On Wednesday we learned that short interest is now at an eight-year high, levels not seen since 2008. It should not come as a surprise. After a meteoric bounce from the lows of early February, stocks seem due for a breather. After all, this whole market is being propped up by the Federal Reserve right?
That appears to be the consensus view at this point. Some great calamity lies ahead thanks to Central Bank shenanigans here and abroad.
Can I propose something else? Everything will work out just fine. Catch your breath. Allow me to explain.
I am not an expert on monetary policy. Unlike most, I am of the belief that the people at the Federal Reserve are probably more suited to handle monetary policy then me -- call me crazy. That doesn't mean I have complete faith in the strategy that's being deployed. It just means I know certain things are beyond my control and even -- wait for it -- best left to others.
Any rational person would have to acknowledge that even if there is not a bubble in the stock market, other assets like, say, high-end real estate, art and even collectible cars seem to be getting a little silly. It's worth noting though that these three markets have at least shown signs of cooling, if not falling sharply as of late. I don't view this as bad.
Back to the market. It's entirely possible there will be a huge stock market bubble as a result of global monetary policy. If history tells us anything, it's that booms and busts cannot be avoided as much as we may try. But is this a boom? The economy is chugging along at a constant, albeit anemic pace. Hardly a boom. Euphoria in the equity markets also seems absent.
Many valuations which were stretched have already "crashed" to some extent. Think GoPro, FitBit and others. Yet, here we are just a few percentage points from an all-time high. Bonds appear overpriced unless compared to similar offerings in other markets. How long that can last is anyone's guess. That seems to leave cash as the only "safe" alternative, despite returning close to nothing.
So the smart money has decided to be short the market here, I guess. This in the face of how poorly "smart money" has performed over pretty much every meaningful time frame this century. Yet, we still seem to care what this cohort is up to.
I don't dismiss the concerns over Fed policy, largely because I recognize I have no idea how this will end. I am willing to at least acknowledge the possibility it will all be okay though, which puts me in the minority.
Currently, every pullback is met with, "This is it! The game is over! Sell everything!" Meanwhile, any recovery in prices is duly noted with disclaimers like "low volume" or "lack of participation" of any given sector. It's all a little ridiculous.