Thelma and Louise

2010 April 8
by Dave

Why oh why is the stock market priced so high? Very good question. I’ve got a plausible explanation for one of the factors placing upward pressure on the price of equities, but your assessment of the validity of my statements is likely to be closely correlated with your personal paranoia index.

So we’ve got all these fund managers of different types, pension, endowment, mutual etc. and with the recent calamitous events many of the places they like to put money have ceased to be viable investment options. Unfortunately these guys get payed based on how much money they invest, and if they keep money on the side lines, it goes away.

They have a lot of money that is constrained to being invested domestically. A lot of those domestic investment dollars are going to end up in equities by default. The fund managers know that equity markets are overpriced and are due for another correction, but they have to invest in something. They are protected from the consequences of this by the fact that if the stock market drops in the shitter, as long as they don’t do worse than every one else, then they won’t be punished financially. How can they be blamed if the whole market tanks.

So I’d like to put an image in your head of a school bus full of fund managers holding hands while it drives toward a big cliff. They know that they’ll be safe as long as they all hit bottom together. You can pick your own most loathed financial public figure as the bus driver. Me, I’m imagining Otto from the Simpsons.

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