The concept of the 'bliss trade' and its potential impact on the stock market is a fascinating and complex topic. It raises questions about the role of governments and central banks in supporting large corporations and the potential consequences for investors and the economy as a whole.
The Rise of the Bliss Trade
The idea of bliss, or 'big lasting state support', suggests that governments and central banks are reluctant to let major companies fail due to the financial strain it would cause within the monetary system. This notion has gained traction as we've seen remarkable gains on Wall Street and in global share markets.
A decade ago, the S&P 500's all-time high was around 2,100, and now it has surpassed 7,600. This unprecedented growth has many wondering if we've entered an era of perpetual gains, effectively eliminating the risk of a market crash.
Moral Hazard and Its Implications
The concept of moral hazard is central to this discussion. Traditionally, investors understand that higher risks should yield greater rewards. However, during the global financial crisis, this concept was challenged when several large Wall Street investment banks were bailed out by the US government.
The Troubled Asset Relief Program (TARP) was a clear indication that some institutions were considered 'too big to fail'. This created a moral hazard, encouraging company executives to take on excessive risks with the knowledge that the government would step in if things went south.
Gemma Dale, director of nabtrade, highlights this investment hubris, which has been prevalent for decades. She believes that the moral hazard has been removed, and this is problematic. It seems that the fear of moral hazard has been replaced with an acceptance, or even an embrace, of immoral practices within US corporations.
Mega IPOs and Reckless Investing
This shift in attitude has led to a more reckless investing style, as evidenced by the record-breaking IPO of SpaceX. Despite concerns about the company's profitability and the fantasy-like nature of Elon Musk's future plans, the company's listing price was set at $US135. Morningstar, however, values the company at around half that price.
This trend of mega IPOs and the exponential growth of companies like Amazon, Meta, Alphabet, and Nvidia raises questions about the sustainability of such practices. Dale notes that these companies are highly profitable but are ploughing all their cash into future projects, leaving investors to wonder if these ventures will pay off.
The Trillion-Dollar Question
So, are share markets now a one-way bet? Given the support for big stocks, can we truly rule out the possibility of a market crash or a significant slump of 40-50%? The last time the US stock market experienced such a decline was during the global financial crisis.
Dale refers to Ray Dalio, who suggests that the US is broke and that things are bound to go wrong eventually. The weaker US bond market and rising yields on 10-year Treasury bonds are cause for concern, as they indicate a higher risk of default and can devastate stock valuations.
The moral hazard behind these big market gains is also a concern. Many firms are being pushed into indexes followed by managed funds, and once they're in, fund managers buy them up. This creates a potential feedback loop that could lead to a market collapse if an economic shock removes several big companies from these indexes.
Conclusion
While the bliss trade and its implications are intriguing, it's important to remember that the market is unpredictable. The idea that we can never see a meaningful downturn is risky, and as Dale notes, we've been wrong about that for quite some time. Our superannuation balances may be reaping the rewards now, but the potential for a market correction is always present.
