People watching from the sidelines as the stock market smashes records on a daily basis are largely shocked and envious of those who have taken the plunge and seen their fortunes rise with the buoyant times.
There is an increasing chorus of warning from institutional traders and financial talking heads warning that there is no such thing as a stock market that only goes up. A major correction, they say, is imminent.
But here’s an alternative perspective.
The valuations of companies in the United States stopped making sense in 2010, when the whole notion of stimulus was first applied to the stock market directly through monstrous liquidity facilities to Tier 1 banks drove hedged investors to take on a commensurate glut of debt to invest with.
The intent by the financial mandarins behind the public-facing institutions was that this money would drive the stock market higher, and they were right. So much so that stimulus has become the leading tool of central bankers around the world.
Meanwhile, public companies borrow to buy back stock, which in turn creates a diminishing supply of shares, which drives prices higher.
So we have this doubling or tripling or quadrupling of the liquidity being loaded into the market, which drives prices higher, which drives profit-taking and further investment, which drives prices yet higher.
In fact, there is literally no possible option for stocks as an asset class to continue rising, as long as stimulus continues to explode the liquidity load on markets.
There will be corrections. But as we have seen throughout 2020, they are brief and always presage an inevitable new leg up in market prices.
And with regulators making it incrementally easier for high school kids to trade everything from options to crypto, the liquidity load continues to increase.
So yeah…valuations are astronomical and make little sense.
And yes, there will be a correction here and there.
But the bottom line is, if you don’t get a glove and get in the game, you are going to continue missing out on the biggest egalitarian wealth creation period in human history.