Former trader and current guy gritting his teeth and drumming his fingers on the table at the daily staff meeting, Richard Breslow, is out with his daily missive and this one revisits what we’ve called “The Wave Paradox.”

We’ve couched this in terms of investors not being able to differentiate between good decisions and decisions being good in part because you made them. But another way to explain it is to simply call it a self-fulfilling prophecy. It’s Howard Marks’ “perpetual motion machine.” The parts of that machine are:

Between those market “participants” (scare quotes there to denote the considerable ambiguity around whether or not it’s appropriate to call machines and mindless ETF allocators “participants”), there’s no way to tell whether you’re riding the wave, creating the wave you’re riding, or both.

This creates a one-way market and it leads directly to confusion on days like Wednesday when everyone finds themselves trying to “explain” why risk assets are declining. Sure, everyone will always try to ascribe causation, but in one-way markets that effort is less a fact-finding mission and more a desperate attempt to talk everyone who overpaid based on the “greater fool” theory of investing off the proverbial ledge.

This conversation becomes especially relevant at a time when one of the key pillars of the “buy at any price” argument (stocks are still attractive compared to bonds) is at risk. Clearly, the question is this: ok, well what happens if yields rise?

More from Breslow below…

Via Bloomberg

The debate continues to rage over whether and why equities are overvalued. Ultimately, it’s a waste of time. Equities are indeed overvalued. We all know it. It’s the best example possible for quoting Justice Potter Stewart. But inflated values hasn’t been a reason not to buy stocks, nor will some nebulous metric change be a reason to sell them. Which is important to get your head around, because you don’t want to be distracted arguing academic minutiae when things do in fact change.