Increasingly Immediate Impulses to Buy the Dip (or, How to Blow a Bubble)
The chart below presents this accelerating eagerness to buy market dips in the S&P 500 since 2010, and the characteristic terminal ramp. This doesn’t necessarily imply a market crash, but I am certainly the last person who would tell investors to disregard this overbought extension as meaningless.
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Undoubtedly, the eagerness of investors to aggressively buy every dip has been driven by the confidence that quantitative easing supports those actions. Still, I doubt that investors have seriously considered the fact that each round of QE has had successively smaller effects, nor that they have asked themselves exactly the mechanism by which QE “works.”
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The reason QE "works" - though with weaker and weaker effects each round, is simple. QE creates an ocean of zero-interest money that must be held by someone at each point in time, and is intended to create as much discomfort as possible for each successive someone. That discomfort drives yield-seeking behavior, and ultimately produces precisely the sort of bubble that is now evident. Having successfully produced that result, investors might want to ask themselves who will relieve them of their positions once they decide to take their profits. Looking around them, and seeing a multitude of investors faced with exactly the same problem, they are unlikely to find the answer in fixed-income retirees and “permabears” except at much lower prices. This is a conversation that investors might want to have with themselves now instead of later. Again, this is not to imply any assurance of an oncoming crash in this instance - maybe the rabbit's foot will work a while longer - but is instead to note that the conditions that have preceded other major market losses are already well in place.
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