I’m not the biggest fan of eating lobster, but I once heard a cook at a rustic seaside lobster place up in New England describe his trick to cooking them just right.
“The secret,” he said, “is putting the lobster into the pot before you heat up the water. The meat’s more tender because they don’t realize what’s happening until it’s too late.”
Not everyone would agree with his assessment of a lobster’s pain faculties. In fact, in New Zealand it’s illegal to boil a live lobster, thanks to the Animal Welfare Act of 1999. It’s considered cruel and unusual punishment.
If only human investors were afforded similar protections from cruel and unusual financial punishment. Why do I say that? Because financially speaking, the water’s in the pot and the Fed has its hand on the stove’s temperature knob, ready to turn up the heat. But most investors, lulled by all-time stock market highs, won’t notice the difference until, like those unfortunate lobsters, “it’s too late.”
At this point, the Federal Reserve and Wall Street are on a collision course. The Fed is saying “We’re really going to do it this time; we’re really going to raise interest rates.”
They’re desperate to let some air out of the asset price balloon they’ve created. And Wall Street is saying “Yeah, you’re gonna raise rates? Right. Show me.” Even with the lifeguard blowing her whistle, nobody wants to be the first one out of the pool.
You’d think we’d have all learned this lesson by now. I can remember in late 1999 and early 2000, as a then-business journalist and bearish-feeling investor, thinking about how “bullet proof” everything felt. Most of Wall Street (and Main Street) regarded whatever negative news that was out there at the time as another chance to "buy the dip."
Then there was the craziness of 2006-2007. By that time, the writing was already on the wall for the real-estate crash just over the horizon. I don’t know how many stories I wrote that warned of the dangers building inside that sector. But that didn’t stop thousands of people, still reading the old "get rich quick" script, from taking out second mortgages to speculate on "can’t miss" deals.
And so here we are in 2015. The amount of leverage used by investors (as measured by margin debt) is at extraordinarily high levels. Opinion polls among investors show they’re feeling optimistic and bullish. And sure, yeah, the stock market is overvalued on a historical basis, but who cares? It’s been overvalued for years.
In other words, we’re all back to feeling darn near bullet proof again. Lobsters in the bottom of the pot.
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