Top Gun FP Client Note: Another Bubble

The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture.  For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom up” investor.

 

…….

 

Four years ago I spoke at this conference and said that I favored my Grandma Cookie’s investment style of investing in stocks like Nike, IBM, McDonald’s and Walgreens over my Grandpa Ben’s style of buying gold bullion and gold stocks.  He feared the economic ruin of our country through paper money and deficit driving hyper inflation.  I explained how Grandma Cookie had been right for the last thirty years and would probably be right for the next thirty as well.  I subscribed to Warren Buffett’s old criticism that gold just sits there with no yield and viewed gold’s long term value as difficult to assess.

 

However, the recent crisis has changed my view.  The question can be flipped: how does one know what the dollar is worth given that dollars can be created out of thin air or dropped from helicopters? …. Yes, we should continue to buy stocks in great companies, but there is room for Grandpa Ben’s view as well.

 

– David Einhorn, Greenlight Capital, “Liquor before Beer… In the Clear”, speech to The Value Investing Congress, October 19, 2009

Forget about the events of the past 12 months…. the punters are back punting as aggressively as ever.  Highly leveraged short term trades are back in vogue as players … jostle to load up on everything from REITs and commercial property, commodities, emerging markets and regular stocks and bonds.

Any sense of control is being chucked out the window.  After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months.  Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?

– E-mail from a senior, recently retired banker quoted in “Rally Fuelled By Cheap Money Brings A Sense Of Foreboding”, Gillian Tett, The Financial Times, October 22

No doubt many brokers would like to attribute this to fundamentals…..

 

Yet, if you talk at length to traders – or senior bankers – it seems that few truly believe that fundamentals alone explain this pattern.  Instead, the real trigger is the amount of money that central bankers have poured into the system that is frantically seeking a home…