Who will prop up the Ponzi?
For the most part, my market interest in focused on investor sentiment as reflected in charts, and finding patterns and clues therein. But I think there are some interesting notes to be made about the fundamentals that underly market behavior.
The casino that world markets have become seem to be their own eco-system. The supply and demand of assets are dependent upon available capital, and when capital starts running low, where will the buying power come from to push asset prices higher? With that in mind, it’s worth noting that mutual fund cash levels are near historic lows: (I’ve seen the chart a few different places, but here’s where I got it)
It’s possible that the ongoing move from mutual funds to ETF’s has made that stat less relevant, but it’s probably still worth noting. Also notable is the return of excessive margin debt, as noted in this recent Zero Hedge post.
So if cash levels are low and margin levels are high… where will buying power come from to push the markets higher? Especially with no fresh bank deposits being created by the Fed.
Moving beyond the suppy/demand of the casino itself, there continue to be reasons for concern within the real economy itself. The ECRI Growth Index has been declining for more than 10 weeks. Doug Short does a great job of regularly detailing the ECRI Growth Index, which has a decent history of forecasting recessions (except the summer of 2010, where the Growth Index hit the lowest recession-less levels in its history. At the time, ECRI Director Lakshman Achuthan stated numerous times that he thought the U.S. economy would avoid a double-dip, despite the low Growth Index numbers.) This year, Laksham says, “It’s a growth rate slowdown and that’s what the market really cares about.” He advises that the growth is not in place for a sustained rally: “I’d be surprised if the market really took off on a sustained basis against what the growth rate of the economy is,” he says. “It’s not transitory.” You can listen to his full commentary here.
So what will keep the Ponzi propped? We are still within a few percentage points of the top, so it’s not too late to put on some shorts/hedges here.