On Monday, former FX trader Mark Cudmore suggested that “the Goldilocks environment for equities is here for a long while yet.”
Well, now it’s Tuesday and Mark isn’t convinced that you get it. Which is why, gun to his head, he had to pen what may very well be his most “permabullish” post to date.
See Mark has had it with your “bemoaning” of centrally planned markets. Enough, Mark figures, is enough.
So this morning, he’s doing away with the idea of “objective” valuations. In Mark’s world, there is no such thing as “objective.” There is only “subjective.” And because “subjective” assessments of value are, well, “subjective,” there really is no such thing as “over”valued.
All sarcasm aside, Mark makes what is perhaps the only good argument for buying risk at absurdly inflated levels. To wit:
Either central banks have not changed the game and the bearish historical models will work, or central banks have altered market dynamics, in which there’s no point referencing rules to the old game as an excuse to sell.
That is a devastating indictment of the position espoused by those who simultaneously claim i) that risk assets can’t possibly go any higher, and ii) that central banks are manipulating prices by ensuring there’s always too much money chasing too few financial assets.
Mark’s right. You really can’t have it both ways. Central banks can create liquidity out of thin air. And while that cannot, logically, work forever, it is by no means clear that the day of ultimate reckoning for the money printers is just around the corner.
No one knows how long this charade can continue. It could all come crashing down tomorrow, or it could last for another two decades. If the latter turns out to be the case, then those who persist in screaming about manipulated markets can’t plausibly continue to express faux incredulity at how “stupid” people are for chasing things higher. If they do, there’s a certain extent to which they’re the stupid ones.
That is, if you posit a vast conspiracy to inflate asset prices and then subsequently claim to be shocked that asset prices continue to rise, there’s certainly a case to be made that you’re the idiot. Not the investors riding the wave by buying ahead of the central planner bid.
The truism that value is a subjective assessment seems to have been forgotten. As a result, U.S. equities are more likely to melt-up rather than melt-down in the short-term.
- Too many investors seem obsessed with the fact that U.S. stocks are “expensive” and “overvalued” when compared to historical metrics
- I’m not disputing those statements. But when there’s an unprecedented amount of liquidity in global markets, then valuations at unprecedented levels don’t seem completely illogical
- Value can’t be adequately compared in nominal terms. Real terms are what matter. If two people are stranded on a desert island and one has some food while the other has gold but nothing else, then she will exchange all that gold for some food. At that point in time, that value is correct, no matter what historical data suggests
- It’s hard to consider valuations stretched when there’s still excess cash on the sideline. I’ve noticed that perma-bears tend to bemoan that central banks are distorting markets while simultaneously failing to incorporate that “distortion” into their valuation metrics
- They can’t profitably have it both ways. Either central banks have not changed the game and the bearish historical models will work, or central banks have altered market dynamics, in which there’s no point referencing rules to the old game as an excuse to sell
- I know which camp I’m in. Global liquidity is abundant and constantly increasing. Central bank balance sheets have been accelerating in size since the start of 2016, not decelerating
- Taking the combined balance sheets of just the four largest central banks in the world (PBOC, ECB, Fed and BOJ) and charting that versus the market capitalization of global equity markets shows no dislocation in broad equity prices
- If anything, this suggests that global equities are “undervalued” as normally they trade at a premium to those balance sheets. And I stress that I’m only charting central bank balance sheets against the entire world’s equity markets
- When you add in the fact that global growth is picking up, global earnings are incredibly strong and long-term yields remain contained, then it’s hard not see this Goldilocks world for equities persisting
- I will acknowledge that this argument focuses on global equities rather than U.S. stocks. I’m firmly in the camp that U.S. equities may underperform other markets, particularly EM ones, for many years ahead
- So how can I say that U.S. equities are at risk of melting up? Because too many investors are fighting reality and using U.S. equities to express a misguided bearish global view. U.S. political noise provides an extra excuse
- This is the macro backdrop. Corrections are obviously possible. But, until the framework shifts again, I’m failing to see why dip- buyers aren’t correct