Saturday, November 21, 2009

Are you taking profits?

Some people are selling off their investments right now, taking profits. Investment touts point to the fact that the recent stock market run up has taken place independently of any fundamental underpinnings. Neither sales nor profit margins are rising. Markets are not expanding. There is no shortage of energy, raw materials or labor. Real Estate is in chaos. The conventional wisdom is that markets were oversold and since the rebound last Spring, now swing the other way. If you believe this you are likely to be taking profits now too.

Nobody is sure what is happening. My own personal explanation is that we are experiencing asset inflation relative to the huge amount of liquidity at negative real interest rates, that central banks have pumped into financial institutions all over the World. A lot of this money has found it's way into equities and commodities, diluting the price. This inflation is not necessarily accompanied by consumer inflation, at least not yet. The thing to remember about this asset inflation is that it is more likely to be permanent than not. The central banks cannot easily afford to pull the rug out from under all the liquidity that they have injected. It's not clear they could do it even if they wanted to. The second thing to remember about this asset inflation is that it is by no means over, will likely continue and may accelerate. If markets fall and I'm not saying they won't, it will be for a different reason. I'm not sure what it would be. Do you have any ideas? I'd like to hear them.

I'm not taking profits yet. Don't take that as any kind of sage advice. It's coming from a guy who lives in a shack and never made a dime that didn't involve a shitty, non union job with no benefits and a paltry hourly wage.

I'm not getting out of the market because I think it's inflated, not oversold. Oversold conditions lead to sell offs. Inflation leads to more inflation. If the market was going to sell off, it would have by now.

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