When money creating powers flood the financial system with cash and cash equivalents, market participants have a choice to make. They can hold the cash, securing a loss in purchasing power if they hold too long.
10 Year US Treasury Yield Vs Moving Average Daily Chart
Or they can acquire assets like high-yielding bonds, stocks and real estate. Those assets should rise in value over the proverbial long-term.
The concern is that the money printing powers did not merely give the pandemic-weary economy a jolt. Central planners increased the M2 money supply 25% in 2020; the M1 money supply component pole vaulted 66%.
This kind of intervention? Nothing like it has ever been seen before.
M2 Money Stock Chart
At first glance, it appears to be helping everyone who has a stake in stocks. Even indirect holders who have pensions need the stock market to thrive if they hope to be paid by previous employers.
VTI Daily Chart
On the other hand, stocks have become divorced from economic reality. They bear little relationship to their underlying fundamentals.
Hyper-valuation is a feature of stock market bubbles. Yet it is not the pin that will burst a balloon.
Some wonder if speculative stupidity might do the trick. It might.
For example, it may be sensible for speculators to force short-sellers to cover their positions. The “squeeze” can send the price of a stock upwards. On the other hand, is the level of interest in the shares of the most heavily shorted companies (and the least viable ones) rational?
50 Most Shorted Stocks
In a similar vein, smaller retail traders have been manic in their attempts to leverage small dollar accounts. Get rich quick schemes tend to mark the end of a stock bubble’s run, not the beginning of it.
Small Trader Call Buys To Open
It may not be possible to identify the specific pin or group of pins that will prick the present-day stock market bubble. Yet the level of speculative activity in everything from “short-squeezing” to “call buying” to “crypto” suggests that a reckoning is closer than many may be prepared for.
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