Tuesday, 15 January 2013

"Stock prices have reached what looks like a permanently high plateau"

If only that would be true...

Blatant signs are for a classic bubble forming on the Icelandic stock exchange - again! Since the beginning of the year, stock prices have practically reached a lift-off speed and defied the market's law of gravity.

The stock index in the Icelandic stock exchange. Taken from Keldan.is. Click to enlarge.

Why this happens one can only speculate about but a not so unlikely spark is the existence of the capital controls which prevent the Johns and Jonases of Iceland to take their money out of the economy. Investors are therefore locked in, searching for investment opportunities in despair.

Many have parked their money in the banking system with its government backup. Others have funded the increased stock of bonds - especially government bonds as touched upon here - but the market value of registered bonds has risen up to 2,160 billion ISK from 1,390 billion ISK in October 2008. The yield of government bonds has dropped significantly as well, dipping below the yield which would neutralise the actuarial calculations of the Icelandic pension funds but they control around 55% of the total worth of registered bonds in the Icelandic stock exchange. Something tells me that the Icelandic pension funds may not be so eager to hold the too-low-yield-for-them bonds anymore once they will be allowed to invest again abroad.

Other trapped investors have decided to jump on the equities bandwagon, especially after the media began to show the price developments on the stock market some interest (such as here, here, here and here).  Like you can count on women flocking to the shops of Paris during the "soldes" period, investors followed the crowd and poured money into the stock market: the turnover of stocks in the first days of the year 2013 was fivefold the average turnover in 2012. Can anybody smell the "permanency" of this newly found stock plateau?

Nothing lasts forever, all stock runs run out in the long run. But who cares about the long run anyway! In the long run we're all dead and today's politicians (and Lords of Finance) will have managed to throw the burden of steering the economy away from recreating the financial turmoil of 2008 onto somebody else's new and unexpected shoulders. And of course the poor soul who is unlucky enough to be in command at the time of the burst of the bubble will take all the blame.

So jump on the bandwagon, enjoy the Beauty Contest and make money beyond your wildest dreams. Just don't come running back to me when you lose them all.

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