When Everything is Strong

For every buyer, there is a seller.

For every debit, there is a credit.

Net exports globally equal zero.

Identities.  They help bring rationality when some people think that the economy only goes one way, as if China could sell off its US Dollar holdings without harming itself.  No one in the global economy has unbridled power.

Thus, I would like to bring to your attention this post from The Capital Speculator.  Everything is strong except high quality bonds.  Hmm… when was the last time I saw this?  Oh yeah, a piece by Richard Bernstein back in 2006, when everything was running hot.

This is not zen, but when everything is strong, something is weak.  Well, okay, high quality bonds are weak… that is normally true when liquidity is rampant.  Money markets are weak too… worse than 2006. Urk.

Think of it this way… long term fixed income claims are not prospering, and savers are getting peanuts, and very, very few peanuts.

Can this continue?  Yes, for two years at most in my opinion.  When the asset markets bifurcate into risky and non-risky, we are close to a top or bottom in the risky assets.  This is not a bottom.

Look, I have made calls at awkward times… equities in 2004, residential housing in 2005, subprime mortgages in 2006, and high yield 2008-2009.  I am not a permabull or permabear.  I aim for what will make money over the intermediate-term.

When everything is strong, be careful.  Trees don’t grow to the sky.  This is the time to pull in the horns.  Counting in the Fed’s future retreat from excess liquidity, it is all the more the time to be careful.