. I am not sure that has been the case lately…