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Stock Market Bubble Floating on Currents of “Irrational Exuberance”

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Last week, Peter Schiff did an interview on The Street and talked about the US stock market, saying, “Well, the bubble keeps getting bigger.” We’ve been talking about this ballooning bubble for months. After a while, it’s easy to blow us off as pessimistic contrarians who just don’t get it. But amazingly, large numbers of investors also believe the stock market is way overvalued.

But they keep buying anyway.

Bank of America called it “irrational exuberance.”

The latest fund-manager survey by Bank of America Merrill Lynch found that a record 48% of investors say the US stock market is overvalued. Meanwhile, 16% of investors say they are taking on above-normal risk. That’s also a record, eclipsing risk-taking during both the dot-com and housing bubbles.

Cash positions fell to 4.4% from 4.7% in October. That marks the lowest level since October 2013 and falls below the 10-year average of 4.5%.

Bank of American chief investment strategist Michael Hartnett said the record number of investors calling equities overvalued combined with simultaneously falling cash positions “an indicator of irrational exuberance.”

Icarus is flying ever closer to the sun. And investors’ risk-taking has hit an all-time high.”

Zero Hedge put it in less metaphorical terms.

While investors intimately realize how bubbly assets have become, they have no choice but to buy them.”

Bloomberg said the results of the survey highlight “the dilemma faced by investors in an era where central bank stimulus has flooded the market with liquidity and suppressed returns from less risky assets like bonds.”

In an odd juxtaposition of seemingly contradictory points of view, investors realize the market is overvalued, but at the same time, they believe it will continue to go up. According to the survey, 56% of the money managers project a “Goldilocks” economic backdrop of steady expansion with tempered inflation.

In other words, what is shall always be.

This is exactly what Peter said during his interview on The Street.

I mean, investors are willing to pay very high prices and have very little worry that the stock market is going to go down. People have very short memories. We’ve had two major 50% declines in the stock market this century – since 2000. So, we’ve had the market cut in half twice and it could easily happen again. Yet nobody seems concerned.”

So, what accounts for this complacency? Why aren’t investors considering the possibility the stock market could once again come crashing down? Peter has a theory.

I think one of the reasons is because the last two times the market went down, the Fed was able to bail out investors who bet on one bubble by inflating a bigger one. So, a lot of investors may have been conditioned to believe that even if the market implodes, if they hold on, they’ll get their money back. But you know, the third time may not be the charm.”

In an economy ruled by central planning and interventionist monetary policy, things always cycle down. Bubbles pop.

Zero Hedge put it in pretty stark terms.

So if this is an ‘irrationally exuberant’ bubble, the next step is clear, only the timing is uncertain.”

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