In my piece this morning, The Relentless Bid, Explained, which has since gone mega-viral by the way (thank you!), I laid out a theory for why the stock market has had a relentless bid beneath it for years now, with shorter and smaller corrections along the way. The premise was that investor behavior has changed – owing largely to the way big advisory firms are allocating assets and planning retirement portfolios.
I’ve gotten a ton of feedback behind the scenes, including comments from some heavy hitters in the industry. Many of these responses center around the following three points:
1. Too many dollars chasing too few assets (share buybacks and a dearth of IPOs have shrunk the investable markets)
2. The presence of the Fed and the endless ZIRP / QE of recent years
3. Demographics play a role – portfolios have calmed down because the largest percentage of investors have aged and calmed down themselves
I agree with all of them, and they all have room to coexist with what I’ve said. In fact, they not only coexist, they converge.
But the most important thing I think should be brought out is the fact that my theory does not mean “It’s different this time.” I am describing what has been going on as relentless, not endless. I am also not projecting it out indefinitely into the future.
In fact, I’d like to quote a passage from Robert J. Shiller’s Irrational Exuberance, specifically the 2005 edition, to show that we’ve seen similar market environments before, which have certainly not run on forever. What these eras have had in common is that each one bore its own creation myth:
The first of the three major peaks in the price-earnings ratio since 1881 occurred in June 1901, right at the dawn of the twentieth century. Prices had achieved spectacular increases over the preceding twelve months, and in mid-1901 observers reported real speculative fervor…
There was another important theme in 1901: that stocks were now being held in “strong hands”: “The ownership of stocks has changed hands. The public speculators do not now own them. They are owned by people who are capable of protecting them under any circumstances, such as Standard Oil, Morgan, Kuhn Loeb, Gould and Harriman Interests. These people who are the foremost financiers of the country evidently know when they go into a proposition what ultimate results may be expected.” This theory, like theories expressed at other market peaks, finds it inconceivable that there could be a selling panic. In the shortest run, perhaps this theory is right. But those strong hands did not stop the stock market crash of 1907, nor the dramatic slide of stock values between 1907 and 1920.
If the “Strong Hands” line of thinking doesn’t sound remarkably like the modern T.I.N.A. (There Is No Alternative), then I don’t know what does. It also reminds me a great deal of the “Permanently high plateau” patois that ended Irving Fisher’s career shortly after he spoke it ahead of the 1929 crash. I believe that there is some basis in reality for TINA but that, like all small truths, it can be taken toward illogical conclusions and reckless behavior. George Soros once remarked that “Stock market bubbles don’t grow out of thin air. They have a solid basis in reality — but reality as distorted by a misconception.”
Believe me, I am highly aware of the fact that “Relentless Bid” can be misconstrued to represent some kind of “new paradigm” that could persist forever. I want to make it clear that I believe the very opposite – that it will suck in the maximum amount of people taking the largest amount of risk just at the point where it will come to an ignominious end. But as in the 1901-1907 example, miconceptions can persist for a very long time before they’re debunked.