Call him Cali Money Man. A wealth manager at one of the megabanks, a man who has been in this business for 30 years, has seen three stock-market crashes while on the job (1987, 2000, 2008) and, unlike some of the other experienced hands in this business, hasn’t re-forgotten the lessons for the third time. He is an occasional contributor to my site and coined the term consensual hallucination to describe how bubbles come about. They don’t just happen on their own! And this is a conversation I just had with him.
Cali Money Man: “The resilience by global equity markets in the face of adverse economic and geopolitical news is a wonder to behold. Not just prices, but volatility and sentiment remain unconcerned by the news. In 30 years I have seen nothing like this. The only historical parallel I can think of is before the First World War, as markets remained calm between the assassination and declarations of war. Afterwards the deluge.”
Cali Money Man: “It’s like we’ve developed an inability to even see risks.”
Wolf, smirking: “You still don’t get it. It’s not that we’ve developed an inability to see risks. We simply can’t see them because there ARE NO risks.”
Cali Money Man: “Don’t I know it. Because everybody tells me so. But it’s not my fault. It’s my broken glasses.”
Cali Money Man: “People show me how tech stocks sparkle, and I see money-losing companies in a crowded space with no barriers to entry.
“People show me the recoveries in Japan and the EU, and I see stagnation.
“People show me attractive risk markets, and I see valuations at historic peak levels.
“People show me the US economy at escape velocity to the Red, White, and Boom new era. I see a heavily stimulated economy in the late stages of a business cycle, with heavily indebted households and corporations, trending at stall speed – and terribly vulnerable to a shock that knocks it into recession.”
Cali Money Man: “Then what? A bailout by the Fed? Can the Fed respond to a crash by dropping the Federal Funds rate by 500 bps? No, that gun is empty. They could boost QE. But look at QE3. During the past year, the Fed’s balance sheet grew by about $1.2 trillion, almost identical to the growth in Adjusted Reserves. No traction. Will doubling this accomplish anything, except perhaps sparking worries about destabilization of the currency? And fiscal stimulus is tapped out too.”
Wolf: You’re still thinking there are risks out there!
Cali Money Man: “I love Oz. Time to watch the flying monkeys go by the window!”
The smart money had a goal, which it now reached via the “multiplier effect” by which a small number of sales can have extreme consequences in price for the rest. Read…. How Wall Street Manipulates The Buy-to-Rent Housing Racket