By Christiaan van Huyssteen (@cvh23)
Yes, This Is An Equity Bubble
My sense is that investors have indeed abandoned basic arithmetic here, and are instead engaging in a sort of loose thinking called “hyperbolic discounting” – the willingness to impatiently accept very small payoffs today in preference to larger rewards that could otherwise be obtained by being patient. While a number of studies have demonstrated that hyperbolic discounting is often a good description of how human beings behave in many situations, it invariably results in terrible investment decisions, particularly for long-term investors. As one economist put it, “they make choices today that their future self would prefer not to have made.” In effect, zero interest rates have made investors willing to accept any risk, no matter how extreme, in order to avoid the discomfort of getting nothing in the moment.
All of that said, the simple fact is that the primary driver of the market here is not valuation, or even fundamentals, but perception. The perception is that somehow the Federal Reserve has the power to keep the stock market in suspended and even diagonally advancing animation, and that zero interest rates offer “no choice” but to hold equities.
Where do you put your money?
The bank? Not if you want to maintain value against inflation.
Start a business? And try cope with tons of government regulations and taxes, and face the risk of strikes etc.
Stocks? Yes, simply because there is no alternative.
So people will rather try make money in the short term, whereas in the bigger picture there is actually a massive equity bubble. But you can’t see the bubble if you are part of the bubble by being inside it.
You’re future self may in fact wish you had rather have been more conservative, and stay away from what is a bubble waiting to pop. The average investor seems to have lost all perception of risk.
We are in fact on an unstable slope, waiting for the snowflake that will cause the avalanche.
Follow us: (@DiagonalViews)