Not Seeing Signs Of Market Exuberance? Look Closer

Geopolitical unrest in Iraq/Ukraine? Buy stocks.  

Unemployment drops to 6.1%? Buy stocks.

Loss of 500,000 full-time jobs? Buy stocks.

GDP falls by much more than expected? Buy stocks.

Q2 economic rebound much weaker than originally estimated? Buy stocks

Rising/falling oil prices? Buy stocks.

Over the last few months, it has not mattered whether the news flow has been positive, negative or indifferent; the refrain has been simply to “buy stocks.” Lord Overstone once said:

“No warning can save people determined to grow suddenly rich.”

The more the markets rise in the face of negative news, the more “confident” that individual investors become in their own abilities. The lure of becoming “rich”overwhelms logical thinking creating a “willful blindness” to rising investment risks.

When casinos first open their doors they “loosen” the slot machines so that they payout more often. Players are attracted by the whirling lights and buzzers that denote a sea of“winners.” As individuals play, and win, they begin to become “confident” in their “skill” of playing a slot machine.  The “can’t lose” psychology begins to overwhelm the logic that the odds of winning are roughly 1-in-264,000 or higher.

Eventually, when enough “fish are in the barrel” the casino begins to “tighten up” the machines to put the “odds” in the favor of the house. As players begin to lose more often than they win, they keep playing under the assumption that their “cold streak” is about to end.  Moreover, just “as soon as they get back to even” they will quit playing. Eventually, out of money, they do leave the machine. There is truth behind the saying“The house always wins.”