Special Update: Market “Melt Up” Continues

This message hasn’t changed over the last week:

“While the Federal Reserve accurately states this is NOT ‘Quantitative Easing,’ apparently market participants didn’t get the memo. The market has risen in every single week the Fed has been active, despite collapsing fundamentals. (h/t ZeroHedge)”

Speaking of optimism, and outright complacency, the difference (spread) between the high yield (junk debt) CDX index and U.S. Treasury yields has fallen back below 300 basis points. The index measures the cost of insuring high yield debt against default. This extremely low cost of insurance, especially this far into an economic expansion, reeks of complacency and a chase for extra yield as we are seeing in other asset markets.

Four Charts That Will Define The Next Decade 

The following four charts were tweeted out by my partner Jack Scott (@jackpscott) which will literally define the next decade.

1 – Annualized Returns are one of the more “mean reverting” series in the financial markets. Decades of high returns are inevitability followed by a subsequent low, and even negative, returns. (If you are close to retirement this is an extremely critical point to understand when it comes to your financial planning.)

2 – Household Net Worth as a Percentage of GDP is pushing record levels. While not in itself a “bad thing,” the benefit has been confined to the top 20% income earners. Importantly, asset growth has far outstripped economic growth which is unsustainable long-term. This series too, will mean revert. 

3 – Corporate Debt To GDP is also pushing unsustainable levels. Debt ultimately has to be “cleared” before the system can re-leverage for the next growth cycle. The next reversion cycle will be brutal on a large number of publicly traded companies which have relied on “cheap debt” to sustain poor fundamental business models. Be careful what you own.

4 – Melt-Ups In Markets Can Seem Rational in the heat of the moment. However, when “reality” inserts itself, the eventual reversion tends to be brutal. 

What you do with the data is up to you. All I am suggesting is that it took a decade of “fiscal largesse” by central banks globally to create these extremes. It will likely take a decade to complete a reversion.

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