Apr 29 2007
Point Break — or Break Point?
“Everything moves in cycles, so twice a century the ocean lets us know just how small we really are. A storm comes out of Antarctica, tearing up the Pacific, and it sends a huge swell north 2,000 miles. And when it hits Bells Beach it’ll turn into the biggest surf this planet has ever seen, and I will be there.”
–Bodhi (Patrick Swayze) in Point Break
Yeah, Bodhi dude — you were there, just a little too long.
Checking the latest economic headlines, we see news such as sales of previously owned homes in the U.S. retreating to the lowest levels since 2003; consumer confidence dropping; the U.S. economy expanding at the slowest pace in 4 years; the Dollar plummeting to an all-time low against the Euro; sub-prime bondholders potentially losing $75 billion; homebuilder confidence dropping as profits slide; first quarter foreclosures doubling from one year prior; a weaker economy as inflation picks up, etc., etc.
And therefore, quite logically – stocks continue to rise, with the Dow closing above 13,000 for the first time ever!
An objective observer would have to ask, “Are the financial markets going nuts?!” The rational answer would seem to be “yes” – and we’d be the first to tell you that markets cannot continue to go through the roof forever in the face of lousy economic news. However, there is a logical reason for all of this. You have to keep reminding yourself of one thing — that you are witnessing the powerful pricing effect of record levels of liquidity on everything, including the current financial markets. It’s nothing new. The stock bubble of the 1990’s, and the subsequent real estate bubble over the past several years were beneficiaries of the same massively expanding money supply. During the current market run-up, equities continue to surf the same liquidity wave. And right now, nobody is complaining
Folks do tend to get a little more concerned (some actually get mad) — when you point out that their stock portfolios have lost around 50% of their value relative to the price of Gold since 2000. Or, that since the U.S. money supply is expanding at a rate of around 10% per year, anything they own not making 10% annualized is really losing money. Or, that adjusted for the Fed’s ridiculously, artificially rigged, lowball inflation rate – the Dow would still have to reach 13,989 to reach it’s 2007 high of 11,723. However, facts acts are facts – and as John Adams said, they are “stubborn things” – and you are always better off accepting them, than not.
This inflation wave is a powerful one – and we would not be surprised to see it propel the prices of stocks up for a while longer. It is, however, important to point out that inflation waves are not selective — they drive up the prices of everything. Not just the things you ultimately want to sell – but the daily necessities you need to buy. People never complain when the values of their homes, or portfolios go up. They do however, when the prices of coffee, eggs, milk, and gas do (as we are seeing today).
Our own internal “human” barometer tells us that we are reaching dizzying, inflationary infused heights in the financial markets. Despite the technical data mentioned above — a part of us, as humans begins to say, “Perhaps this thing will really continue going up forever.” That as much as anything, tells us that things may be nearing a peak.
It’s important to remember that all liquidity waves are created by the expansion of credit (i.e. massive borrowing) – and like all debt, it someday must be repaid to the same degree. And, the most rudimentary economics tells us that to pay down debt, you must either cut your spending or increase your income, or both…
So have fun, rip off a few more turns, and enjoy the ride. Just make sure to pay attention to the approaching shoreline – because the swell is huge, and you don’t want to follow Bodhi’s suicidal example at the end of the movie – staying on a massive wave as it comes crashing down.
