Positioning Indicators at new Extremes

We are updating our suite of sentiment data again, mainly because it is so fascinating that a historically rarely seen bullish consensus has emerged – after a rally that has taken the SPX up by slightly over 210% from its low. Admittedly, a slew of such records has occurred in the course of the past year or so, and so far has not managed to derail the market in the slightest– in fact, since 2012, only a single correction has occurred that even deserves the designation “correction” (as opposed to “barely noticeable dip”).

While a number of positioning and survey data show a bullish consensus that easily dwarfs anything that has been seen before, this consensus is not reflected in expressions of exuberance by the broader public. “Anecdotal” sentiment seems more cautious and skeptical than the quantitatively measurable kind. Most likely this is because the vast bulk of the middle class has been so thoroughly fleeced in the last two boom-bust sequences that it finds itself in dire straits in spite of the reemergence of major asset bubbles across a wide swathe of assets. This includes by the way an astonishing revival of the bubble in real estate prices – see e.g. this 330 square foot shack in San Francisco, which recently sold for $765,000:

 

expensive SF shackYes, that tiny dark-brown thingy situated on a steep road sold for $765,000. The real estate bubble is back.

(Photo credit: SFARMLS)

 

Moreover, with the broad US money supply (TMS-2) having nearly doubled since 2008 and other major central banks inflating their money supply as well at breakneck speed, there has been more than enough “tinder” provided the world over to drive asset prices higher. This by the way makes a complete mockery of the constant refrain of central bankers that we are allegedly threatened by “deflation”. The inflationary effects of their monetary pumping are simply showing up in asset prices rather than consumer goods prices – ceteris paribus, a rapid inflation of the money supply always leads to prices rising somewhere in the economy.

 

Bubble Trouble

There is of course a “danger” that this asset price bubble will burst rather spectacularly once monetary inflation slows down sufficiently (it will probably never be reversed again in our lifetime, but a slowdown is already underway). In light of the current rare extremes in positioning, sentiment and leverage, the eventual denouement of the current bubble should be a real doozy. Note that in every respect one can possibly think of – with the sole exception of household debt – systemic leverage is at new all time highs (not only in absolute terms, but relative to everything, including the size of the known universe), and is likewise positively dwarfing anything that has occurred before.

Specifically relevant for financial markets are record highs in margin debt, record highs in hedge fund leverage, as well as record issuance of junk debt in recent years, which in turn has given rise to systemic leverage once again vastly increasing in the credit markets on the part of investors as well. To the latter point, note that financial engineering that is specifically aimed at enabling the taking of extremely leveraged positions is back with a vengeance as well – however, at the same time, the markets for the underlying debt instruments have become quite illiquid due to new banking regulations that hinder proprietary trading activities by banks (for a more detailed discussion of these topics see “A Dangerous Boom in Unsound Corporate Debt” and “Comforting Myths About High Yield Debt”).

In light of all these considerations, it is truly remarkable how little concern there is. Even former skeptic Hugh Hendry is these days talking about the alleged “omnipotence of central banks” which money managers are forced to surrender to (this view strikes us actually as an example of the “potent directors fallacy” – see also this comment by EWI on the topic). While we certainly have some understanding for his perspective – after all, as a fund manager, he cannot afford to “miss” an asset boom, or he will soon be out of a job – we do think he may be underestimating the potential for a capsizing of the happy ship that could well happen in an unseemly hurry, for currently unanticipated reasons. With “reasons” we actually mean “triggers” – the reasons are already discernible and perfectly clear: we listed most of them above. All that is still needed is a trigger that alters the perceptions of a critical mass of observer-participants.

In short, bubbles don’t burst because of a “black swan”: rather the swan – often a combination of events that makes it impossible to identify a single trigger – is a diffuse trigger mechanism that sets into motion what is already preordained. It is the famous “one grain too many” that is put atop a giant sand pile – however, it is the sand pile that is the problem, not the one grain. This is also why precise timing of a bubble’s demise is so difficult – it is unknowable what exactly will actually lead to the change in perceptions that ultimately provokes the unwinding of the leverage that has been built up.

At some point down the road, a Zimbabwe or Venezuela type very rapid devaluation of money may emerge. In this case asset prices would become solely a function of monetary debasement. It is important though to keep in mind that things don’t just move from the present state to the Venezuela type state from one day to the next – not to mention that it may not happen at all, if central banks in developed nations alter their policies in time. Assuming for argument’s sake though that it does eventually happen, there will still be an interim phase during which monetary debasement will e.g. alter the perceptions of stock market investors regarding the multiples they should pay for corporate earnings. This is what happened e.g. in the 1970s: multiples contracted into single digit territory, because market participants decided that the future stream of earnings would be less valuable in real terms, and thus deserved a commensurate discount.

 

Sentiment Data

Let us move on now to our suite of data. We have on purpose decided to follow a number of data points that relatively few people usually look at, in the hope that they may therefore be slightly more meaningful. Below we show three different views of Rydex data. The first chart shows the Rydex ratio in the form (bear+money market fund assets)/bull assets, as well as the disaggregated bear, MM fund and bull assets. It is noteworthy that the ratio of bears plus fence sitters to bulls has now also declined to a new all time low (the chart is inverted).

The second chart shows a more detailed view of money market and bear assets, plus the “pure” bull/bear asset ratio. The latter has made a remarkable move in recent weeks – it has gone straight up without even the slightest correction, as assets deployed in bull funds have exploded higher. In terms of this data series it represents the most extreme expression of a bullish consensus ever.

Next comes the leveraged bull/bear fund ratio, which compares assets in Rydex funds that employ leverage. Almost needless to say, it is at an all time high as well, but what is most remarkable about it is that it has spent more than a year in “excessive optimism” territory. This by the way goes to show that these data are not very useful for timing purposes. What they are useful for is this: the more time they spend in extreme territory, the more profound the move in the opposite direction is likely to be once it gets going.

Similar considerations apply to the Investor’s Intelligence survey and the mutual fund cash-to-assets ratio which come next. We show a very long term chart of the latter – what is noteworthy is the big difference in fund manager positioning and sentiment during the period beginning in 2000 compared to the secular bear market that lasted from 1968 to 1982. The latter was characterized by extreme fear and caution, while the period since the 2000 tech mania peak shows a remarkable degree of complacency (again, we think this is quite meaningful for the long term outlook).

Lastly we also update the still growing divergences between junk debt ETFs and credit spreads versus the SPX.

 

1-RYDEX-1Rydex: the (bear + MM funds)/bull funds asset ratio has now also hit a new all time low. This was mainly due to a huge surge in bull assets (which have increased roughly by one third in the 6 weeks since the October correction low) – click to enlarge.

 

2-RYDEX-2A closer look at money market funds, bear assets and the “pure” bull/bear asset ratio. The latter has just made a truly stunning move. Nothing comparable has ever happened before – click to enlarge.

 

3-Rydex leveraged
The leveraged Rydex bull/bear asset ratio – in “extreme optimism” territory for more than a year, and currently at a new all time high – click to enlarge.

 

4-II-surveyThe Investor’s Intelligence survey. The bull/bear ratio has failed to return to the 27 year high hit earlier this year twice in succession, but the bear percentage has fallen back to 14.9% – only slightly above the all time low of 13.3% recorded earlier this year – click to enlarge.

 

5-mutual fund cashThe mutual fund cash-to-assets ratio. Compare the secular bear market of 1968-1982 with the period since the year 2000 tech bubble peak. Fear and caution have been replaced by utter complacency. This is likely telling us something about what to expect in the long term – click to enlarge.

 

6-JNK-SPXJunk debt (represented by the JNK ETF) compared to government debt and the SPX. Credit spreads are widening and the divergence with the stock market keeps growing – click to enlarge.

 

Conclusion – Real Wealth Undermined:

As noted in the title to this post, in some respects we’re in danger of running out of appropriate descriptive superlatives for the current bout of “irrational exuberance” (we’re open for suggestions). The current asset bubble is in many respects reminiscent of the late 1990s tech bubble, but it also differs from it in a number of ways. One of the major differences is that the exuberance recorded in the data is largely confined to professional investors, while the broader public is still licking its wounds from the demise of the previous two asset bubbles and remains largely disengaged (although this has actually changed a bit this year).

A few additional remarks regarding the alleged “omnipotence” of central banks: monetary pumping certainly has the power to distort prices across the economy, which includes inflating the prices of titles to capital. However, at some point there will be a stark choice – either the pumping is abandoned voluntarily, or one risks the destruction of the underlying currency system.

Moreover, there is another limiting factor in play, which doesn’t get as much attention as it probably deserves. Monetary pumping merely redistributes existing real wealth (no additional wealth can be created by money printing) and falsifies economic calculation. This in turn distorts the economy’s production structure and leads to capital consumption, thus the foundation of real wealth that allows the policy to seemingly “work” is consistently undermined. At some point, the economy’s pool of real funding will be in grave trouble (in fact, there are a number of signs that this is already the case). Widespread recognition of such a development can lead to the demise of an asset bubble as well.

 

Charts by: StockCharts, SentimenTrader

 

 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

10 Responses to “Irrational Exuberance – Descriptive Superlatives Exhaustion Point Is Reached”

  • zerobs:

    I think the exuberance continues until the market can no longer deny the fact that millennials aren’t investing. 401K participation is down because company match is gone except for a few financial companies offering it. They don’t really have any spare money to invest anyway what with student loans at their highest level in history. They saw their parents lose value on houses, retirement accounts, etc. and see laying down roots as a lack of mobility (and becoming a sitting duck). Mind, this isn’t a massive generational movement, but it doesn’t have to be – the financial economy is so leveraged that only 3 or 4% more millennials than prior generations have to shift their attitudes to create a problem for the economic planners’ forecasts.

  • Talking about timing, as you say it is really difficult. But I would want to add another bit of data. Using the Sequential indiactor from Tom Demark in a monthly chart, the market is in a position that has just happened 4 other times since 1910. You can read it in this link (it is in spanish):

    http://themarketsbullfighter.blogspot.com.es/2014/11/el-sp500-se-encuentra-muy-sobrecomprado.html

    I think the end of this rally, from a Demark sequential perspective is just ending. We´ll see.

  • JohnnyZ:

    I think we are moving to a kind of a new type of an indirect command economy – a communism for the rich so to say – where they control primarily the path of the stock market and financial alchemy as a measurement stick of the success of the central planers, politicians and the elite. Economy is sluggish, wages are down, but see the stock market is growing, so everything is fine. People are being trained like Pavlov’s dogs to accept this “truth”.

  • rossmorguy:

    Extreme exuberance (or extreme anything) is not always a sign of irrationality, I suppose. I think it’s the lack of caution on the part of stock market participants, as shown by the charts in this article, and which is so unusual, that seems crazy to some of us. I think that even if I had been long the S & P since early 2009 (rather than shorting it at first and for the past couple years just watching), I’d be nervous and have significant hedges in place. But that’s just me, obviously.

  • 23571113:

    the assumption of this article is that extreme exuberance must be irrational… no. In a secular bull market, it is completely rational.

  • Belmont Boy:

    “Climactic Arousal.”

    Randy gamesters at ultimate tumescence, locked in the roiling embrace of perfervid central banks. There will be, alas, no afterglow. Just aftermath.

  • No6:

    Financial derealisation.

    I hope I live long enough to see central bankers held fully responsible for this mess.

  • rodney:

    A few quarters? A couple of years? Who cares when … It will end in tears and “no one could have foreseen this” …

  • rossmorguy:

    Thank you for this update. They have not ceased to amaze and will no doubt become even more breathtaking before the end of the year. Here are a few superlatives for the time being: Parabolic Expectations, Monetary Mania, and Qeuphoria.

  • Kreditanstalt:

    The Fed – via ETFs and S&P futures, and likely through other central banks, commercial banks or investment banks acting as proxies – is BUYING STOCKS.

    Nothing else can explain this.

    Someone in authority should, at Yellen’s next testimony before government, ask this question, wording it carefully…

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • French labour union workers and students attend a demonstration against the French labour law proposal in Marseille, France, as part of a nationwide labor reform protests and strikes, March 31, 2016. REUTERS/Jean-Paul Pelissier/File PhotoHow the Welfare State Dies
      Hollande Threatens to Ban Protests Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it's basically crickets (sole exception: Politico).  Gee, we wonder why?   They don't like him anymore: 120.000 protesters recently turned Paris into a war zone. All...
  • The-answer-is-yesToward Freedom: Will The UK Write History?
      Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call.   The battle lines are...
  • water houseA Market Ready to Blow and the Flag of the Conquerors
      Bold Prediction MICHAELS, Maryland – The flag in front of our hotel flies at half-mast. The little town of St. Michaels is a tourist and conference destination on the Chesapeake Bay. It is far from Orlando, and even farther from Daesh (a.k.a. ISIL) and the Mideast.   St. Michaels, Maryland – the town that fooled the British (they say, today). Photo credit: Fletcher6   Out on the river, a sleek sailboat, with lacquered wood trim, glides by, making hardly a...
  • nails-in-a-bed-of-nails-new-yorker-cartoonGoing... Going... Gone! The EU Begins to Splinter
      Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
  • queen_gold-840x501Rule Britannia
      A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union.   Waving good-bye to...
  • junkThe Problem with Corporate Debt
      Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour.   Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell   As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:   “Businesses racked up debt in the...
  • MACAU, CHINA - JANUARY 28: Buildings of Macau Casino on January 28, 2013, Gambling tourism is Macau's biggest source of revenue, making up about fifty percent of the economy.What Could Possibly Go Wrong?
      A Convocation Of Gamblers The Wall Street Journal and BloombergView have just run articles on the shadow banking system in China.  This has put me in a nostalgic mood. About 35 years ago when I was living in Japan, I made a side trip to Hong Kong.   Asia's Sin City, Macau Photo credit: Nattee Chalermtiragool   I took the hydrofoil to Macau one afternoon and the same service back early the next morning.  On the morning trip, I am sure that I saw many of the...
  • saupload_loves-me-loves-me-notA Darwin Award for Capital Allocation
      Beyond Human Capacity Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy.  The inputs are too vast.  The relationships are too erratic.   The economy - complex and ever-changing interrelations. Image credit: Andrea Dionne   Quite frankly, keeping tabs on it all is beyond human capacity.  This also goes for the federal government.  Even with all their data gatherers and...
  • deflated-souffleThe Fed’s  Doomsday Device
      Bezzle BALTIMORE –  Barron’s, in a lather, says the market is facing the “Two Horsemen of the Apocalypse.” Huh?   Only two? There were four last time!   Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower. But Brexit is a side show. As our contacts in London...
  • rate_hike_cartoon_10.15.2015_largeJanet Yellen’s $200-Trillion Debt Problem
      Blame “Brexit” BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap.   “Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened...
  • Brexit supporterGold and Brexit
      Going Up for the Wrong Reason Gold is soaring. It should—and a lot—but in my view not for the reason it is. Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost — one must minimize its use.   August gold contract, daily – gold has been strong of late, but this seems to be driven by “Brexit” fears - click to enlarge.   Moreover, insuring against Brexit might ironically be equivalent...
  • Incrementum signalIn Gold We Trust, 2016
      The 10th Anniversary Edition of the “In Gold We Trust” Report As every year at the end of June, our good friends Ronald Stoeferle and Mark Valek, the managers of the Incrementum funds, have released the In Gold We Trust report, one of the most comprehensive and most widely read gold reports in the world. The report can be downloaded further below.   Gold, daily, over the past year - click to enlarge.   The report celebrates its 10th anniversary this year. As...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com