This is Called a Market Melt Up and it is turning Cash into Trash

The speed of market cycles is in today's modern economy is staggering.

There has been a lot of news made the past week about the one year anniversary of Lehman's collapse.  I was surprised however that very little news was made in the financial press that the week before - March 9 to be exact - marked the six month anniversary of the ultimate market collapse.

The market collapse of last March marked an extraordinary event.  It seemed that everyone wanted to sell everything regardless of price.  In the final stages we saw a rapid collapse in the price of every listed company on every market, and of products generally deemed to be relatively safe (such as commodities).  The final capitulatory stages of the collapse mirrored 1929 in every way shape and form imaginable, unnerving even the most seasoned of investors and left everyone unable to contemplate a recovery, much less a rapid one.  I lived through the post-911 days and never dreamed of selling, but this time I just couldn't stomach it and was a seller of a lot of stuff at or close to the bottom.

Now, merely 6 months later, our collective memory of those panicked days some 6 months ago is gone, and instead of a meltdown, we have a meltup.  Stimulus has provided a net of sorts, but also created real worries about the dollar.  We have an environment where many are rushing to get out of cash as quickly as they can, money managers are rushing to get into to a market racing higher, and virtually everything is being bought regardless of price.  The market has moved 60% off of the lows - a move which was even unpredented in 1933 - and the pricing of all securities and commodities assumes very strong growth in the months and years ahead.

I don't believe that the market will return anywhere near its lows and I do believe that it will trade still higher.  Today, it is ahead of itself on all rational valuation basis.  Yet, this is a meltup and it certainly isn't a bubble.  And, a fear - this time a fear of a collapse in the currency and a fear of being left behind - can drive it still higher.  While meltups can be like meltdowns in a sense, this market could presumably still move much higher.  It can also stay at a level following a meltup without ever having a meaningful correction until the economic fundamentals (including inflation) eventually justify the prices.

I don't think cash is trash, but I can envision circumstances where it underperforms everything else for years.  If this meltup continues, then that is just beginning.  

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Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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  • Rick56

    September 19, 2009

    People don't generally hold cash with the expection that it will outperform other investments. They do so because it's a safe place to park assets. In general, they give up yield for safety.

    I do like your melt-up concept though. It make sense when the Dow goes up 9 out 10 days. I wouldn't be buying into this market. Huge deficits, massive debt, low real estate prices - these are all still with us. If we have stopped getting worse, that's good, but I hardly think scraping along at the bottom is much to celebrate about.

    I think this is a bear market rally. Time will tell.

  • Shorebreak

    September 20, 2009

    The absence of risk-aversion to the point of pouring all one's cash into this market is just plain dangerous. When the plug is pulled again, the last ones out will be the small investors. They never learn, and the result has been many 401K accounts going nowhere for the past 10 years. The consumer was the main thrust in past GDP advances. Why is it different this time? Don't look for much GDP growth with lingering unemployment, housing slumps, credit difficulties, commercial property going into the dumps, and consumers finally squirreling away some savings. This "melt-up" could freeze-up at any time.

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