The Wisdom Of Looking Like An Idiot Today

Stocks & Bonds

There has been an absolute party in the stock market over the past two years. The S&P is up nearly 40% (!) since early 2012 and has almost tripled since its 2009 lows. It's been nearly impossible not to make money in the stock market recently (unless you've owned mining shares).

Bonds have remained at historically-elevated prices. And although 2013 has seen prices come off slightly from their highs, prices are still substantially above pre-crisis levels.

The pumped-up performance of paper assets here is of course due to the staggering amounts of new money the Fed has been creating since 2008. Starting with a balance sheet of $880 billion pre-crisis, the Fed has since expanded it by an additional $3 trillion. In less than 5 years. And it's continuing to expand to the tune of $85 billion (some calculate $100 billion) per month.

Most of that money sits in excess reserves enriching the banks at zero risk, at high hidden cost to the public (a rant for another day). But enough of it is sloshing over into the markets where it does exactly what excess liquidity always does: rise all boats.

So, if you decided to stay out of the markets, you've watched the party boat pass you by. They say "Don't fight Fed" and so far, the Fed is indeed winning. In reality, it will likely prove to be the Charlie Sheen version of "winning", but to the casual observer whose 401k is up 20% this year, the Fed definitely appears to be playing the better hand.

Real Estate

How soon we forget. Home prices have resumed climbing at historically-aberrant rates. The Case-Shiller home price index just reported that, year-over-year, its national home price index grew by 11.2%.

A number of markets have re-entered bubble territory. San Francisco, where prices are now higher than at their 2007 peak, saw a 26% year-over-year increase in average prices. Las Vegas, the poster child for housing prices excesses six years ago, saw a 29% average price increase from 2012 to 2013.

The tell-tale sign of an overheated housing market -- house flipping -- is back.

If you've been holding off on purchasing real estate (as I have) -- expecting a stumble back into recession, or higher interest rates, could bring prices down to saner baselines -- again, you're watching prices get away from you.

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