While preparing for our latest newsletter we came across some new information we feel compelled to share with clients. As we discussed in an earlier newsletter, this is not the first time the Federal Government has taken over financial markets and the economy. They did it during the Great Depression in the United States and they did it in post WWII United Kingdom. They also did it during the Y2K crisis. The Fed printed $500 billion mid-year 1999 in accordance with the “Contingency Financing Plan” to assure banks had sufficient liquidity to lend for Y2K. Liquidity chases momentum and much of this made its way into the Nasdaq, which subsequently rose 90% ($1.00 to $1.90) before dropping 80% ($1.90 to $0.38) leaving investors with substantial losses:
Much of the recent liquidity added by world central banks has flowed into US assets, stretching valuations to levels seen during other bubble periods. Investors may become overly ebullient as they see prices continue to rise only to see a reckoning later, when the punch bowl is taken from the party. Since we cannot know when that date will be, we feel it remains encumbent to be appropriately conservative, to avoid speculating in overvalued assets and to be patient.
