A crowded trade is when buyers have no cash remaining to buy more. Trades are uncrowded if they have cash on hand to push prices higher. So, when the world’s largest asset manager, BlackRock with $4.9 trillion assets under management (AUM), says the world today is flush with cash — $70 trillion dollars in fact – the implication is that prices are going higher even if conditions may not warrant doing so in many cases.
But, the hard question is why is there so much cash around and what are the implications?
The most obvious answer is that central banks now own the debt markets with their historically low interest rate policy. Most investors other than Sovereign Wealth Funds and other central banks have quit. About $10 trillion is even invested in negative yield instruments today. Investors are unhappy with the low yields and are holding money in cash awaiting higher yields.
Why then are investors holding back from equity markets? Prices are definitely higher than the long-term fundamentally based norms, but have been much higher at times. There must be a logical reason then.
Could it be that investors are undecided about such important matters as BREXIT, the US presidential election and the developing cold war between Russia and the United States? To me, none of these factors comes close to being a good reason to withhold so much cash from the equity market.
Could it be that dividend yields are too low? They have been much higher even when inflation was higher and real returns much lower.
Could it be that corporate earnings are too low and in danger of falling? Well, 3rd Quarter and 4th Quarter earnings are on the rise.
Could it be that opportunities for capital growth no longer satisfy investor’s appetites? There are value plays among seasoned companies in the energy, utilities and financial sectors that are impressive. There are many small cap growth plays that are still far from being mature. There is substantial hype from leading experts that precious metal prices are soon going to soar.
And yet, cash is sitting in bank and broker accounts and money market funds that pay almost zero return.
I don’t profess to have the answer; however, I do have an opinion, one that I continue to publish regularly.
I think equity investors are getting the shaft from interventionist central banks filling their coffers in equity trading carried out by their computer programs that have been designed never to lose, the reason being they don’t pay taxes and can print freely whatever money needed to get them out of bad trades. Their opponents, being some of the world’s smartest active asset managers, even those backed by substantial computing power, are losing the battle. Investors are sick of it, saying “why bother?”
But no matter what central banks have done to get the people’s remaining cash to work in capital markets, e.g., tactics like negative yields and mini flash-crashes that almost instantly produce attractive price levels for many stocks, the people are still not impressed. In fact, they are, as I say, sick of it.
So, what is going to happen now? As I have also said before, equity prices are going higher. Oil and precious metal prices too are going higher. The risk appetite of people will return when they see those central bank algorithms driving prices in one direction, higher, making us feel richer.
Call it what you like, i.e., feeling rich, feeling less exploited, feeling like taking riskier bets, and so forth; it’s all about feeling, about mind-set. It is not about investment or common sense. Not at this point.
We have all been played for too long, being stripped of our wealth and our capacity to earn income from our labor. Now we are going to be told to play along as prices are going higher. The name of the new game, as I have been saying, is multiple expansion, which is simply another word for a better feeling or mind-set.
I have been saying for a couple months that the Dow 30 is going to lift to the 23,000 level or a bit higher. Governments will enjoy the higher taxes and of course will spend the money to get real jobs for people, not the part-time servant work many have been forced to accept, if in fact they could get any work. Because of higher equity market levels, central banks will be able to raise inter-bank rates, which the humongous banks will enjoy. There will be more economic activity too because corporate boards of directors will also have a new-found mind-set to expand, to acquire and to increase dividends that stay in lock-step with higher share prices.
Why is this dynamic about to happen? It’s not due to we the people because we no longer count. It’s about the powers that be meeting their needs. And they can’t do that if we keep $70 trillion in cash, no longer players in their game.
As market prices lift, the passive funds will still be telling their clients they are the smartest people in the room simply for riding the bandwagon, never mind how that bandwagon is being continuously disassembled by exploitive algorithms. But that’s a blog for another day. The real winners, however, will be alpha-seeking high performing active asset managers, the ones who understand what real investment is truly about, what Benjamin Graham was teaching when I was still a university sudent, something quite different than guessing at squiggly lines.
It’s not that there wasn’t a time technical analysis worked well for many believers. It did work – until computer programmers re-engineered those systems to easily beat the users, causing many of them to stay in cash or maybe buy real estate.
That game is over because it has left too much cash on the sidelines and global economies are sinking. Cash will soon come into the market because central banks will make it happen. However, to invest cash with an out-performing result will now require a different strategy and tactics from the ones employed for 30 years. From now until the foreseeable future, to win in the capital markets game – and it has been a game no different than a casino for too many years – we must specialize at fundamental analysis. We must buy stocks like we buy companies, the Benjamin Graham way.
End of story.
Interesting in how what goes around comes around. Because of human nature, it always does.
