Kass: The Loss of Market Innocence
This column originally appeared on Real Money Pro at 8:37 a.m. EDT on June 24.
NEW YORK ( Real Money) --
"It's you who are telling me; opening my eyes to things I'd looked at so long that I'd ceased to see them."Risk happens fast. We all knew that last week was coming, that last week was inevitable. I (prematurely) cautioned in January-February (and in the ensuing months) that this market day would come -- a day in which the liquidity, so necessary to recover the world's economies from the Great Decession, would come to an end. Or, at the very least, I suggested that its ending would begin to be discounted well in advance of the triggering event. I worried that a period lies ahead in which both stock and bond prices fall at the same time, breaking the correlation of the last few years. I argued that tepid global economic growth would render the recovery vulnerable to policy mistakes and exogenous events and/or black swans. I warned that the Fed's quantitative easing was losing its impact, that trickle-down was helping only a small segment of the U.S. population (i.e., the wealthy) and that the liquidity provided by QE was widening the disconnect between stock prices and the real economy. I questioned the wisdom of expanding valuations in the face of slowing economic growth, a challenging profit landscape and the diminished impact of central bank easing. I expressed the argument that structural headwinds were being ignored (over the cloak of zero interest rates and massive liquidity). Despite over four years of easy money, the U.S. was left with still-punkish sub-2% real GDP growth, far from the well-balanced and self-sustaining growth that was sought after by extreme and unprecedented loose monetary policy. I wrote that the investment world was flat and not even the U.S. was an island and uncoupled from the rest of the globe. I worried about the eurozone and its incomplete reform initiatives and still-recessionary economic existence. I was skeptical that China's economy could continue its world-leading growth rates amid empty cities and developments and questionable/sketchy reporting of economic data. I observed that the market's ramp was exaggerated by high-frequency-trading programs tied into price momentum strategies and ETFs (particularly those of a leveraged kind) that rebalance with frequency.
-- Edith Wharton, The Age of Innocence
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