If you are a market observer or a Wall Street analyst, you should be on the edge lately. Why? If you’re looking at investor behavior and investment trends, it looks like Wall Street is undergoing a lot of heavy risk-taking.
It’s not hard to understand why. Thanks to quantitative easing and other fiscal stimulus programs undertaken by the US Federal Reserve, the European Central Bank, and the Bank of Japan, there’s just too much liquidity in financial markets. This liquidity has to go somewhere. It can’t be easily soaked up by the system.
Not surprisingly, otherwise risky stocks become more attractive as the safer stocks get overbought. You only need to look at the price per earnings ratio of a typical American company to see what I’m talking about. According to many analysts, the Wall Street’s current price per earnings ratio is extremely high. We’re talking about high enough to cause a lot of concern. That’s how much risk-taking is going on in Wall Street. In fact, complete dogs like Twitter are worth dozens of billions of dollars for no fundamental reason. You also need to look at consumer discretionary stocks and material stocks. These are showing a lot of traction lately.
Something very nasty is going to happen once the market wakes up to the fact that current market valuations are not supported by real economic performance on the ground. There is a big gulf between Wall Street and Main Street USA. This plays out in bold terms in market valuations and investment patterns. It’s only a matter of time until the market goes for a correction. The problem is timing the correction. It’s also anyone’s guess which event or which economic factor will act as a trigger for Wall Street’s collapse.
