In the spirit of modernising all language (see yesterday’s post on Australian), we’ve updated the French expression “fin de siecle” to something more useful….fan do seek.
The French expression means “end of the century” or through usage, the end of an era. Today, the Fan Do Seek implies the nearing of the top of the equity cycle “melt up.”
The “melt up” is something we mentioned last year in the pages of Outstanding Investments. It’s a simple idea. Faced with massive public and private sector debt, the governments of Anglo Saxon economies will resort to a time-honoured tactic for dealing with debt: increasing the money supply to inflate away the previous debts.
With a huge increase in the quantity of money, the price of everything melts up. On the list are oil, gold, health care, a cup of coffee, a chicken parma, tickets to the World Series, and of course, stocks.
John Dizard gives three reasons for the “melt-up” in an Financial Times article. The short version is: central banks, cash, the rout of the doomers.
Dizard says, “What we haven’t really had yet, outside China, is a traditional end-of-cycle rally in equity that takes us beyond the atmosphere to the edge of space. I believe we will manage that within the next 18 months, before most people in Wall Street and the City have to move on to organic farming, bartending, or their parents’ spare room.”
He may be right. You look at the market and see US$93 oil, gold at nearly US$800, and stock markets charging up. How else to explain it but a convergence of central bank easing, new money in the market, and the willful denial of reality by everyone but we happy few here at the Markets and Money?
“The Fed and its sister central banks,” Dizard writes, “have to put aside their delusional dynamic stochastic general equilibrium (DSGE) models and cut policy interest rates to the point where we get even more of a bull steepening in the rate curve [ed note. Lower short-term rates, higher long term rates]. That will put a slightly better gloss on still anaemic earnings.
“Deeply pessimistic, end-of-life-as-we-know-it stories and columns in the financial press will help accelerate the depressive part of the investment world’s bipolar cycle,” he adds, to our concern, we add. We don’t think the bears and skeptics have done much to mute the markets manic move up. But we’ll go along with it for now…
But the most obvious argument for rising stock prices is money flow. “The last element for an equity bull market is already in place: a source of new cash. I refer to the sovereign wealth funds (SWFs), already much commented on in these and other pages.”
Australia’s own AU$50 billion Future Fund is a player in this sense. The SWF’s represent large pools of capital that have to be invested somewhere. And with the bear market in credit rendering the CDO and mortgage-backed-bond market off limits, good old fashioned blue chip stocks may be THE place to be in the next 18 months.
The whole thing has a sort of Pavlovian feel to it. Why do people buy stocks? Because that’s what you’re supposed to do. Meanwhile the world’s economy hurtles toward a fundamentally new currency regime and the structural, even historical repricing of energy as an economic input. It’s not just business as usual. But that’s how markets are behaving…and who are we to argue with the market? As the chart from fintag below shows, stocks are already getting a “flight-to-quality” bid:
Why haven’t there been more mergers in the metals market? Are high stock prices making takeover targets too expensive for cashed-up majors? Or has the credit crisis made debt financing unavailable for buyouts? Or could it be that the big boys have revised their metals forecasts downward and are not in acquisition mode as a result? We’re just wondering…
Tomorrow is Halloween, although we know the holiday is not celebrated here in Australia with nearly the same commercial rigour as in America and even, lately in France. Free lollies and costumes. What’s not to like? To get Australia in the spirit of the day, we’re coming to work dressed as we always dress…bearishly. What will you be wearing?
Markets and Money