The Party Has Gotten out of Hand Thanks to the Fed’s Free Booze. Time to Look for the Car Keys

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By Bill Bonner, Chairman, Bonner & Partners:

Our guess is that this stock market is living not only on borrowed money but also on borrowed time.

With the addition of Chinese Web portal Alibaba, there are now 44 start-ups preparing to enter the public markets. Each of these has a valuation of more than $1 billion. The last time there was this kind of action in the IPO market was 2000, just before the dot-com bubble blew up. And the last time stocks were this expensive was 2007, when the subprime/finance bubble blew up.

That was also the last time share buybacks by US corporations passed the $600 billion mark, which they will do again this year.

Yes, dear reader, the party has gotten out of hand – thanks to all the free booze supplied by Ben Bernanke and Janet Yellen. It’s time to look for the car keys.

Party On!

This is not to say that it won’t go on longer. And it is not to say that it won’t get wilder, too. There are already people with lampshades on their heads. And girls are dancing on the tables. But at least no one has called the cops… yet. You don’t want to be there when they do.

What might make stocks go up further?

Well, the Fed might decide to hold off on more QE cuts, for example. The economy is not recovering and the Fed knows it. A shock or two in the stock market or bad employment numbers would probably convince Yellen & Co. to stop their “tapering” of QE… at least for now.

Or, like the European Central Bank, the Fed could announce a new scheme of unspecified interventions. Instead of the higher interest rates everybody expects, US interest rates could go lower… and it would be “party on” again, with higher stock prices to boot.

Thanks to the ECB, Italy is now able to borrow at 13 basis points lower than the US. Lenders are giving money to France at a yield 114 basis points lower. Are France and Italy more creditworthy than the US?

Well, that’s just the thing: When it’s party time, people stop doing the math. The eyeshades, pencils and calculators are put away. As long as the music plays, speculators will dance.

The IPOs don’t have any earnings?

So what?

Italy can’t pay back its debt?

Who cares?

Call us an old fuddy-duddy. We’ll sit this one out.

“Buffett-itis “

We have been talking about investment theory… and practice. Long-term readers will find this unusual. We’ve been writing about money for the last 15 years. Never before have we shown much interest in investing it.

What happened?

Friend and colleague Porter Stansberry (the founder of Stansberry & Associates) persuaded us to write a paid monthly investment letter. All of a sudden, we had to think not about economics and politics but about investing! And then, when we got into the subject matter we found ourselves coming dangerously close to the one thing we can’t tolerate: positive thinking.

In economics – at least at a public policy level – positive thinking is a trap. Every intervention is a mistake. Small ones are nuisances. Big ones are disasters. Earnest economists – who believe they can improve the world with laws and policies – are a constant threat to human happiness and progress.

But what about investing? Does positive thinking pay off?

You, dear reader, having watched this infection develop, first as a minor scrape on our cynical Efficient Market Hypothesis, and then as a serious case of “Buffett-itis.” That’s right, we were beginning to think the man from Omaha was right all along: The EMH is seriously flawed. Serious investors who are willing to do the hard work can beat the market.

It seems obvious. The “market” – especially when prices are high and the music is loud – is made up of people who are not serious and who are not willing to do the hard work. If you can put on your positive thinking cap and do a better job of figuring out how much a stock is really worth, you’ll probably do better than the average investor. And if you don’t want to do the hard work yourself, find someone who does…. By Bill Bonner, Chairman, Bonner & Partners

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  6 comments for “The Party Has Gotten out of Hand Thanks to the Fed’s Free Booze. Time to Look for the Car Keys

  1. Ray
    Sep 17, 2014 at 4:40 pm

    The party is getting a bit rough, let’s get our underwear and leave!

  2. Economic Truths
    Sep 17, 2014 at 11:00 pm

    The bears HATE this market, keep trying to get the top, but FED keep injecting money, just not so much as they were before. We are still going up. This is one scary chart.

    Check out this scary chart ===> http://bit.ly/1fMcakI

    Basically the way you look at this, it means, we keep going up on the market, every time there is an injection of money by teh fed. Do you love it? can you smell the top? welll…. I dunno, but if you are smelling something, it smell like more verbal diareha about the fed, and how they are ramping this market, before the death crash like 2008 is coming.

    Remember how everyone got tricked into that con job. The market goes andn crashes every 7 years from 2000 so that means things will get very interesting in the next sevearl years.

  3. Sep 18, 2014 at 6:46 am

    The same folks pounding the table in certainty about the Fed being able to keep the party going for as long as they choose to spike the punchbowl with crystal meth are largely the same ones who thought the sky was falling in March 2009.

    That multiple measures suggested the decline of 2007 to ? was about over in 3/2009 was lost on most folks. Those watching charts took their short positions off, but some of us lacked the imagination to grasp that the party could be restarted immediately, before full sobriety was reached (after a much more protracted bear market wiped away many trillions in excess debt.) We thus sat out this dollar-debasement boom, and the gnashing of teeth is audible.

    Even deluded by their own PR, surely FOMC members grasp that being lauded for the appearance of success comes with the risk of blame should the trend sour. I wonder if some of them grasp the parallels to Marie Antoinette and experience sleepless nights therefrom.

  4. RDE
    Sep 18, 2014 at 8:50 am

    Just for giggles sometime, compare the RIO on a 100K invested in gold bullion 15 years ago with the same 100k handed over to Uncle Warren and Charlie Munger in the form of Berkshire Hathaway stock. And this after five years of market manipulation have frozen out any increase in gold prices. Still think that Buffett walks on water?

  5. Rai O'Brien
    Sep 23, 2014 at 7:14 pm

    I have always been a big fan of Bill Bonner, since his days with Agora – Mogambu Guru – and the Daily Reckoning, but I must sound an objection. In one of Bill’s recent essays on your website, he (in highlighted aghast-ment) says that he is basically pro-investment at the present time:

    Article “The Party…”

    “But what about investing? Does positive thinking pay off?
    You, dear reader, having watched this infection develop, first as a minor scrape on our cynical Efficient Market Hypothesis, and then as a serious case of “Buffett-itis.” That’s right, we were beginning to think the man from Omaha was right all along: The EMH is seriously flawed. Serious investors who are willing to do the hard work can beat the market.

    It seems obvious. The “market” – especially when prices are high and the music is loud – is made up of people who are not serious and who are not willing to do the hard work. If you can put on your positive thinking cap and do a better job of figuring out how much a stock is really worth, you’ll probably do better than the average investor. And if you don’t want to do the hard work yourself, find someone who does”

    Sorry, but this seems beyond the pale. Bill is apparently starting his new investment group. Is this what Wolf Street allows — a subtle form of personal business promotion?

    • Sep 23, 2014 at 7:34 pm

      Rai, I understand your concerns about “business promotion.” I saw that line too. It seemed a bit out of synch.

      But this is the deal: I get most contributor articles for free. In return, I allow links back to their sites, along with names of their companies, or newsletters they sell, etc. Some of them aren’t subtle at all.

      Bill has a bone-dry sense of humor that I find hilarious. He has a down-to-earth approach in some of his articles that I find very sane in this crazy world. And so some promotion is the price I’m more than willing to pay to have his insights and his style and humor on my humble site.

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