A point I have been trying to make since the beginning, which in my case for public writing was 2004, is “but it is what it is” (biiwii). The name of the website was a direct (and bullish) response to my own bearish bias (which endures to this day because I have seen no improvement in monetary policy making) as the Greenspan era credit fueled cyclical bull market was getting ramped up. In other words, it is what it is; don’t fight it. It was bullish.
Today we have a decent ‘jobs’ number for February, considering the weather. Earlier in the week the ISM manufacturing data came in strong, again considering the weather. The stock market has a potential melt up scenario and really, things seem pretty good with the recent recovery from a winter blip in economic data.
It is bullish while it is bullish. In other words, as long as the positive effects of policy making and speculative sentiment last the economy and the stock market are going to remain positive and bullish, respectively. That has never been a point of contention.
PE ratios and other valuation metrics, while not at value levels by any means, have not been in bubble territory. That is because corporate profits have been very strong. That is a fundamental underpinning and it is real, to conventional analysis. Yet another point I have been trying to make over the last year or so is that it is the backdrop against which these profits are earned that is not sustainable and hence not real.
The act of holding Zero Interest Rate Policy (ZIRP) for 5+ years and purchasing $Billions in T bonds and MBS has served to leverage debt toward economic growth. A great job by our dear policy makers. But just as the commercial credit bubble that fueled the cyclical bull market (terminated 2007) came with built in hazards, so too does this one.
That previous cycle was bullish while it was bullish. Then, when enough credit had been issued and enough risk taken on, it was time for the balancing of the books. That is a polite way of saying market liquidation.
This market is bullish while it is bullish. But when the distortions in credit (this time official as opposed to commercial) seek their natural balance – and they will one day – the adjustment is going to be a bitch. There is documented evidence of excessive margin debt in play along with several other signs of leveraged excess, like A Warning on Junk Loans.
But as is typical of human nature, warnings will not be heeded – not really – until it is too late. Until then, it’s a game of musical chairs in a market comprising an increasing proportion of the public; the same public that just became aware that there was a bull market going on around mid-2013.
The bull market is 5 years old, which is roughly the longevity of the last two cycles. While a nice, neat 5 year lifespan would be fitting, we have the bull’s potential out to mid-year or, given recent developments (see first link above) possibly even late year. It’s bullish while it’s bullish and not one moment longer. That moment may have arrived as I hit the ‘publish’ button on this post or it may be out there on the horizon.