Callum Thomas — Chart of the Week: The Speculation Generation

The chart — US households at a record equity allocation, valuations at a record high

• Today's chart is "one for tomorrow's history books": US households are running the highest allocation to equities on record.
• That allocation extreme mechanically pairs with the stock market trading at record-high valuations — the two are two sides of the same coin.
• Bottom line: "a generational shift in investor behavior has been observed."

A once-in-a-generation market-structure shift — and why it's understandable

• This is "the type of shift you see only once in a generation" — a fundamental change in market structure with implications for the economy, politics, and the forward-looking risk-vs-return outlook.
• It got here for logical reasons: the S&P 500 gaining more than 10x off the March 2009 lows, strong earnings growth, waves of tech disruption, low interest rates, and passive flows.
• To be fair, then, "it's an entirely understandable development."

"Understandable" is not "normal" — the speculation generation

• Even though it got this way for logical reasons, "it's important to acknowledge that this is not normal and we live in highly unusual times."
• The euphoria tells: investor confidence near record highs, earnings optimism at euphoric levels, defensives and diversifiers in the dustbin, and social-media chatter saturated with an almost desperate sense of greed — investors grown accustomed to 2x, 3x, 10x returns, "the bull market minting many geniuses."
• His name for it: "the speculation generation."

The framing — not good or bad, just the lay of the land

• "This is neither good nor bad, it's just a thing… and that's the thing": as market analysts "we ought not get bogged down in good or bad, bullish or bearish, optimism or pessimism."
• The disciplined questions instead: what is the lay of the land? what does the data tell us? and what are the most pragmatic next steps we should take (or prepare to make)?