Understanding the Moment

The other title I had in mind for this post was Our Long National Nightmare is Over.

Yesterday on the AdvisorShares Alpha Call Michael Young, the call's host, was planning to tease me about the season that the Red Sox had but not surprisingly I found something applicable to investing here.

One of my older brothers is a bigger sports fan than I am. Shortly after the Red Sox won the 2004 world series, which came on the heels of two Super Bowl wins for the Patriots (we are from Boston), I proclaimed that this is our decade and that we should enjoy it while it lasts. The Sox and Pats won one more each and then a little later the Celtics and Bruins won championships too. While we're at it the Boston College mens hockey team won four championships, Boston University won one and even the Boston Cannons won a Major League Lacrosse championship.

In pointing out in 2004 that this was something special I believe I had some understanding of the moment.

So it is with investing. The late 1990s was one kind of moment where everyone involved was making a lot of money without having to do much work. It turned out badly for most folks for not realizing that it was a unique moment that would end. The market is having a different kind of moment now that I talked about yesterday on the Alpha Call.

In the last 42 months the S&P 500 has more than doubled. In that time there has been little to no natural economic growth and little to no natural economic recovery. What I mean by that is that whatever economic growth has occurred has come from the Fed's having the accelerator pressed all the way to the floor and that much of the stock market's price appreciation has come from the Fed trying to steer people into more equity exposure.

To the extent the above is true (I believe it is) then it makes sense to think about what may happen if the equity market ever decides to stop playing along with the Fed's policy. I don't know if that will ever happen but if the market has doubled on what are still lousy economic fundamentals (I believe they are lousy for being artificial) then participants need to understand that and realize that the consequence could be painful. This is not a prediction just a realization of what the rally has been built on and that the Fed thinks things are still weak enough that we need zero percent rates until at least 2015.

The national nightmare bit at the top is also a Red Sox reference as the team fired beleaguered manager Bobby Valentine yesterday. His hiring was an obvious mistake right out of the chute, went south right away and now is finally over although along the way the team was completely gutted and so we may be in for a period of rebuilding. When he was hired I commented that giving him the job was "truly a black swan."