Let's move up to 50,000 feet above this market in order to truly appreciate what we are witnessing presently.
Here is the view from way up above:
- Everyone was convinced the world was ending just nine months ago.
- As the power of the Fed and the accompanying liquidity became known, the message went from "don't fight the Fed" to "let's make love to the Fed."
- As the momentum in equities, especially tech, grew increasingly powerful in nature, investors decided to completely ignore anything happening in the economy presently in order to focus on everything positive that lies ahead.
- As the perception of what lies ahead grew increasingly positive and powerful in nature, especially with a vaccine on the horizon, investors decided to leverage their positions.
- With increasing fiscal stimulus measures and a continuing lax monetary policy, the view of the Fed being all mighty and powerful has only grown.
This rapid fire succession of evolving market psychology based on emergency economic measures has led to a psychosis among investors that involves complete allegiance to price appreciation without any consideration whatsoever for what can be on the other side of emergency fiscal and monetary stimulus, leading to a seemingly perfect landscape of picturesque meadows that the bulls have been given full permission to roam without boundaries.
This seemingly perfect landscape is the greatest danger of all as we prepare to flip the calendar over to 2021.
Investors have built up such expectations for perfection, in what has become a stunningly imperfect world, that the slightest slip of the narrative has potential to cause disproportionate reactions among the over-leveraged, over-exuberant masses.
2021 has become the year where the markets have been given no room for slipping.
Everything needs to work.
From the sick getting healed. To the economy reviving. To fear turning to optimism. To economic policies that have never been attempted working splendidly to the oohs and aahs of the desperate masses.
It's a tall order to fill, which doesn't mean it will not be filled. However, to believe such an environment isn't fraught with danger is the peak of ignorance, or perhaps, excessive optimism that has turned into a full fledged mania.
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