The Wile E. Coyote Moment

With the great post-Armageddon bull market party in full swing suddenly everyone's an investment genius again. Back in 2008, when stocks were languishing at lows not seen since talking movies were invented, no one wanted to know. And, as usual when the bull is running, logic is taking a quiet break and considering early retirement.

Well, logic needn't bother. At some point people are going to look down and realize that they've run over the cliff edge again. The question is not if, but when, the Wile E. Coy moment will happen. The trouble is that bull markets get people thinking they’ve got brains when mostly what they’ve got is hope.

Unstable

The problem with this current market is that it's built on unstable foundations, predicated on governments continuing to pump in cheap money. Clearly the hope is that by restoring public confidence a real recovery can be jump started. And, frankly, there's some evidence this is working: people are spending again, and business confidence is rising and with it the prospect of genuine investment and real rises in peoples' earnings.

Unfortunately the mess we're in isn't simple to fix. As real wages in the developed economies have fallen the only way people can spend more - and our consumerist lifestyle is based on people spending more - is by digging into savings or by borrowing more. And as most of us don't have any savings it doesn't take a genius to square that particular circle. Yet markets continue to rise, inexorably it seems.

Bull

At some point during a rising market economics starts to take a back seat and that ephemeral thing called confidence starts to kick in. Stocks are rising, ergo, stocks will continue to rise. And with this comes the corollary, my stocks are rising, ergo, I’m an investment genius. Zhen Shi and Na Wang have taken a look at this in Don’t Confuse Brains With A Bull Market and have discovered, unsurprisingly, that investors trade more in a bull market than a bear market.