Well, it’s been a week….there’s an old Chinese curse that translates as, “May you live in interesting times”, and these times sure are interesting. What was that old musical – “Stop the world, I want to get off!”.
You may have noticed that a ‘deal’ was ‘done’ re: the USA and Canada. Donald got his wish that NAFTA was replaced, but what’s in a name? He needed to get this deal inked before the mid-term elections because of all the states that need the Canadian input/throughput and, after his disaster in many of these same states thanks to the farming and related multiplier issues caused by his self-inflicted impasse with China, he had no more time and no more political wiggle-room. So, in his inimitable fashion, he is declaring it a BIG VICTORY, THE HUGEST – but what does it say to anyone when you declare ‘war’ (trade or otherwise) without notice on your friends? And, when the actual win (sic) is so picayune a very distressing message is being sent to everyone else, especially those who aren’t “friendly” in the first place.
This past week Robert Shiller, the Nobel Laureate economist, warned that the Age of Irrational Exuberance is back – without boring you with details, he is essentially stating that, overall, people in general are acting illogically in an economic sense ….. eg: not too long ago, Iran threatened to blockade the Strait of Hormuz. That day, the stock market went up anyway – that’s what he’s talking about, that it doesn’t matter what the news is (or isn’t), people are in an exuberant mood. When the shares of so many companies keep getting bid higher and higher even as these same companies are showing ‘increases’ (sic) in earnings per share only by borrowing money and buying back shares and cancelling them, thus having a smaller pool over which to distribute the earnings (some of which might be called spurious in and of themselves)….. There will always be people who buy houses that they cannot afford but, more to the point, will probably never be able to afford – but, when there is a measurably significant statistical percentage whose sole rationale for the purchase is, “buy it now because it will be more expensive tomorrow”, then that is economically and fiscally irrationally exuberant. The USA, 10 years after the last housing crash, has been exhibiting this in various markets; Canada has it in Vancouver and Toronto; China has it in spades everywhere – how long can it keep on chugging? Once people start seriously asking that question, they will start asking others, and the market will turn, just as signs of it doing so are now evident in Hong Kong and London (although for differing reasons).
The belief that tomorrow will always be better/more expensive than today is just not supported by verifiable real statistics, any more than your winning 3 hands in a row at blackjack is a determination that the outcome of the 4th will be positive as well. Sooner or later, the wheel turns and irrational exuberance develops into irrational despair, where nothing seems like it will ever be good again and where the sun will never shine.
Neither position is true but the markets are more of a forum where perceptions are more important than reality (and it is often hard to determine which is which). Why would a stock go up right after the US presidential election only because its Chinese name sounded similar to that of Donald Trump unless we factor in the element of irrationality?
It was Alan Greenspan in 1996 (yep, 22 years ago) who coined the term, “irrational exuberance” to warn against an overheated stock market that had a shortage of solid fundamentals – the warning didn’t work then and it isn’t working now. A few weeks ago, Nouriel Roubini warned that variables were rapidly moving into place that would predicate a problematic 2020….no one commented; no one even blinked. The attitude seems to be, “Tomorrow will take care of tomorrow”. That’s true – but will tomorrow take care of you?