well well well, the market is waiting for Ben’s speech but… does it matter much?
the equity melt-up has been quite impressive taking the Bears out of guards and reinforcing the conviction on the Bull side that “don’t fight the FED” is the best play at hand. We have to admit that since the low of 2009, the market has been crawling back with shallower corrections happening. In my “bunch of thoughts for the new year”, I raise the question if we are on the verge of a new bubble for asset price and if yes… I’d rather choose to be on the safe side since bubble always tend to pop. Well, I do believe that we are in a liquidity bubble and like water spilling… it is very hard to know where it will go. The mood being that with ZIRP… and infinite money printing… there is no other way than taking some additional risk to make money… with the money. I have a bit of hard time with this thinking, sounds like magic, if the risk free rate is 0%… what should be the no risk free rate of return? Let’s put it another way…. if credit growth with low interest rates is so low or.. even negative…the field of business opportunities at hand must be somehow not very interesting and therefore… the potential returns (I mean real cash flow and dividend after taxes!!) must not be very attractive. At the end… it looks like that the only expected return is the potential asset price inflation fuelled by ZIRP. Looks like a musical chair game… when ZIRP hits the wall for whatever reason…. the consequences could be dire!
Now… since fighting the FED is not apparently a good option… what could derail ZIRP. Let’s not forget that the FED has become the single biggest buyer of treasuries… it has become the ultimate buyer and the market knows that. I do believe that one day, the FED’s relationship with the market might become a very interesting battleground and if history is a good guide…. the FED will not stand the pressure. How could this happen? A change of mood and or perception like…. printing money ad infinitum has in fact very little impact on the real economy , unemployment and investments and represents a potential huge liability. Why? once again.. if history is a good guide…. printing money has never been a tool to eradicate poverty, incentive good capital allocation, create social and economical well being othewise we all would be rich , well and beautiful enjoying the best time of our life having some kind of robots working for us (maybe the robot parts might come one day…).