dstclair wrote:The current market is not rational, because it's based on on yield-chasing and Fed liquidity injections and not on fundamentals. In the current market, Apple's market cap is at various points higher than that of IBM, Google, Microsoft, and Amazon...combined. They make a great product, but does that seem like a rational valuation?
This behavior has existed since I started paying attention to the market. Nearly 20 years ago, Netscape went public and arguably started the Dot Bomb era. The stock tripled on opening day giving them a market cap of around $3B (1995 dollars) although they had no revenue and gave their products away for free. Not too rational. This is less the exemption than the rule for the past 30 years in my observations. Investing is a long-term strategy that will see a few bumps along the way.
I'm not talking about usual "irrational exuberance" over certain companies, to use Greenspan's phrase. Apple is just one example. The entire market is propped up right now by essentially free printed money from the Fed in the banking sector. With interest rates near zero, all savings and low risk holdings are being driven into the equities in search of returns.
This can't last forever, but the Fed has painted itself into a corner. The last rumor that the Fed was going to end its bond-buying programs dropped the market by 400 points instantly, so they backed off of that. They claim QE is tapering, but it's so slow that there is essentially no effect. Rates can *never* be raised substantially, because the US government debt service would crush the federal budget, and excessive consumer debt will crush individuals. So they will talk about raising rates, but it will never happen. If it does happen (and it should) it will cause a depression.
The underlying debt and derivatives issues that caused the 2008 meltdown have never been addressed. It was all spackled over by money printing and Fed asset purchases. And now we see the return of the subprime lending that caused the problem in the first place, because (in the short term at least) it's lucrative and once again, it's all about chasing yield at high risk, since money is being driven out of reasonable risk investments by low interest rates.
In Europe, and likely soon the USA, zero interest rates are going negative, and cash holding accounts will be *charged* to hold cash. That is yet another way to drive out savings and force the equities markets ever upward. Once the majority of savings is flushed out, the system can grow no more and will head back to Earth with great energy.
Combine this with the court decision in the MF Global case, saying that "segregated accounts" (those held by clients) can be used by an institution to save itself from financial losses. MFG was acting in the capacity of a bank, so that means that the savings accounts you hold may be used by your bank to cover its own losses. And additionally the FDIC doesn't have enough money to cover even a single major bank (JP Morgan/Chase, Goldman, etc) failure. So that money will simply be *gone* as it was for MFG clients. So sorry, so sad. Sure, the Fed could print more money and give it to the FDIC, which just adds to the debt load and reduces the value of the currency.
The real problem is not the equities markets; this is a sovereign debt currency crisis, where the equities and bond markets are being used as a crutch to "kick the can" of debt further down the road. In an aviation analogy, the Fed and the US government are near stall speed and are trying to correct it by pulling the stick back as hard as they can to prevent losing any altitude. It will end badly. What needs to happen is for the Fed to "release back pressure on the stick and let the nose drop" to allow all the bad debt to clear out of the system and allow failures in the banking and insurance sectors, but with Goldman Sachs as the largest contributor to both political parties, that is not happening.
