Stocks pulled back, bonds and oil rose a little, and gold finished the day basically unchanged. In short, not a lot happened overnight as markets continue to deal with the taper/no taper attitude from their enabler, the Federal Reserve.
We continue to think this is all a part of the topping out process. And we think it’s particularly telling that the US market quickly gave up its gains following the Fed’s surprise ‘no taper’ call last week. Since that bullish surge in prices, the bellwether S&P500 index has fallen four days in a row.
The latest concern is that Uncle Sam has just bumped his head on the ceiling…the debt ceiling. It’s the same old circus nearly every year. The US goes on borrowing money uncontrollably until it maxes out its congress-imposed limit. Then there’s a long and protracted argument about how this level of spending cannot go on, and any increase in the debt limit will come with tough conditions and blah blah blah…
Then congress approves an increase, and it’s snouts in the trough for another year or so.
But the Republicans want spending cut commitments again before approving any increase. That’s going to be a tough deal to cut, given the government has just engineered a rather hefty fiscal contraction, bringing the deficit down from over US$1 trillion in 2012 to around US$700 billion this year.
So expect it to be a pretty decent fight…enough to worry markets globally for a while anyway.
Does this mean the ‘top’ is in? That’s what we’ve been arguing for a while, although it has nothing to do with debt ceilings or the Fed or anything else. It has to do with other warning signs, like overvalued stocks, a tepid economy and wobbly emerging markets. In short, there’s a lot of risk out there for not much reward.
Good old Warren Buffet thinks so too. According to this article, Buffett’s Berkshire Hathaway is sitting on US$49 billion in cash. Buffett says ‘Stocks have moved a long way. They were very cheap five years ago. That’s been corrected…We’re having a hard time finding things to buy.‘
Unlike your standard fund manager, who has a mandate to be fully invested at all times (or maybe has the discretion to go to a whopping 5% cash) Buffett can do what he likes. If he can’t find value in the stock market, he holds cash and waits.
Or he even gives cash back to his investors. At the end of the 1960s bull market, Buffett liquidated his partnership fund and handed cash back to his investors. It was a prescient move. He avoided a very volatile time and only waded back in during the 1973-74 bear market, when the major stock averages were down nearly 50% from the 1968 bull market peak.
So is Buffet’s $49 billion cash hoard telling us a market peak is at hand? No, but it’s telling you there is a distinct lack of value in the market. And Buffett has pretty good form in equating lack of value with market tops. He cashed up in 1999 too, just six months or so before the market peaked in March 2000.
Meanwhile, over at the Financial Review, columnist ‘Chanticleer’ is talking about cash in a completely different way. As in, when will Australia’s huge cash hoard descend onto (and into) markets and push up asset prices?
‘Chanticleer’ makes the same mistake most people do when they think of cash. They believe that it represents fuel for asset prices. That is, cash ‘goes into’ the share market and helps push up asset prices. The more accurate explanation is that cash ‘goes through’ stocks, helping to push them up.
Using this reasoning, we would argue that cash has already gone through stocks and buoyed their prices. Allow us to explain…
When you buy a share, or anything, you pay with ‘cash’. Once you hand the cash over and get an asset in return, the cash goes into the pocket of the seller. It doesn’t disappear. Someone must hold that cash. So while many people think they must get rid of cash and get into the share market (or housing market or whatever) because of low interest rates, other people, like Warren Buffett, are accumulating cash.
Cash doesn’t just disappear from the system because you don’t hold it anymore. It must go somewhere. The only entity that can withdraw or inject cash from or into the system is a central bank. They do this by raising or lowering interest rates.
In Australia, interest rates are at record lows. So is it any surprise that there is so much cash ‘sloshing’ around the system? There shouldn’t be. In order to lower the official interest rate the Reserve Bank of Australia effectively deposits cash into the banking system. This surplus of money pushes its cost (the rate of interest) down.
When interest rates are very low, you’re always going to have a lot of cash in the system. It’s not ‘on the sidelines’ as people like to say. It’s in the game. Cash will push asset prices up when no one wants to hold it for very long. That is, people want to keep swapping the cash for another asset until those asset prices get to a point where the safety of cash looks pretty good.
And that’s where we might be now. Warren Buffett certainly thinks so. He’s swapping assets for cash while other less experienced players are swapping cash for assets.
Our own Vern Gowdie, editor of Gowdie Family Wealth, is doing the same. He recommends cashing up and waiting for cheaper prices down the track. But what will bring about cheaper prices? Higher interest rates would do the job, but that probably won’t happen with our heroic central bankers at the helm.
The other great variable is confidence. A lack of confidence will make cash look attractive. Once again, cash will ‘go through’ stocks, but this time it will exert the opposite force. Stock prices will fall until the cash ‘first movers’ decide it’s time to swap it back again for stocks.
For hints on when that will happen, keep an eye on Buffett’s cash hoard.
for Markets and Money
From the Archives…
How Long Can the Government Charade Continue?
20-09-2013 – Vern Gowdie
The End of Australia’s Boom Economy
19-09-2013 – Satyajit Das
Super… Who’s Going to Buy Your Shares When You Retire?
18-09-2013 – Nick Hubble
Australian Banks in the Firing Line
17-09-2013 – Nick Hubble
Yellen at Stocks to go Up
16-09-2013 – Nick Hubble