The "Everything Market" May Continue for Some Time
The current market scenario can be described as the "everything market," where almost all investments are appreciating in value. However, the reasons behind this phenomenon might not be what you think. A recent interview with Jim Paulson, a consistently optimistic market observer, revealed his rationale for the ongoing rally.
Paulson attributes the rally to a combination of factors that usually create an "Everything Market" at the beginning of a new bull market. These factors include falling short rates, declining bond yields, rising money growth, expanded fiscal stimulus, and persistent disinflation. He believes these factors are fostering expectations of a soft landing, thereby improving both consumer and business confidence.
However, this might not be the actual reason behind the rally.
On the flip side, gold enthusiasts are enjoying soaring gold prices, attributing it to the erosion of the U.S. economy due to mounting debts and deficits. Michael Hartnet of BofA recently stated that long-run returns in commodities are rising, led by gold, which is a hedge against debt, deficit, and debasement.
Historically, gold performs well when deficits as a percentage of GDP increase, as concerns about U.S. economic health rise. However, gold performs poorly when economic growth resumes, and the deficit declines. Interestingly, since 2020, gold prices have been soaring, even as economic health remains robust, and the deficit as a percentage of GDP continues to decline.
In addition to stocks and gold, bonds, commodities, real estate, and cryptocurrencies have also seen gains this year.
In essence, regardless of your investment thesis, the price action currently supports it. But that doesn't necessarily mean your thesis is correct. In an "everything rally," rising asset prices can mask investing mistakes.
This analysis leads to two important questions: What drives the "everything rally," and when will it end?
The Real Reason Behind the "Everything Rally"
When it comes to what's driving the "everything rally," everyone has their theory. Stock enthusiasts suggest that easier monetary accommodation by the Fed and improving earnings are the key drivers for equities. Gold enthusiasts, on the other hand, are enticed by increasing government spending and expectations of a dollar decline to loft gold prices higher. Each asset class has its "reason" for going higher, but the real reason may be much simpler.
In every market and asset class, the price is determined by supply and demand. If there are more buyers than sellers, prices rise, and vice versa. While economic, geopolitical, or financial data points may temporarily affect and shift the balance between buyers and sellers, ultimately, the price is determined by asset flows.
The amount of money flowing into assets has been remarkable since 2014. Despite many concerns, 2024 is on track to be the second-strongest year of monetary inflows since 2021. This is surprising considering the government was flooding the system with trillions in monetary and fiscal stimulus then, compared to the current contraction.
As asset prices increase during the "everything market," more money is drawn into those assets, forcing prices to rise as demand outstrips supply. The demand for stocks, gold, real estate, cryptocurrencies, etc., comes from many sources, including hedge funds, private equity funds, corporate share buyback programs, passive indexes, pension funds, institutional funds, mutual funds, retirement plans, global investors, retail investors, and most importantly, Central Banks.
A significant accumulation of cash in money market funds will face declining yields as the Federal Reserve cuts interest rates.
There are three primary reasons why asset prices are rising in the "everything market": liquidity, liquidity, and liquidity. In other words, in an "everything market," there is too much money chasing too few assets.
The number of publicly traded companies continues to decline for various reasons, including mergers and acquisitions, bankruptcy, leveraged buyouts, and private equity. With fewer publicly traded companies, there are fewer opportunities as market capital increases. This is particularly the case for large institutions that must deploy large amounts of capital over short periods.
The same is true for gold. While the demand for gold increases as prices rise, the supply of gold has declined since 2019. As a result, gold is no longer a "risk-off" asset with a negative correlation to equities but is now a risk-on asset, just like equities.
These "everything markets" can last much longer than logic suggests. However, they do end. The termination of "everything markets" is usually triggered by some unexpected event that interrupts the flow of liquidity.
The Technical Perspective
"Everything markets" can persist longer than logic dictates. However, they eventually end, and it's impossible to predict what will cause it or when. This is evident from the history of the S&P 500 index and gold, where technical extremes marked short to long-term corrections and consolidations.
In both cases, these extremes corresponded to more important headline events such as the "Crash of 1987," the "Dot.com Crash," and the "Financial Crisis." Like the S&P 500, the technical deviations for gold are also at levels that have denoted short to long-term corrective cycles.
As Paulsen noted in his interview, "everything markets" typically last only six months to a year. He expects this one to be in force at least for "the next several months."
There's no way to predict what will eventually cause a shift in liquidity as the Federal Reserve and global central banks move back into easing mode. A reversal could be triggered by a "crisis event" or a reversal of monetary flows. The technical analysis indicates that it will occur, likely when the fewest investors expect it.
But that isn't today.
Investors often "buy high and sell low," which is always the case. This brings to mind Warren Buffett's famous words when investing in an "everything market": "Investing is a lot like sex. It feels the best just before the end." Perhaps this is why Warren has been raising a lot of cash lately.
Bottom Line
The "everything market" phenomenon is intriguing and offers a unique perspective on the current state of global finance. It's a testament to the fact that market dynamics are not always as straightforward as they seem. While it's easy to get caught up in the excitement of rising asset prices, it's crucial to remember that markets are inherently unpredictable, and what goes up must eventually come down. So, what are your thoughts on this "everything market"? Do you think it will continue, or are we on the brink of a significant market correction? Share this article with your friends and discuss it. You can also sign up for the Daily Briefing, which is delivered every day at 6 pm.
The "Everything Market" May Continue for Some Time
The current market scenario can be described as the "everything market," where almost all investments are appreciating in value. However, the reasons behind this phenomenon might not be what you think. A recent interview with Jim Paulson, a consistently optimistic market observer, revealed his rationale for the ongoing rally.
Paulson attributes the rally to a combination of factors that usually create an "Everything Market" at the beginning of a new bull market. These factors include falling short rates, declining bond yields, rising money growth, expanded fiscal stimulus, and persistent disinflation. He believes these factors are fostering expectations of a soft landing, thereby improving both consumer and business confidence.
However, this might not be the actual reason behind the rally.
On the flip side, gold enthusiasts are enjoying soaring gold prices, attributing it to the erosion of the U.S. economy due to mounting debts and deficits. Michael Hartnet of BofA recently stated that long-run returns in commodities are rising, led by gold, which is a hedge against debt, deficit, and debasement.
Historically, gold performs well when deficits as a percentage of GDP increase, as concerns about U.S. economic health rise. However, gold performs poorly when economic growth resumes, and the deficit declines. Interestingly, since 2020, gold prices have been soaring, even as economic health remains robust, and the deficit as a percentage of GDP continues to decline.
In addition to stocks and gold, bonds, commodities, real estate, and cryptocurrencies have also seen gains this year.
In essence, regardless of your investment thesis, the price action currently supports it. But that doesn't necessarily mean your thesis is correct. In an "everything rally," rising asset prices can mask investing mistakes.
This analysis leads to two important questions: What drives the "everything rally," and when will it end?
The Real Reason Behind the "Everything Rally"
When it comes to what's driving the "everything rally," everyone has their theory. Stock enthusiasts suggest that easier monetary accommodation by the Fed and improving earnings are the key drivers for equities. Gold enthusiasts, on the other hand, are enticed by increasing government spending and expectations of a dollar decline to loft gold prices higher. Each asset class has its "reason" for going higher, but the real reason may be much simpler.
In every market and asset class, the price is determined by supply and demand. If there are more buyers than sellers, prices rise, and vice versa. While economic, geopolitical, or financial data points may temporarily affect and shift the balance between buyers and sellers, ultimately, the price is determined by asset flows.
The amount of money flowing into assets has been remarkable since 2014. Despite many concerns, 2024 is on track to be the second-strongest year of monetary inflows since 2021. This is surprising considering the government was flooding the system with trillions in monetary and fiscal stimulus then, compared to the current contraction.
As asset prices increase during the "everything market," more money is drawn into those assets, forcing prices to rise as demand outstrips supply. The demand for stocks, gold, real estate, cryptocurrencies, etc., comes from many sources, including hedge funds, private equity funds, corporate share buyback programs, passive indexes, pension funds, institutional funds, mutual funds, retirement plans, global investors, retail investors, and most importantly, Central Banks.
A significant accumulation of cash in money market funds will face declining yields as the Federal Reserve cuts interest rates.
There are three primary reasons why asset prices are rising in the "everything market": liquidity, liquidity, and liquidity. In other words, in an "everything market," there is too much money chasing too few assets.
The number of publicly traded companies continues to decline for various reasons, including mergers and acquisitions, bankruptcy, leveraged buyouts, and private equity. With fewer publicly traded companies, there are fewer opportunities as market capital increases. This is particularly the case for large institutions that must deploy large amounts of capital over short periods.
The same is true for gold. While the demand for gold increases as prices rise, the supply of gold has declined since 2019. As a result, gold is no longer a "risk-off" asset with a negative correlation to equities but is now a risk-on asset, just like equities.
These "everything markets" can last much longer than logic suggests. However, they do end. The termination of "everything markets" is usually triggered by some unexpected event that interrupts the flow of liquidity.
The Technical Perspective
"Everything markets" can persist longer than logic dictates. However, they eventually end, and it's impossible to predict what will cause it or when. This is evident from the history of the S&P 500 index and gold, where technical extremes marked short to long-term corrections and consolidations.
In both cases, these extremes corresponded to more important headline events such as the "Crash of 1987," the "Dot.com Crash," and the "Financial Crisis." Like the S&P 500, the technical deviations for gold are also at levels that have denoted short to long-term corrective cycles.
As Paulsen noted in his interview, "everything markets" typically last only six months to a year. He expects this one to be in force at least for "the next several months."
There's no way to predict what will eventually cause a shift in liquidity as the Federal Reserve and global central banks move back into easing mode. A reversal could be triggered by a "crisis event" or a reversal of monetary flows. The technical analysis indicates that it will occur, likely when the fewest investors expect it.
But that isn't today.
Investors often "buy high and sell low," which is always the case. This brings to mind Warren Buffett's famous words when investing in an "everything market": "Investing is a lot like sex. It feels the best just before the end." Perhaps this is why Warren has been raising a lot of cash lately.
Bottom Line
The "everything market" phenomenon is intriguing and offers a unique perspective on the current state of global finance. It's a testament to the fact that market dynamics are not always as straightforward as they seem. While it's easy to get caught up in the excitement of rising asset prices, it's crucial to remember that markets are inherently unpredictable, and what goes up must eventually come down. So, what are your thoughts on this "everything market"? Do you think it will continue, or are we on the brink of a significant market correction? Share this article with your friends and discuss it. You can also sign up for the Daily Briefing, which is delivered every day at 6 pm.
