What Scares Me Is the Absence of the Fear of Loss

What Scares Me Is the Absence of the Fear of Loss
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"It's not "Morning in America." Rather, Trump makes uncertainty and volatility great again. Stocks exhibit a volatility and randomness in price action rarely ever seen -- 1% daily moves become common place. The S&P 500 hits a high of 2,375 for the year and a low of 1,815 (down some 22.5% from today). Ultimately, it closes the year down 15%."

--Kass Diary 15 Surprises for 2017 

Over the years, like just about everyone else who has ever invested or traded in equity markets, I have spent some time studying market tops.

What do they look like? Is there a general pattern -- the equivalent of a general theory of relativity?

But as I am a fair Texas Hold 'em Poker player, I have looked not only for a generalized "top" shape, but within those shapes clues for how to read the intentions of market participants.

It is not my intention to bore you with my generalized observations about market tops or any insights I might have gained about reading the other player's intentions during topping periods. Rather. I want to offer you an observation related to a missive I wrote last week in which I featured George Soros' reflexivity insights.

Simply, there is a rather stunning lack of fear of loss showing up in equity markets. Moreover, there are almost no signs of fear of loss even beginning to build in the market's largest players, whoever the hell they are these days. And finally -- and I think this goes to my stated concerns over the last few months -- this lack of fear of loss is completely inappropriate!

At this moment, the biggest players in the equity market (again, whoever they are these days, and I don't pretend to know) are showing no signs of fear of loss in the market's price and volume patterns -- none!!

I find this incredible given the list of problems I have attempted to lay out.

How can this market's big boys have no fear of loss at this point? How is it they are not sliding toward the doors of the party room, calling their chauffeurs on their cells to "bring the car around the back and keep the motor running"?

The disconnect between reality or risk and protective behavior in the markets -- or rather the absence of protective behavior -- is frightening to me.

Are they right about the risks not being sufficient to lead to protective action, or do they think they possess some other form of protection other than reducing positions or -- and this is what worries me most because I think this may be the answer -- the people making the decisions on the largest pools of equity buying do not have any personal financial risk in the outcome. I suspect the biggest players are playing with other people's money (OPM) in some manner different even from the old-timers' hedge fund OPM days -- no personal financial involvement, no career risk and perhaps believing they have a way to shift any losses to some unsuspecting parties.

This probably all sounds nuts. However, one thing I am sure I see at a time when policy uncertainty and varying outcomes are heightened and rarely have been higher, valuations are elevated relative to historical norms and fear is absent -- the biggest players in this equity market are still operating without any visible signs that they fear any impending losses.

And that is definitely nuts!

Doug Kass is president of Seabreeze Partners Management Inc. This essay originally appeared at TheStreet.com.  

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