ASK BART: Shouldn't you be doing something?
- By The Notorious CFP®
The following is a new series dedicated to answering real client questions. The questions themselves- including names and details- have been altered to protect the innocent. This series aims to educate, inform, humor and provoke. If you find offense or disagree, please submit your response to firstname.lastname@example.org for future publication.
READING TIME: Weeks. (I'm not joking..)
TABLE OF CONTENTS
- Where we are
- How we got here
- What happens next
- What to do now
The title above isn't just some cheap, rhetorical clickbait but an actual question that I receive explicitly a couple of times a week now, many more times implicitly (and both increasingly as the stock market continues to vacillate). I never begrudge the inquirer for a very reasonable question and logical reaction to the carnage many investors have experienced in the stock market in 2022 and 2023.
This is a topic I presume is occupying most investor's thoughts these days, as account balances whipsaw from day to day, and primarily downward. If I was my own client, I would be seriously questioning my advisor's intelligence and activity (or lack thereof) as well, so no I don't take it personally. No such inquires are not out of line because it's part of the job. Fortunately, I don't look at my accounts more than a couple of times a year, so I don't have to deal with the inevitable and uncomfortable thoughts of terminating my advisor relationship. I would publicly recommend the same to my clients, except that would be considered biased and self-serving.
The volatility across all financial markets in the past year and a half was such that even some of my toughest, most tenured and battle-hardened clients are struggling to keep the faith, and more than a few have even contemplated turning their paper declines into permanent losses (translation: sell and/or go to cash.) And it's not hard to understand why. However, it's crucial that investors know and understand that the foundational cause of the turmoil roiling our financial markets today is human psychology. It's at the top of the causality pyramid from which everything else permeates downward from a form of collective madness that has gripped our society. I'll soon explain why, and why it matters.
In this series, I'm going to delve extensively into the present economic environment that we all inhabit. Then I will help unpack how we as a society and investment community arrived here, before providing a general market outlook and how investors can and should take advantage of the current market landscape to protect and growth wealth.
WARNING: Before starting, it's critical to mention that this is a particularly dark series, far more than my typical happy-go-lucky perspectives. As such, if readers recognize that they are generally predisposed towards anxiety or depressive thoughts when absorbing potentially negative economic data and news, then my advice is to stop reading, schedule me for the crib notes, and/or turn on the Hallmark Channel's 90 Days Till Christmas series. Even though it's the same story line and plot every damn night, I suspect it's gonna continue to be a ratings bonanza.
Conversely, if you can stomach some reasonably ugly data, biting critique, dyspeptic humor, political cynicism, and good ol' fashioned scorched earth commentary... then on the other side of this, you should be rewarded with some unique and enlightened perspective, and dare I say HOPE. Because that's what I achieved creating this content. In the end, it's not what I say and write that's important, it's how you choose to interpret it, that matters. (A critical life lesson that our society has apparently forgotten.)
To set the stage before we travel down this particular rabbit hole, successful investors must first internalize and accept the possibility that the worse the financial markets get from here on out, the better the long-term investor generally does. Either the market will go up or it will go down. The former is good-er, but the latter is better.
Have you ever noticed how wealthy people always seem to get wealthier during bad economic times? While highly leveraged people folks struggle? Why is that?
The answer is often perspective, temperament and attitude. For anyone with a time horizon beyond 3-5 years, the reality is that stress, stupidity and chaos often produce opportunity that often results in tremendous blessings. Here's an example: if markets always behaved rationally, predictably and linearly, they might never offer us the most attractive opportunities and certainly would not facilitate outsized gains. You need wide swings to capture large gains, it's inherent in the process. To be successful in the investing game, one must control (or outsource) their fears of financial loss and emotional stress in order to recognize the cyclical, reliable and rare opportunities uncovered within market corrections.
The natural world is not static. We do not live in a controlled environment and human are not robots. And the future is neither known nor predictable. We're designed to vacillate between periods of extreme greed and fear, and thank God we do. Capitalistic economies contract, and thank God they do. Markets correct, and thank God they do. Those that succumb or become paralyzed by these realities usually lose. Those that embrace them usually win. It's not the cultural swings, economic recessions and market drops that ultimately matter in the end, but how one adapts to them and moves forward.
How we respond, as with all things in life, define us. You know this because you've lived more than two decades on this earth, which means you've experienced a economic recession and a market correction. And for every decade over that, you've experienced another. So if you have determined that this one is any different, it says far more about you than the "that rigged, corrupt 'ol stock market casino."
- How will you be defined by our current challenges?
- What are the lessons you were meant to learn?
- Do you fear instability, or embrace it? And why?
- How will your future self look back on your actions today?
To be successful in the investing game, one must control (or outsource) their fears of financial loss and emotional stress in order to recognize the cyclical, reliable and rare opportunities uncovered within market corrections. They're almost always blessings in disguise for long-term investors.
WHERE WE ARE
The Mid-Life Crisis
Now that we got that out of the way, let's get started...
First, I sincerely wish I had better news for you. None of what you're about to read is going to be easy to hear, but I am convinced that there is not only a light at the end of this tunnel but also incredible financial opportunity. The simple truth- and this blog post in less than 1000 words - is that a general unease has permeated the culture during the past few years, and people of all stripes are struggling to identify and process exactly what has changed in their lives (and those of their fellow citizens), and what it means for the fate of our country and economy- both where they are now and where they may be headed.
it's crucial that investors know and understand that the foundational cause of the turmoil roiling our financial markets today is human psychology. It's at the top of the pyramid and everything else permeates downward from a form of collective madness that has gripped our society.
When diagnosing our current predicament, it's always helpful to establish some baselines.
First, the President of the United States is not the source of your problems. Nor was the last guy. They're honestly just symptoms of a greater cancer, mere props in a grand production, serving to distract the stupid and the emotional from what's really going on and what's really important. The climate and it's changing nature are also not the source of our anxiety, nor the border crisis, the Supreme Court, social injustice, declining morals, the destruction of democracy or your mother-in-law. These are also just surface-level manifestations of something far more complex.
If we continue to cling to the belief that these superficial events and circumstances directly impact us and our wellbring, then it's because we are unable to properly interpret them. If so, that's likely because we are deficient in some capacity or lacking a particular skillset that would allow us to adapt. Or at least cope. Most older and more mature adults already understand this implicitly, but it always bears repeating. Since I've deduced that the vast majority of Americans today are just children trapped in adult bodies. Please don't shoot the messenger! If you have to blame someone, blame your parents ('Cuz I do.)
Whether it's Will Smith assaulting Chris Rock, Bubba Wallace assaulting Kyle Larson or Kanye attacking Jews, it's hard to ignore that a small proportion of society still operates in a state of virtual adolescence. They behave like spoiled, entitled and petulant children lacking enough discipline in their youth and even fewer real-world consequences in their adulthood. You see it on the TV, you see it on the roads. You see it in your family. We're a society that was not- and is not- spanked enough. Now we play in traffic, and blame the cars.
I perceive that much of the current cultural calamity we now experience is the result of a form of arrested development- a state defined by the absolute refusal of many to acknowledge the reality of one's own age and the passage of time, and the passing away of certain frivolities and taking on of new responsibilities. They therefore want to pretend that they're still children. They dress inappropriately, speak crudely and try to be friends with their progeny when what they most need is a parent and mentor. It's my conviction that if you actually like your parents before you become an adult, you've been poorly raised and somewhat cheated and likely cursed. Adulthood is going to be tough for you, especially as we traverse the next few years.
Major problems with extended adolescence arise because pretending to be a kid is never going to work, it's only going to make things worse. That's one reason that many Americans born in the late 20th century are refusing to grow up, marry, start families, raise their kids properly or engage in a myriad of other forms of adulting. Lack of accountability, lack of justice, lack of everything that defines maturity. In effect, large swaths of America - and the developed world - are stuck in the world's longest mid-life crisis. Longer than even Madonna.
When I was a child, I spoke as a child, I understood as a child, I thought as a child; but when I became a man, I put away childish things. - 1 Corinthians 13:11
I know I'm seem to be straying from the original premise involving economics and markets. But we're still in the origin story chapter, and we can't just skip ahead.
To be effective and live with purpose, we as humans are frequently called upon to identify the true source of our life's myriad quandaries. It then becomes incumbent upon each of us to solve those problems ourselves. We cannot and should not rely on the government, nor the companies with which we exchange money for time, nor our families, and not strangers on the Internet. If CNN or Fox News is the outrage drug you feel the need to consume each day to fill fulfilled, then how you feel about the source of your hostility is your problem, likely a projection of your own insecurities that will continue to exacerbate your own failures in life. Or at least that's what a fortune cookie told me last night.
I'm certain that if CNN employees knew how much little time they had left (as the company, not life), they would regret not focusing on more important things. But I guess that's really the story of America 2022. We simply have too much money, comfort and free time. Hence the concepts of social justice and climate activism.
But in all seriousness, if you fell for the Trump Russian Collusion hoax or believe President Joe Biden is the actual evil mastermind destroying our country, then you're being played. If a guy who thinks America is composed of 54 states is running the show, I would suggest you really haven't thought this though. And that's not me saying that, it's the universe, channeling me through this blog. I'm just the conduit calling out the stupid in all of us with nothing to lose.
My point is that the general anxiety we are all experiencing a.) is real and b.) represents the apogee of a much larger existential arc that's been cresting for many years, even prior to the COVID pandemic. Many attribute our current economic malaise to the inevitable - albeit delayed - consequences of government shutdowns and the economic dislocations within a country floating adrift due to several very ill-fated decisions on behalf of our political and corporate leaders. Others prefer to assign primary culpability to the acceleration of technology and social media. Some blame Putin or some other boogeyman, usually white and usually male since they're the only demographic you can legally disparage and discriminate against in modern times. And also because they're the ones with too much testosterone; ergo the demographic typically inflicting the majority of the mischief on the greater populace.
"The bottom line is markets, and the factors that influence them, are full of idiots. They range from politicians making fundamental mistakes, fund managers dramatically mispricing risks, central bankers studiously miscalculating economic shifts, company boards focusing on all the wrong things, right the way down to investors who really did believe what the Reddit Boards told them. It’s a skill to listen. Its even more skillful to question." - Bill Blain, Morning Porridge
I observe far too many Americans choosing to blame the "other" half of the country that disagrees with them on one issue or another. You see it at the store. You see it on television. You see it at the polls. We are a country deeply divided. Diversity is not a strength when you can't even agree on the nature of reality. And everyone knows exactly whom I'm referring to, both those nodding right now as well as those silently fuming. Your reaction is your self-indictment.
I can make a pretty compelling argument that the Western developed world was suffering from a certified mental health epidemic well in advance of the arrival of the Wuhan Lab virus and Operation Warp Speed vaccine on our shores, but we as a culture chose to ignore this fact, because we lack either the collective intelligence or ethics (or both) to properly recognize it, identify the root cause and work toward a solution. We're not exactly a culture that's great at tackling serious problems proactively; we seem to prefer to ignore them until it's too late and remain reactive.
America prefers to fight symptoms, which are far more profitable to corporate America. This is why 70% of Americans take at least one prescription drug (up 15% since 2019) and America consumes 75% of the world's drugs, despite representing only 5% of the world's population. And we're worried about Ukraine and the climate. We are led by very, very stupid people.
Perhaps a country of psychologically distressed citizens too focused on their own self-interests or deficient in both wisdom and character conveys benefits too attractive to ignore for a subset of powerful political, ideological or corporate interests that would rather see our country and it's people be engaged in a weakened, confused and dependent state.
That being said, it would be hard to argue that our current condition has not exacerbated exponentially in the wake of the COVID pandemic: hundreds of thousands of Americans dead; small businesses and middle-class livelihoods decimated or on life-support; schools closed and our children's lives destroyed based on faulty 'science' spouted by politicians, liberal arts majors and graduate 'soft' degree holders; and a feeling by many of helplessness and fear about what might come next. You see it on the news and in the studies, but I see it up close and in living color every day in my office.
Someday I suspect individuals will be held accountable for their support of school closures. Because everyone knew. But that day is not today.
In summary: yes, the world has gone insane. Obviously and of course. But what kind of insanity is this? And how does it relate to how much money we've all 'lost' in the market in the past two years?
We'll get to that over the next couple
hours posts in this series. For now, I shall really twist the proverbial knife (my greatest life skill) by introducing my thesis in a short, popular, random (and quite controversial) recent post titled Requiem for a Correction. I recommend a detour there before continuing further on this topic.
Across the many dozens of intimate personal interactions I engage in daily, I have yet to encounter even one client in the past two years who is even remotely comfortable with the current direction of the country, the leadership, the economy and the markets. At
all times- depending on one's exposure to the news- it can feel like our society is spinning out of control, the pace is accelerating and the entire experience has become massively disorienting, if not overwhelming. And that's by design.
To compound matters, many have been led to believe that our mental health problems are the result of a singularity: one man, one political party or some other sole 'boogeyman' entity. I recognize that this is the easier intellectual route to travel - and therefore the one most popular today - with the average American, who was educated in a government facility, possesses limited cognitive abilities, still consumes their news from a television (which by definition should disqualify one from giving an opinion on politics out loud, or frankly voting) and have been raised and conditioned by soundbites, tweets and inane online commentary for so long they don't even remember a time that was any different. (And that was even before the smartphone.)
I get it. It's hard not to look at George Soros, point to his meddling in local politics like a Scooby Doo villain and not ask God why he still walks the earth a free man. Or look at the last four presidential candidates and not question how these people escaped the nursing home. It's not unusual nor unprecedented for humans to fall for or engage in this type of delusion. Societies throughout history have always required a worthy villain, enemy or opponent - USSR, Ho Chi Minh, Fidel Castro, Darth Vader, Andre the Giant, the Dallas Cowboys... And if an enemy is not easily identified, then one will ALWAYS be provided for us. Usually by a media that traffics in emotion and subterfuge as their primary business model. And we slurp it down every single time.
However, targeting of a single person, entity or idea that we don't like for life's problems often only satisfies a compulsion to avoid stressful consideration of complexity and nuance. It also prevents self-accountability or identification of our own problems or agitators inside our own walls. It can strip us of our agency because if our personal problems are the result of something or someone else, then we're absolved from having to solve them ourselves. Hence the past sixty years of race and gender relations.
Take for example, Pete Buttigieg. Love him or hate him, it's 2023 and he is still complaining that our roads are racist. Out loud. While he ascends to the position of worst Transportation Secretary in our lifetimes. Yes, the man who literally bought two babies because he knew it was a prerequisite to be elected President of the United States, still has a job. His message resonates because Americans cannot exist without an enemy.
Anger can be a potent emotion to foster in another because it helps dehumanize and resentment usually injures the aggrieved most. Which is the state most desirable to the elite, and therefore increasingly prevalent in American households with a single parent or two working parents.
As I wrote and predicted in early 2020 (and conceived in the aftermath of the 2016 election) - and Doris has had to suffer through most mornings for the past two years... and which many Americans are only now starting to discover - for most Americans, their real mental struggle isn't actually with someone or something external, but with something inside themselves. It seems the minute they think someone else is their problem, my job is to inform them that they are their own problem. They've been tricked. And that's a painful pill for anyone to swallow, especially for those who have been yoked to comforting lies or ideology from their parents, the school system and/ or the government. Many will never disconnect from the matrix to understand or see this, and will continue to hold on to distorted, counter-factual and counter-productive beliefs until well past the point they no longer serve them. Even when a President has departed office years ago, he will still be blamed many years later for the sins of his predecessor.
Many Americans are only now starting to discover that their real mental struggle isn't actually with someone or something external, but with something inside themselves.
South American Prosperity
I'll give an example to bring the point home. Few people I ask are familiar with Venezuela's descent from wealthiest country in South America at the dawn of the 21st century to third-world status today. I traveled extensively in Latin America during that period and the aspect I remembered most vividly about the wealthy Venezuelans I encountered was their arrogance. The price of petroleum was quite high back then and the country derived incredible financial and national benefit from its domestic production.
That is until they didn't. The evolution of a socialist economy, and the expulsion of the evil "gringo" and his evil Western corporations, were but two of the early missteps by their leadership and a population that thought they could redefine economic reality on their own terms. That didn't end well, because it never does. (Unless you control the global reserve currency, which they did not.) Today, most of Venezuela is a literal hellscape where middle-class people that look just like you and me dumpster-dive for scraps of food and plot their escape to neighboring countries or- increasingly, the United States. Milton Friedman rolls over in his grave and I personally believe any college econ professor should be forced to leave their ivory towers to teach their classes remotely from Caracas at least once in their career.
“I smell it and if it smells good, then I take it home,” said Tony, who declined to disclose his last name because he does not want his wife and four children to know how he has been putting food on their table for more than a year. - Reuters, March 1, 2019
When I reflect back on my travels through that beautiful continent, I also witnessed the massive social delusion as Venezuelan society began to slowly implode. Even as the cost of fuel rose, small businesses were destroyed, stores shelves emptied, prices skyrocketed, and police reform led to mass criminality - yes, I'm aware this sounds vaguely familiar but I'm still talking about early 2000s Venezuela!- assets like housing and stocks were going up and staying UP in price, but the value of their currency was going DOWN faster. Inflation raged. Like our real estate market, residential home prices weren't so much increasing as much as the CURRENCY (which is not money) used to buy them (bolíva) was decreasing in value, a key distinction that most Americans who only took high school economics miss today.
This phenomenon was originally popularized as 'a crack up boom' by Ludwig Van Mises, a character certainly familiar to anyone who has ever opined about capitalism or socialism online or to other people out loud (LOL, I wish!) The crack up boom is a interesting economic framework from which to contemplate our current state of affairs in the United States, for anyone who has ever wanted to sound smart but lacked the confidence to do so. Or anyone who thinks their home is more valuable than it was in 2020 just because it takes more US dollars to buy it (hint: its price is higher but its value is lower. And if you can't understand that, you are at grave risk.) American homeowners today mistakenly assume that we're getting richer because houses are worth more dollars than we paid for them. That's because we're stupid. Your home is actually worth less than it was five years ago. And if you don't understand that, call me. If dollars are losing 10-15% YOY, anything else you own that is not on a similar trajectory is actually losing value. And that is by design.
I know this will sound completely foreign to all of us brilliant Americans, but up until the the party ended, Socialist Venezuelan was still blaming entities the state media told them to blame (mostly big business and the evil United States). They still believed in the power of their own government apparatus (welfare) to save them. Following historical precedent, they then transitioned into the common late-stage but predictable scapegoating of individuals ("they just didn't implement it right"), when it was really their own retarded narrative and misunderstanding of people and economics that was the true culprit.
Socialism and communism cannot - and indeed have never- succeeded, not because they were never implemented correctly, but because they cannot be implemented correctly. Their inherent structure dooms them to death, like a white dwarf, but on a much more accelerated time horizon. Also because it's attracts additional retarded people in a self-perpetuating loop, like we experience in the United States today. (I mean retarded in the clinical sense, of course. That absolves me of critique from the cancel mob.)
Yeah, it's gonna be that kind of blog post- snowflakes and the easily triggered should bail out now. I'm speaking in GenX terms here, and when I referenced 'scorched earth' in the introduction, that wasn't hyperbole. It was the article byline.
I introduce Venezuela's decline early because it imparts a very powerful analog to our current financial market predicament, and spotlights the need for a different roadmap on how to break free of our current economic trajectory, and ultimately benefit financially (Spoiler alert: I have found that one should behave financially in the opposite way to anything that a.) has been tried before but b.) has always failed 100% of the time in the past- socialism, communism, fascism, etc.) Capitalism eventually fails as well, but the timeline is exponentially greater and often does so specifically because it devolves into a precursor to one of the former systems.
The story of Venezuela's rise, decline and eventual collapse is also an appropriate analog to the path our current society has travelled to arrive at our current cultural and economic malaise.
The Dark Triad
A theme that I consistently hear this year from clients pervades across both sexes, most political leanings and all socioeconomic strata, one that seems to weigh heavily on all but the most obtuse or proactively disconnected. Intense and deep-rooted angst has become the prevailing je ne sais quoi of the Western World (and beyond), the source of a cultural affliction that seems to be infecting virtually every aspect of our society and finances. In my estimation, a key component of this disquietude involves control (which is closely associated with choice), specifically the belief that we can maintain command over all aspects of our daily existence. Indeed, I can acknowledge that I've witnessed this fallacy throughout my twenty-plus years in financial services, and even in myself.
You see, if psychology is the concrete foundation of our modern existential predicament, and Mass Formation Psychosis the rebar, then control represents the edifice from which we build the structure of our life's narrative. While it's largely intangible, a feeling of control is beneficial because it allows us to go out into the world with a degree of self-assurance that we will come back alive, and even thrive while we're at it. We all desperately want to believe that we possess full autonomy over our own lives, our environment and our future. Most of the time, this is an easy illusion to maintain because we in the developed world live fairly safe and uneventful lives, enjoying unmatched levels of convenience and luxury. Control is certainly a blessing but in striving for dominion over one's circumstances, I observe that far too many people have come to believe they are their own God, especially non-believers. It's the foundation of our cultural self-absorption, manifesting in such arenas as transgenderism and climate change activism.
Of course, no one I know would articulate their condition as such and most people lack that level of consciousness even if they could. But this appears to be the consequence of a culture with collective tendencies trending towards the Dark Triad of narcissism, Machiavellianism, and psychopathy. This toxic combination is reinforced everywhere we look today- on our televisions, our smartphones, social media, driving a car in Dallas... and in so many of the hollow, transactional and meaningless interactions with others.
Modern culture appears to be spiritually adrift in a sea of egocentricity. I interpret this as primarily self-absorption manifesting as a glaring and increasing lack of societal altruism. Quite simply, most people have their head way too far up their own (ear), and I suspect you've noticed this as well. As a result, those rare experiences that inform or remind us of how little we actually do control in our own lives can often feel like a violation of both the natural order and our profound sense of self.
For many, that explains our own reactions when stock markets go down and we observe wealth seemingly evaporate. It feels like a violation of (our) laws of finance, or how we think they should behave. This is especially true for younger generations that's been told their entire lives how special they are, while being simultaneously and perpetually bailed out and protected from life's ugly dark side. Consequentially, during this current market correction, hard-earned savings disappearing overnight feels like gravity failing. They struggle to understand, cope and move forward. They shatter. They rage. They Tweet to their 90 followers. And that's what's going on right now in all financial markets- from stocks to crypto to (soon to be) real estate.
The truth is that control is largely an illusion that we desperately cling to, one that has been gradually and carefully cultivated through a lifetime of conditioning and aided by our advanced technological and affluent society. We are intoxicated by the belief that our perceptions are reality, when in fact most are just false (but comforting) representations, like filters on Instagram and Tinder.
My observation - both personal and professional (but definitely not educated!) - is that the full autonomy and agency bestowed on us by our sense of control may actually produce a chemical-like effect of well-being and ease that is now being harnessed and manipulated by those entities that would benefit most - namely some of the most powerful pillars of modern life like our government, corporations, churches and community organizations.
The truth is that control is largely an illusion that we desperately cling to, one that has been gradually and carefully cultivated through a lifetime of conditioning and aided by our advanced technological and affluent society. We are intoxicated by the belief that our perceptions are reality, when in fact most are actually false (but comforting) representations.
For instance, when cosmetic and healthcare companies want us to feel insecure about our bodies, they introduce 'solutions' seemingly within our control (for the cost of a few dollars). This includes hair color, eye liner, facial creams, fillers, Botox, TRT, gastric bypass surgery, breast augmentation and other panaceas that lead us to believe we can control aging. We are quick to embrace them, yet how few among us are willing to fully recognize and tackle the toxicity in our own diets, drinking water, cities, physical activities and sleep- all clearly more effective long-term solutions- because frankly, where's the money in that?
Mega-corporations motivate us to buy their products by presenting images in commercials, ads and social media posts that offer up that one product or service we've been missing to achieve the elusive happiness that we all seek. When governments want to consolidate more power, acquire more control and neuter personal liberties, they escalate or even manufacture fear - usually through contrived "wars" on communism, drugs, poverty, disease, terror, climate change, health care costs, Russia, etc.
Governments throughout history always coordinate with their propaganda arms in controlled media outlets to saturate the zeitgeist with buzzwords, bogeymen and dire media coverage that drive and manipulate the most malleable minds that were educated in government buildings for eight hours a day under their curriculum and influence. They sometimes even subjugate entire racial/gender demographics into the benevolent arms of group think, which does far more to enslave than liberate. But as we've seen - and I will discuss in depth below - those aren't arms, baby.
"Choice is an illusion created between those with power and those without" – Merovingian (The Matrix Reloaded)
In a recent blog post, I attempt to explain how control and cognitive dissonance can collide with markets in sometimes unpredictable and often adverse ways to sabotage our financial security.
Unfortunately, another problem arises when we're misled by disinformation to believe obvious untruths. A good example of this is observable with the stock market, which has averaged about 8-10% long-term and has been thus far the greatest wealth-generating device in the history of the world, but is sold to most of us as complex and risky. Despite crushing all other asset classes including real estate, I suspect that's why only about half of Americans even participate in the stock market at all.
But this is one perception of many that doesn't seem to hold up to closer scrutiny. While markets can certainly behave erratically and appear somewhat risky in the short-term (< 5-10 years), investors in many financial instruments need to have long-term time horizons (think 3-5 years minimum), understanding of financial concepts, historical context of markets, suitable risk tolerance and sufficient outside capital to avoid altering their holdings if and when they lose value for sustained periods of time (roughly every 5-10 years). In my experience, if they can achieve all of that, then true market risk often dissipates. I would argue - with plenty of evidence- that the risk of not participating in the financial markets is the riskiest bet of all.
And thank God markets are risky, because can you imagine if the stock market only went up and never down? Then everyone - even the young, entitled, reckless and the stupid - would be doing it, and all the time. What would happen if (hypothetically, of course..) the investing population was misled to believe in a perpetually rising stock market with no risk? There would also be no fear, of course, which would lead to increasingly larger and wilder speculation. I know, impossible to comprehend, right?!?!
On one hand, we might all work like a boss to accumulate enough scratch as possible and put it into the market to grow nonstop. Many Americans would stop overspending and over-financing everything they make (and then some) for consumer purchases that they don't really need - like granite countertops, the newest smartphones, self-driving cars, and anything Apple - in order to impress people they don't even know or like. Everyone would be successful, and we would all come together each tax season to celebrate our shared bounty with the beloved IRS, give thanks to our politicians for their generosity in prudently spending our money, hold hands and sing kumbaya. Local DC resident Chief Senator Elizabeth Warren could read us recipes from her Pow Wow Chow Cookbook and lead us in Cherokee songs. It would be a gay old time, indeed.
Admit it. Right now, your brain is saying, "I don't have time to read this tripe," but your body says, "Oh wow, he's about to go off the rails. He thinks he can just say whatever he wants... like it's 2015... Dude's committing professional suicide... It's screenshot time."
Compounding the inherent risk embedded within the fluctuating price of stock certificates, in 2022 all investors (and advisors) rediscovered that the investing community is prone to temporary and unpredictable bouts of irrational and illogical behavior, and the market is not as easy to tame as we've been led to believe. Before the modern Federal Reserve adopted their current mandate and became much more "active" (around the turn of the 21st century) the stock market would go down in value (or flat) fairly frequently... like approximately every 7-8 years (1981, 87, 1990-91, 94, 2000-02, 08, 11, 15... you get the idea...) The new Fed has recently and successfully forestalled much in the way of major pain in the stock market since 2009, so we've really been "in extra innings" the last few years of gradually rising markets. Some might argue we were due for a pull back. Trees don't grow to the sky, ya' know...
But man, does this market below really seem that risky to you? Are bell curves really something to be feared? Or expected?
I recognize that history and facts don't matter to a lot of people these days. Some even feel threatened by facts.... But I go on record as admitting that I LOVE facts, and I want you to love them, too!
Make no mistake, the federal government, the Federal Reserve (head of the banking cartel) and Wall Street are very invested in convincing Americans that investing is easy to understand, fun to participate in, predictable at all times and very lucrative for those involved. It's incumbent on their survival for investors to believe that all other participants are just like you and me- logical, rational, patient, funny, and devilishly good-looking, etc. It's also helpful if you perceive the other players to be cold, calculating and robotic in their behavior, know the exact price of all assets correctly and never misbehave or overreact.
Sadly, that's not how it works about most of the time. That's not how any of this works.
Furthermore, we may want to believe our elected politicians can control Earth's weather, consumer preferences, health and beauty ideals and equality of outcome- indeed many people raised in dysfunctional homes grow up believing that exact fantasy- but our leaders increasingly do a rather crummy job of letting the free market operate. They want you to believe inflation is an uncontrollable act of nature, while the weather is a controllable act of mankind, when it's exactly the other way around. Personally, I wouldn't let my own Congressman in my home and would incarcerate most of them if I could. Yet, we continue electing them year after year. And we get the politicians we deserve.
People making their own decisions about their own lives is anathema to most Americans and terrifies them. They would rather have safety and convenience than liberty. So they allow our leaders to intervene in what were once free markets. And this has led to a level of a level of investor complacency over the past 13 years (since the Great Financial Crisis 2008-2009) that has lulled more than a few investors into believing that the stock market is universally fair, can only go up, dips in value just for their benefit and only exists to cherish and support them. Like a Snuggie for your money.
They want you to believe inflation is an uncontrollable act of nature, while the weather is a controllable act of mankind.
The truth is that - like the real world- markets can be merciless. The vast majority of the time, they are calm and predictable. And they usually do go up. But every few years, they deviate from the norm and (gasp!) go down or sideways. Believe you-me, it's a real scandal. Depending on the length of time since the last market disruption, the volatility can unsettle even experienced and resilient investors if they perceive it to be beyond their comfort zone or subsist for longer than they feel is appropriate. Normally this happens every 7-8 years, but on rare occasions the Fed can engineer a warm and safe 'economic summer' for 13 years in a row, like 2009-2020. Like the Green New Deal, the idea sounds great in theory. But in reality, the implementation is actually very bad. And the reasons should be obvious to anyone living in Texas. When we go without tough winters for a few years, the one that eventually arrives has outsized impact and catches many of us off-guard. Without a chance for fault lines to blow off steam occasionally, we set ourselves up for The Big One every so often.
Newer investors are often famous for losing faith early on when markets drop and investors approaching retirement are also prone to panic-selling because they think they need it all safe and protected on the exact day they retire. Which is a bizarre conclusion if you think about it. If a decrease in market valuations persists long enough, especially if there is a compelling narrative about why the market is down and might stay down forever- say, for instance, if one were to believe that our leaders are the complete morons that we were always warned they would be - then our old friend, cognitive dissonance, can rear it's ugly head and sabotage even the smartest investors.
2024 is gonna' be fun
“Let me tell you something you already know. The world ain't all sunshine and rainbows. It's a very mean and nasty place, and I don't care how tough you are, it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life. But it ain't about how hard you hit. It's about how hard you can get hit and keep moving forward; how much you can take and keep moving forward. That's how winning is done! Now, if you know what you're worth, then go out and get what you're worth. But you gotta' be willing to take the hits, and not point fingers saying you ain't where you wanna be because of him, or her, or anybody. Cowards do that and that ain't you. You're better than that!.”
― Sylvester Stallone, Rocky Balboa
Habits of Success
Client frustration resonates with me because the truth is that doing something - anything - to protect assets is one thought that rarely leaves my mind. I'm
superhuman of course, Type-A and fairly proactive, but even I'm susceptible to the same temptations with my personal investments as my clients. When I watch years of my own savings evaporate in mere months, I feel the same pain, experience all the regrets and lament all the "woulda/ shoulda/ coulda's" with the money that is (technically and temporarily) gone.
It always feels like a grave injustice has been committed because I did the 'right thing' by saving my disposable income instead of spending it (like most of the populace), only to find myself worse off than if I hadn't delayed gratification at all and simply blown it on something pleasurable. Like Nutella. At least I'd have the memories. And only weirdos look back fondly on the actual act of saving money.
Perhaps you can relate to those feelings as well. Perhaps you're also feeling a little foolish about past investing following this recent market sell-off. Fortunately, such regrets are always fleeting to me. Brief, unconscious regressions back to a time when I was a less experienced investor, when I simply lacked enough repetitions (i.e. mistakes, failures and losses) necessary to understand them for what they are, and achieve mastery in the investing game.
I will let you in on a little secret: I rarely look at my own investment account statements anymore (quarterly at most, semi-annually on average..) because a.) I kinda' don't care, and b.) I understand my own investor temperament and the need to avoid putting myself in compromising situations that might sabotage my long-term financial success. When I marry an investment, it's for life. So when it misbehaves, I let it have it's little moment. I don't throw a tantrum and head for the exits like Gisele Bündchen. I made a promise, and that still means something to some of us.
This is similar to my strategy with other temptations- like Las Vegas, cigarettes, Dunkin' Donuts and wild women. I know if I can get home from the grocery store without the cookies and chocolate in the grocery bag (the reusable cloth ones, of course. Because I'm a citizen of the world and want to be on the right side of history), then I know I've won 90% of the battle. And thus it is with my investments. 'Cuz I know who I am.
When I work late to finish a new financial plan, or go to the gym instead of socializing with friends or watching television, I don't experience this same kind of regret as investment losses because I know there will be a guaranteed payoff at the end... and usually soon- gaining a new client, saving a dollar, losing a pound, etc. The positive result I receive is always a consequence of the effort, it's a universal constant. But when I observe my account balances drop on paper, even though I know it's inherently built into the free market, capitalistic process (markets can't always go up, they have to go down occasionally)- the losses somehow trigger a more painful neurological experience.
With "my crystal ball in the shop," I never know for sure how deep or how long that market corrections will continue. I think human brains process this kind of sacrifice with investing uniquely because- although we intellectually know and accept that our portfolios cannot always go up and will eventually recover and go on to new highs, as they always have - emotional demons still whisper into our minds, "What if it doesn't this time?" "What if this is the big one?" "What if this jackass, [insert boogeyman] is the guy that finally drives America over the proverbial financial cliff?"
In addition to 1.) avoiding account statements like chocolate cake, I've also 2.) spent most of the 21st century carefully "training my brain" to consider most of my long-term assets as not real money nor something I will ever access. That way, it doesn't hurt as much when it loses value. I see this same ethos in some of my best clients as well. Today, anything I don't hold in bank accounts might as well be Monopoly Money or some uncertain future payout (like the corrupt Illinois lottery) to me.
I recognize that for some that mentality may seem odd, irrational or simply a privilege of my young(er) age. However, a.) that doesn't preclude it from being the correct approach and b.) I have identified these as two proactive mental efforts that I can control that also have produced successful outcomes in the past. They may not in the future, but so far, the markets - and my accounts - have reliably risen over any sufficient length of time. (I suspect this is where I'm required to disclose that "Past Performance Is No Guarantee of Future Results. Consult your financial advisor for more information. Please don't sue me.")
I know if I don't look at my accounts and don't feel the money, I'm less tempted to do dumb things with (or towards) it. An investor gains a competitive advantage if they can internalize (or even pretend) that "it's only money" while also recognizing that if the US stock market were to never recover from a major correction, then that likely means that all of America's largest companies went belly-up simultaneously. Which would mean Americans stopped buying homes, vehicles, smartphones, computers, MSM lies, etc. Which could only occur if we stopped using any form of money. That would seem to me to be a very precarious situation preceded by far greater calamities, like a nuclear holocaust, zombie apocalypse, alien invasion (followed by the inevitable enslavement and uncomfortable probes), you get the idea...
In those types of highly-improbable scenarios, or even where just a few companies dissolved suddenly, and Americans lacked goods and services to consume, then there would likely be no more economy, the US dollar would no longer have value backed by a military and taxing authority, and retirement accounts might be the last thing on most Americans minds. Most of us probably wouldn't be alive. Especially me, 'cuz I ain't going up into no alien spaceship without a fight. I know what happens up there.
So there's that.
It's dark but it's true. If it all goes to (pot), then what does it matter? But if it doesn't, then what do you have to lose by waiting 12-24 months for an economic recovery? I've waited two years (and counting) for a freakin' new car... you don't see me selling my truck and yelling at the dealership. I've waited even longer for a new home. I've waited decades to be hugged by my father. Do I abandon all hope?? Heck, no! I just go on with my kickass life and control the things I can control. Like the minds of my readers. Muahahahahaha!
I acknowledge all that can seem a wee bit morbid and nihilistic but a.) have you met me before?.. and b.) sometimes it's my job to wake some people (the heck) up so we can really work through their deepest (sometimes irrational) fears. For instance, I actually get a, "What if it all fails?" type-question at least once a week. Sometimes every day. Usually from very smart people. I typically respond by carefully navigating the client through a poor man's version of the Socratic method - i.e. questions and answers about their unease in regards to worst-case scenarios - before transitioning into important topics like goals and objectives.
Inevitably, many come to realize the inherent and impractical conflicts and contradications in their worst-case narrative. Like how worried were residents of New Orleans about their Roth IRAs during Hurricane Katrina? I mostly remember people floating down city streets in small boats looking for water and bullets. The groceries stores were empty and boarded up, even the vegetables were already stolen by then (which is rare in New Orleans). The entire city was underwater. Refugees were using the Superdome as a giant toilet. Kanye West proclaimed to America that George Bush Jr. hated black people. A significant portion of those Cajuns fled to Texas, were shocked that people there didn't live like animals and as a result never returned home to Louisiana. Harris County and Texas schools have never been the same.
My point is that worrying about a collapse of the financial system is kinda' ridiculous, right?
Hardly manipulative, I instead perceive my Socratic script (of love, just for the record) as a reliable method for exploring where the true sources of underlying anxiety really arise from in order to determine if our perceptions, expectations and concerns are truly warranted. Many times they're not. Often we collectively coalesce around the idea that worrying about these scenarios is a waste time, a resource that could be used doing something more productive. Like giving me more money to invest. Or buying me gifts. Or voting for me as Top Financial Advisor in Kerr County again.
The point is that I would never manipulate my clients. You're too smart and attractive. Patient and forgiving. And oh so clever.
If I had to resurrect a unifying theme from this whole diatribe from several chapters (and hours of your life) ago, it's that protecting client wealth is always on my mind, it really is my life mission. So adjusting portfolio asset allocations in response to market dynamics seems on the surface to be a logical manifestation of that covenant. However, I'm aware from history - and my own professional experience - that the compulsion to act can be dangerously quixotic. My bulletproof mentality is simply an obscure combination of a unique financial background mixed in with some above-average self-discipline and mental conditioning (with some delusion thrown in) that prevents me from acting on almost many of my market impulses. For me or my clients.
I realize the truth that the time to act is almost always before the stimulus to act appears. That is, when it makes the least sense to do so because typically the market is up and/or rising. That runs contrary to the majority of our hardwiring and the human experience, which is one reason I suspect why humans struggle so much with financial markets, especially during their infrequent drops. Our ancient and magnificent hind-brains are not designed for a stock market that's only a few hundred years old. As a result, we have little to no historical or biological framework from which to approach it effectively.
Once the stimulus appears (for instance, a substantial market adjustment or a shock), it's usually too late and ill-advised to do much of anything- assuming your portfolio strategy checks all the traditional boxes of successful investing, namely: buy quality, diversify and hold on (or even increase) your positions when markets go "on sale." Once a market enters a true market drop like this one - especially if it's steep and/or without an obvious catalyst- then the most productive action is often to decide when and how much more to buy of your existing positions (not sell). Indeed, one of my most important responsibilities is to discourage clients when I feel that they may be acting on their own emotional impulses - and against their own best interest- during those (typically and relatively) brief windows of time when market go down or sideways.
The time to act is almost always before the stimulus to act appears. That is, when it makes the least sense to do so because typically the market is up and/or rising. That runs contrary to the majority of our hardwiring and the human experience, which is one reason I suspect that humans struggle so much with financial markets, especially during its infrequent drops.
If all that fancy talk comes off as somewhat trite and glib, a.) good, that's pretty much my schtick these days, and b.) I wrote a recent post called Some Historical Perspective with some other (colorful!) reasons why doing something is rarely the best reaction to market volatility...
Some people think I'm overly critical of government. These people are called sheep. They are the problem with America and their perceived problems are subordinate to their mental dysfunction.
In the absence of scant positive news anywhere at the moment, investors today are understandably on edge. We are becoming increasingly rattled by the ineptitude of our leaders- and our society as a whole- to lean in to our challenges and make the difficult, courageous decisions that have historically moved the country forward in past crises. It seems almost inconceivable to most of us that any of our 21st century US Presidential or Congressional candidates - on either side of the aisle - were our very best Americans for the job. Like, in a country of almost 350 million people, Trump vs. Biden?? Cruz vs. O'Rourke? Really??
If you're like me, you can think of 2-3 family members that are infinitely more qualified than anyone representing you in federal office today. I wouldn't let any President after Reagan into my house, and for all but the most ideologically damaged, I think they would agree with me. Obama would be uncomfortable with your security alarm, Trump might hit on your sister and Biden would be looking for the nearest bathroom or basement. Hillary would be in the garage smashing your computer hard drive and Romney would be spreading two-faced gossip and lies in the corner. As a result, many of are left wondering, "Where have all the real men gone?" I focus on the men not to be misogynistic but because I think we all know where our female federal politicians have gone...
I suspect that if we're honest then we all know the answer to that question if we apply even a modicum of effort. It's not an accident that the elected leaders of virtually every country in the Western developed world today are less intelligent, masculine, innovative or courageous than their immediate predecessors and in a different league to those of the past century. If you find yourself struggling to distinguish between Macron and Trudeau, or LaGarde and von der Leyen, then you're not alone, and that's by design.
In our country, it's important to recognize that up until now, each successive President for the past 40 years has been largely inferior to- and certainly less effective than - all of the men that came before them. And that's not an accident nor coincidental, either. Of course, this is true for our 'leaders' in all areas of government, not the least being the two other branches of the federal government as well. [Insert Racheal Levine jokes here.] All three branches are in tangible decline, because as Joseph de Maistre opined, we always "get the leaders we deserve." Last I checked, we're still a Republic.
“The government you elect is the government you deserve.”― Thomas Jefferson
In addition to failures at the highest levels of politics, COVID served to uncover and exacerbate tremendous rot and ineptitude within our largest public institutions (from federal law enforcement and local government to education and health care) that had been previously swept under the rug or ignored; as the burdens and vulnerabilities of a large, undisciplined and unconstrained empire have grown exponentially. A fiat currency will tend to produce such outcomes.
These specific conditions have certainly sustained and even accelerated since the Great Financial Crisis of 2008-2009 (i.e. the Fourth Turning). While I have no doubt that we can (and will) rise to the occasion when the time calls for it - and sooner than many people think- the truth is that Americans, as well as our economy and markets, are currently at a historic inflection point in 2023. It sucks that we can't jump directly to the next phase of American exceptionalism without some pain, but alas we seemed destined to hobble through our own internal crises to get there, like most humans do in their personal lives (unless you can cite major successes in your own life that were easy and without some degree of sacrifice and struggle).
America faces myriad obstacles that will only respond to resolutions that conform to the founding principles of the country while still being able to accommodate new paradigms as well as a majority of the dwindling sane people left in our society. It's also clear that group does NOT include President's Biden's ruling cabinet of puppeteers (Susan Rice, former President Obama, WEF, Davos, et al) nor former President Trump and his rotating staff of lackeys and charlatans. Is it just me, or did reality television die when a man who became famous for a television show developed around his acumen for selecting great people was exposed for his complete ineptitude with surrounding himself personally or professionally with folks with sub room-temperature IQ's? Remember Omarosa?
You know when you're nostalgic for a White House run by grownup neocons like Al Gore, Karl Rove and Dick Cheney, the country has clearly jumped the shark.
Like humans, generational societal "pivots" rarely manifest during good times (when so many are 'fat and happy' and willing to overlook and ignore important systemic problems). Change usually requires extraordinary conflict and challenges that literally force us to fundamentally rethink how we operate our affairs- politically, socially, professionally and financially. And most important, personally. We're almost there now.
Since it's founding, America has undergone three major pivots - called "turnings" - that upended and reset society: The American Revolution, The Civil War and The Great Depression / WWI-II. They were each roughly 80 years apart by design, because that's the average span of healthy human life and as a result, also how long it takes for the lessons learned by one generation to be fully lost. Of course, American's next Fourth Turning was scheduled to occur on or around 2008, but we somehow dodged that opportunity, for better or for worse.
Or did we?
I am genuinely optimistic for the future, and I see the current chaos as both an opportunity and a much needed wake-up call. However, I also recognize that the bridge from where we are now to where we should be will not be without great sacrifice and loss. Letting go of the anchors we currently cling to in order to embrace a new and better future will be paramount, and that begins (as always) within our own minds and our current perceptions of our world (most of which, as I reported on in Requiem for a Correction, is deeply flawed.)
The George Floyd / BLM riots, the January 6th riots, the debilitation of the Texas Energy Grid for a long weekend, the annual California energy collapse and most natural disasters like Katrina suggest that most Americans are ill-prepared for even a minor deviation from the norm. Perhaps 90% of the young people I know would not last a week without Wi-Fi, much less electricity. As a result, to rise and move forward, we must first awaken from our current cultural stupor, while simultaneously rooting out and improving upon those destructive elements of our society that we've allowed to fester far too long.
“I would tell [investors], don’t watch the market closely.. Investors who buy good companies over time will see results 10, 20 and 30 years down the road. If they’re trying to buy and sell stocks, they’re not going to have very good results. The money is made in investing by owning good companies for long periods of time. That’s what people should do with stocks.”
- Warren Buffett
I know I'm coming out the gate hot with a lot of fancy five-dollar words, high-fluting ideas and charged rhetoric, but don't despair. This post was about our current state of affairs, but I will next lay out a definitive, somewhat offensive (to some), obscenely long (to all) but comprehensive framework for investors to understand how we got here and where we're headed. We will identify the opportunities that abound and discuss how, when and where to take advantage of our current dislocation in modern financial markets.
You thought this article was going to be about which stocks to buy. I understand. And I'm sorry. This isn't the hard-hitting, deep-dive financial analysis of USA Today.
I won't lie. Even my own resolve can become tested in markets like those we've experienced in 2022, as our current market decline admittedly feels distinct from any of those from my previous twenty years in financial services (as they always do.) You see, I gave up more than two decades of my prime years - personal, physical, professional and definitely social- to move from the "fun" mecca of Texas (Austin) to the two wealthiest counties in the state (per capita).
It was an enormous risk, as I knew not a single person and would be rebuilding my practice essentially from the ground up (again.) Over 90% of small businesses in America fail within three years and I would be trying to do it for a second time. I knew survival- much less success- would require long grueling days, nights and weekends serving as steward of the savings of as many households as possible, primarily successful and conservative Baby Boomers. That was my plan from the jump.
I constructed defensive, ultra-conservative portfolios with a focus on principle protection. I changed firms four times in two decades to construct the absolute best business model for modern investors, far superior to my competition at the wirehouses (which includes virtually any investment firm with TV commercials, sports stadiums or online marketing.)
Throughout my journey from W-2 salaried employee advisor to self-employed small business owner starting at $0 income each month to Certified Financial Planner™ and finally to Registered Investment Advisor (RIA), I've faced professional obstacles, deeply personal betrayals and industry upheavals that one can't even imagine, experiences that I'm not even comfortable sharing (which is rare for me!) The journey began by knocking on 125 doors a day in the 100 degree Texas summer heat for four years, just to keep my job at Edward Jones... and then it got harder.
At that first stint, I was on probation my entire tenure, all the while several colleagues (and at least one assistant) actively and explicitly tried to get me terminated for cause, my bosses actively threatened to can me on multiple occasions, and I had to attend remedial sales classes run by peers with inferior skill sets but who had been placed in large existing offices with client levels that would take me a decade to achieve. I look back like an abusive spouse and wonder how and why I stayed so long in such a terrible relationship, just to help investors.
After breaking free to become an independent advisor unbeholden to Wall Street, my M.O. has generally coalesced around conspiring to 'hit singles and doubles' for clients primarily approaching or in their retirement years, always playing it prudent with the understanding that we would likely surrender some market peaks to ensure that we would enjoy greater protection on the downside when markets inevitably corrected. That feels like an awesome business model in 2022, but for the past fourteen years that was frequently at odds with some overly aggressive clients and cost me quite a few accounts. I often wonder where they are now and if they ever reduced risk, knowing they almost certainly did not.
Unfortunately, in the first half of 2022, my safety-first strategy did not work out as expected for my clients, nor for almost anyone else in the world. I know, I know... you have a friend or brother-in-law who piled into energy in 2021 and has made a killing since then. (After a decade in which oil and gas enjoyed -50% losses.)
Ask around. There are very few sectors that were not hemorrhaging in 2022. As in the early stages of most emotion-based market sell-offs like ours, everything is for sale and steep discounts abound. There was not a single sector of the S&P 500 (except for oil and gas) that was not down, and every market index in the world lost more than that - including (and most notably) international stocks, bonds, cash, precious metals and of course, crypto.
The laws of economics seem to no longer apply and everything seems to be falling in value at roughly the same terminal velocity, because indiscriminate selling by novice or uneducated investors (who may or may not distinguish between the merits of their existing holdings), begets more selling and causes a lot of babies to be "thrown out with the bathwater."
It's only when we look back months or even years down the road that we can truly observe periods like today with proper perspective. As Warren Buffett once opined, "In the short run, the market is a voting machine but in the long run it is a weighing machine." If you understand this simple truism, you'll better recognize how market prices can fluctuate so wildly during times of confusion, stress and anxiety. In reality, markets tend to be fairly stable the vast majority of the time, but can be prone to bouts of temporary madness. Kinda' like some of our family members, but let's not go there today.
Behind the scenes, I've been waiting a very long time - since roughly 2009 - for the opportunity to benefit from a defensive strategy that could transition into "offense" during market drops- i.e. replacing some of our conservative positions for cheaper shares of some of the world's best companies, including many that had been trading at absurd valuations for years, thanks in part to the Fed's easy-money, risk-on monetary strategy. Stimulated by a lot of "funny business" (free money, low rates, quantitative easing... all manufactured by the Fed and leading to the massive stock buy-backs that have inflated the market during the past decade), these policy maneuvers all would have been considered inconceivable to previous generations of investors.
As a result, 2021 stock performance left us with arguably the highest premium valuations in modern market history. I felt confident that we were moving toward that elusive and lucrative market correction. So our investment group engaged in some defensive maneuvers late that year, but even those were relatively ineffective against the combined headwinds of inflation, interest rates, oil/war and the supply chain disruptions (what I call "the four horsemen of 2022.")
While I continue to harbor a strong conviction that a window of opportunity may be fast approaching (or may have even started), I also recognize that the prices we're seeing today are already depressed from their highs and may be trading at once-in-a-decade levels. But even I failed to anticipate the full extent of our current (and in my opinion, ridiculous) sell-off in in financial assets. As such, I am uncertain whether we've seen the lowest prices of this correction yet, and frequently doubt that we have. I suspect some of my readers feel the same.
More and more panic-stricken investors, speculators and DIY investors (who thought they had mastered capital markets and that stock trading was an easy game over the past decade) are 'throwing in the towel' and "heading for the exits" as they slowly start to realize that fundamentals still matter, Reddit may not be the most reliable source of investment advice and online stock trading apps might actually be to wealth creation what online social media is to mental health.
Once enough investors begin to 'capitulate' in unison, some experts believe we'll then have a strong argument that a new market bottom is being established and the next bull rally may already be in motion. If you are unfamiliar, capitulation is a term that roughly equates to an environment where nobody wants to own, buy or even talk about any stock at any price. I know this environment very well.
It is at that point that those refusing to sell generally dig in, become numb and literally stop paying attention to the markets or their accounts. Others, however, instead choose to sell out before they 'lose it all.' We haven't seen that mood shift on a broad scale yet in this cycle, but I suspect we could soon. Of course, that's because the Fed has perverted the normal market cycle that provides these lucrative opportunities when the market "goes on sale" (typically occurring every 7-10 years) by protecting us from sustained correction-like losses for the past 13 years. Jerome Powell and his board of governors are in effect, mimicking the parenting styles of Dr. Spock-Boomers and GenX.
Online stock trading apps might actually be to wealth creation what online social media is to mental health.
Unfortunately, this helicopter-parenting style of managing an economy has produced effects on world markets similar to those in American homes: adject failure. I have written extensively on this phenomenon when describing the insurmountable and unconscionable damage we've inflicted on our youngest Americans (and investors) in my wildly off-topic post regarding the fundamental dysfunction of our newest investors, titled A New Generation. It goes hard on these fragile snowflakes and pulls no punches. If someone has to be called out for speaking the truth, far be it for me to sit this one out since I work for myself and can't be cancelled. You could complain, but then you'd have to defend yourself. And that rarely goes well.
I then double down on the our newest investors again in a follow-up hit-piece titled, Muppets on Parade. Trust me, it's both ruthless and hilarious. Even the jokes are painful.
The World's Most Efficient (Legal) Market
In most of my client conversations, I find that few investors - of any age or demographic - ever stop to truly appreciate the seemingly magical ease with which we can transact in securities whenever and wherever we want, or contemplate why someone else would be willing to buy our investments at the price we are selling them.
Anyone who has ever bought or sold a security on an exchange (NYSE, NASDAQ, OTC, etc.) likely considers the contra-party (if they consider it at all) as just some nebulous 'blob' existing in the investing ether, a faceless and benevolent deity that will gladly take your shares or sell them back to you at (roughly) the same price at any hour of any day.. like a Red Box Video kiosk for your wealth. We rarely, if ever, reflect- even for a moment- on whether there is an actual person on the other side of the trade and if they could have more and better information about our investment than we do. Is it...
- An unemployed day-trader sitting at home in his underwear trading options, trying like hell to avoid getting a real job?
- A mom buying shares for her kid's college account on her smartphone at the end of the month?
- A large brokerage house or fund company accumulating shares to fulfill client orders for the day?
- An investment bank who has determined that anyone dumb enough to exchange their shares at that price deserves to be fleeced?
When you think about it, it's humorous that any of us believes that we have more knowledge or perspective on the markets, the economy and the future of both than virtually everyone else in the world, since financial instruments are by default priced at the perfect combined average global opinion of its underlying value. It's as absurd a proposition as say, believing a President, Congressman or government bureaucrat is more qualified to regulate or control [insert any sector of our economy] than hundreds of millions of actual participants in that sector, each with the free will to vote with their pocketbooks and their feet on what is the best path for their lives.
A disturbing proportion- certainly the majority- of Americans gladly exchange their own personal liberty in order to have their lives controlled by masters who will gladly make their decisions for them. For most, it somehow feels safer and preferable than actually living free but having to carry the burden of responsibility of one's own life. If you generally support Social Security, Medicare, pensions, the FDIC and the Justice Department (CIA, FBI, INS, etc.) then you're in that camp (and you're likely extracting more resources than you put in, but that's a very uncomfortable truth for many to admit.) And that's fine.
But recognize that's literally the theme of the classic movie, The Matrix and many American's lives today- an existential dichotomy that fundamentally divides the Divided States of Retardia politically as well.)
"The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it." - Adam Smith, The Wealth Of Nations
So when investors feel compelled to trade their stock shares out of fear or greed, or even based on market timing (versus a more traditional recurring or one-time lump sum purchase or sale), they are in effect communicating their belief that they are right and everyone else is wrong. Unfortunately, most people lack this level of self-awareness and humility, and thus march themselves and their financial future right into the slaughterhouse of an engineered market correction. They play right into the hands of their opponents on Wall Street.
In that moment of selling, the predominant thought is usually, "Thank God I have someone to buy these shares off of me..." instead of raising a red flag and pausing for a moment of serious self-reflection. Which is a challenge, I admit, when your trading platform is a gamified app on your smart phone- like Robinhood, WeBull and E*TRADE. It reminds me of the people who walked away from their (temporarily) upside down homes in 2009, happy to turn them over to Blackrock. Anyone who looks back on that time period realizes how naïve and disastrous that decision would have been and today we judge those people harshly. But if you've ever sold shares out of fear that they might lose more value, then realize that history may look similarly - and disparagingly- upon you. Some of you sold out in 2008 and 2009 and know exactly what this feels like.
I often wonder if a retail investor community that typically transacts in investment shares directly with a machine in their hand or desktop- devoid of intermediaries - has on one hand removed the humanity from the experience (a blessing for market efficiency) at the expense of failing to fully consider whether they have all the information needed (or at least more than the other party), whether the trade is either prudent or necessary, and whether they should instead sleep on the decision first.
Can you imagine walking onto a car lot or auction house and just immediately paying the price on the window sticker? (I'm referring to pre-COVID, of course. After the government shut down car companies and their suppliers - and then when they reopened, pressured those same companies to fire their unvaccinated employees, thus creating some 'unforeseen' supply chain problems... who could have predicted that... now vehicles now go for well over MSRP by default to a lot of people who are not smart. Which is why voluntarily buying a new or used car in 2022 or 2023 should be seen as an act of financial insanity.) Of course, me and my clients would never do that because we all know that the car lots and auction houses are rigged against the public and the first price offered is always the worst price offered. Yet this is exactly how far too many investors now approach modern markets, which sets many up for
slaughter failure... That's why they love Carvana (which is on its way to bankruptcy as we speak.)
This is an important point because a.) I said it and b.) because it has resulted in what I perceive to be a period of massive indiscriminate selling. At times during the last two years, it seemed like all assets were in a state of freefall. Even bonds- a reliable harbor of safety in past corrections- were down almost as much as stocks, and still have lost more in 2022 than in the past 45 years combined. All international markets are down, some by several multiples of that, partially due an ever-rising dollar. (Did you know that China's markets have been down for almost four years?)
US Dollars are being metaphorically lit on fire daily by the multiple rounds of Trump/Biden stimulus and President Biden's "incredible transition" inflation of energy supply destruction, bribery masquerading as child care credits, student loan forgiveness, inflation relief checks... all shameless vote purchase schemes which will bring new levels of pain to all Americans, vastly exceeding their momentary benefit to Millennials/ Zoomers and their worthless 5/6-years of adult daycare certificates masquerading as college graduate degrees.
Today, sitting in cash is the only guaranteed loser of 2023. Moreover, even so-called uncorrelated assets (translation: those expected to move independent of - or even contrary to - the stock market) like commodities, crypto-currency and even real estate funds, have been declining at an even faster pace.
Below is a mutual fund outflow report from the Investment Company Institute (ICI). It shows investors fleeing literally every single category of the stock and bond markets. It almost always acts as a contrarian indicator (which often suggests that when more Americans are flooding into funds, it's time to get out. And vice-versa.) Right now, massive amounts of money are being withdrawn. While no one knows the timing, or whether it's smart to be buying right now, this certainly argues to NOT be selling when everyone else is selling. Indeed, "That's not how this works. That's not how any of this works..."
Not surprisingly, stock valuations are adjusting downward to reflect dimming economic prospects for the remainder of 2022 and into 2023, in what sometimes feels like a self-perpetuating spiral. Very few experts have a credible explanation for exactly what tangible factors are actually causing this preponderance of fear. It's still heavily debated, but I provide some possible causes below.
The resulting drop seems to be manifesting an enormous and unexplainable disconnect between the markets and the actual economy that they're meant to index. Interest rates are rising but still historically low. Supply chains are compromised but improving quickly. Inflation is at a 40-year high but expected to moderate next year, with a government unable to print any more checks (with the notable exception of student loan forgiveness, which is Build Back Better via Executive Order and guaranteed to exacerbate inflation further). The Ukraine aid is also hyper-inflationary but no one in the media wants to talk about that and most Americans don't question where they money is coming from (hint: it's being stolen from their grandchildren's labor, wealth and prosperity. And boy are they gonna' be pissed!)
War looms large in Europe but the most likely scenario is still a peaceful resolution. (The alternative is possible nuclear war, so perhaps I'm simply playing the odds.) No critical sectors, companies or governments have failed, the labor market is incredibly strong (if still dysfunctional) and people are spending their debased money like it's 1999. Which is exactly what you would expect when the value of dollars is losing 1% per month and has been for two years. Maybe you noticed the uptick in paper license plates these days. Paying 10% over full price for a depreciating asset and financing it?... Sign me up!
When I was a kid, paper license plates and fancy cars meant you were somebody or had accomplished something. Now it usually represents just the opposite, the culmination of a series of bad life decisions (just like tattoos). When I see someone driving a new car today, I just feel bad for them. Like they just got a tattoo or face piercing. Like, "Ooh, that's gonna sting for the next two decades..."
So why is virtually every financial markets acting as if we've experienced a sudden shock to the system?
Similar to real estate, we are beginning to see reliable red flags going up that were visible in previous stock market corrections as well, and this dynamic is further exacerbated by declining investor sentiment and emotional selling. I'll go way out on a limb and guess that most of the sellers in today's market are doing so not because of P/E ratios, book valuations, cost of goods sold, EBITDA and 200-day moving averages, but because "my account is down a lot. And it's very stressful. I can't afford to lose this money. It was supposed to pay for my Lambo..." Which I always find to be an interesting response to falling prices. Like, have you ever known someone who sold an asset - home, vehicles or possessions- specifically because it had recently dropped a lot in value?" In what other industry to people purposely take losses voluntarily?
Probably none, because that reaction is absurd and apparently only happens in the stock market, where many people seem to prefer buying high and selling low. They claim they want to be rich, but when prices inevitably fall, instead of moving money into the market they experience a toxic combination of amnesia and trauma (which sounds like my response to my Engineering Calculus exams in college). Instead, they often choose to wait until everything returns to normal (= full price) before feeling comfortable enough to buy back in. In almost any other market, people usually prefer for prices of their assets to go up before selling. In my business, people prefer to pay full price and hate when things go on sale.
To be honest, I've been expecting more hysteria to be stoked by the media- they're usually the first in line to exploit suffering and manipulate public emotion during periods of volatility. However, these days there's nary a mention on the front pages of any news site (check for yourself) or anywhere except buried deep in the business sections of most of the dying legacy outlets. They're too busy running a minute-by-minute chronicle of the Johnny Depp / Amber Heard trial, responding to what Meghan Markle, Duchess of Sussex thinks or debating "what the victory of a Trump-endorsed GOP candidate in Pennsylvania could mean for the end of the republic."
As we've discussed, if you consume news from a source with a (large) city/state/country is in the title, you can guarantee it's on billionaire financial life-support and won't be around for much longer, like cable television or professional sports, which are headed for almost certain extinction. New networks seem to resemble Political Action Committees more than anything and you can tell who they answer to by watching the commercials.
If anyone is still consuming either TV or newspapers post-COVID, I honestly just feel bad for them. Like how bad and how numerous do the lies and abuse have to get before you break up with someone? You're gonna waste your precious nights and weekend sitting around watching overpaid general studies majors that do not like you? Like people who watch the NFL and NBA? Or is your life so empty that you just don't care, as long as it distracts you from Monday?
Regardless, it seems pretty clear why the MSM is choosing to ignore this market decline, and the fact I don't need to tell you why is all the evidence you really need to know at this point. Any news source with three letters is basically equivalent to state-sponsored Pravda. They seemed quite diligent in their reporting during the last two corrections of 2008 and 2020 (weird, right?!?!), so their refusal to acknowledge not only reality, but also the most important financial news in the country - which has immense influence on your present and future- seems ponderous to me.
Maybe they're just that stupid. But I doubt it. It's far more likely that they think we are...
This is Pravda-level propaganda. Do you know anyone that reads the Washington Post? Is it time to call APS on these folks?
We're a country that allows Critical Race Theory in our schools, but still allows students to major in journalism and other liberal arts.
Today's high schools and universities are effectively daycares for young adults. And people borrow money to put their kids in them voluntarily. And let them choose their own majors. It's a mad, mad world.
While we're taking MSM to the proverbial woodshed, we would be remiss if we forgot to spotlight America's most famous economic journalist and Noble-winning economist, Paul Krugman, who finally acknowledged this past summer that he doesn't know anything about economics and is stupider than you are. Fresh off his child pornography crisis that I never saw coming, he now claims to not have foreseen inflation as a potential consequence of increasing the supply of US dollars by 40% in two years.
PROFESSOR Krugman joined a rather prestigious group of progressive imbeciles in that prognostication, including President Biden (or more accurately, his staff) an his predecessor, as well as the current and previous Federal Reserve Chairmen, Jerome Powell and US Treasury Secretary Janet Yellen, respectively. There are others who belong in this very-inclusive club, but they weren't dumb enough to claim as much out loud, like these jokers.
If you think I'm being a bit hyperbolic in my criticisms, behold the people that control our economy...
How could leaders held in such high esteem be so wrong? How could they still be employed? And how we can trade against their incompetence? Don't worry, I go into more depth about this bizarre dereliction of duty in a recent post titled, Play Stupid Games, Win Stupid Prizes. It will help dispel any notions that the media and our leaders have any clue about what they are doing and should be generally ignored. If the pandemic response taught Americans anything, it's that the people in charge are not any smarter than you and me. And we can profit from their stupidity with minimal effort.
A Decline in Confidence
As a result of our mind-numbing federal and statewide malfeasance, almost every sector of the economy seems to be facing new and significant headwinds, and many investors appear to believe that things could get worse before they will get better. The primary drivers are mounting (and shocking) worries about our political leadership (both aisles), the health of the overall economy, shrinking corporate profits, and the prospect of an escalation of the war in Eastern Europe. But make no mistake that the problem is primarily leadership.
This is why the country is in so much trouble. At least one half of the country has an inability to live in reality, an addiction to a destructive delusional fantasy and an inability to properly identify and diagnose problems. And the other don't half don't care. And we all know which half based on your response to this graph.
And yet each year, each administration and each "crisis," Americans voluntarily and enthusiastically relinquish more and more control to a corrupt, bloated government that can't even manage it's own affairs, much less ours.
At this point, the federal government has become little more than a glorified welfare / jobs program, a place increasingly used to hide degenerates and an exploding non-productive class of workers while somehow remaining solvent solely on the backs of the country's dwindling supply of producers. Having dismantled small business (and attempting to cripple it further with inflation), government leadership is just about the only place left where older Americans past retirement age can still find work in this country (besides Walmart). As a result, new opinion polls from the government's own (compromised) surveys from Gallup hint of the ominous conditions that might befall us if a political pivot was not in the works...
How many of these worries do you believe are directly attributable to our political leaders? And how many were created by evil ol' capitalism and free markets? Should a history of employment in the private sector and/or military now be a prerequisite for elected office?
You probably thought my original rhetoric was a bit hyperbolic. If so, you're really not operating in reality and I can help you find the help you need.
So if you are wondering why the stock market is down this year, it's crucial to understand the the foundation of our dilemma consists of:
- ...massive collective angst about our current personal and financial (household) situations,
- ...under the backdrop of greater frustration with our national (federal government and regulators) situation,
- ...as a result of actions performed by leaders that we elected.
All other factors, symptoms and side-effects- including the current decline in "our perceived value of shares of ownership in America's largest corporations" (i.e. stock shares) - spring forth from what is essentially our emotion and perception. And that's a problem.
I expound upon the political backdrop of this current economic malaise in my post titled, Don't Hate the Player, Hate the Game. If you're super-squeamish about politics or proud of who you voted for in 2020, it's probably not for you. But if you truly value a transparent, objective perspective on how much damage our current and past Presidential leadership has inflicted on your personal wealth, I guarantee I will shatter all political golden calves and ensure you never look at our leadership (or me) the same again. By the end, you will absolutely be submitting this blog to law enforcement alerting them to an economic "person of interest." Trust me, I'm already on their list.
In this post, we've explored the current landscape of our cultural, economic and financial environment to help readers understand the truth about the situation we currently found ourselves in, not some curated or manipulated narrative crafted by those with an agenda. My objective is enlightenment, I ask for and expect nothing in return.
You're probably left with an odd taste in your mouth and left wondering how I can do - or why I am doing - my job. What hope is there if the situation is as bad I imply? The answer is simple: all of the corruption, dysfunction and malfeasance in the system is a blessing. When our leaders in government (and some corporations) intervene in any industry (like capital markets), they ALWAYS break things. Even when they attempt to fix things that are not broke or that they already broke, they break them even worse. And this is a universal constant that goes far beyond our shores or our own history. It is the nature of working in a capacity and in occupations that do not have to be successful in order to survive.
People (not me, of course) will say, "We need a vast and perpetually expanding public sector leviathan of absurd departments and jobs because the majority of Americans are not employable in the private sector and their productivity cannot possibly exceed their costs." They will further argue, "These people are better being a marginal net drain on society and the taxpayer because the alternative (living under a bridge, committing crimes, having more children, writing blog posts, etc.) is far worse." The truth, however, is that the very worst part of a system that is not subject to economic realities is that it will naturally attract people, behaviors and outcomes that are not only suboptimal but ultimately destructive.
In the geopolitical sphere, these leaders and organizations destroy countries and cultures - like Vietnam, Iraq, Afghanistan and Ukraine. In the economic arena, they distort and corrupt industries - like health care, education, finance, law, energy, (cough) science (cough), law enforcement... you get the idea. But most important of all, they harm individuals. And in most cases this is a tragedy, no doubt.
But I am going to let you on a little secret. If our political and corporate leaders didn't constantly break things and make them worse, then there would be no dislocations in our society, economy and markets. And without these occasional dislocations, there would be few opportunities to make outsized profits. If the entire free-market capitalistic economy was free to operate unencumbered by the damaging results of the absolute consolidated power of a few, then it would succeed and fail more predictably and reliably. Industries would self-correct, citizens would be smarter; more engaged and less complacent; and markets would behave more rationally and linearly. It would not be perfect, but progress would continue far more consistently and rationally. The system itself would be healthier. Milton Friedman and Thomas Sowell have proven this conclusively. But you don't know or value them because the system did not teach you. And that's not an accidence.
We will expand on this concept in depth later on, but it's enough to understand that the nature of humans is that they are deeply flawed. And when you bestow power on flawed people, their mistakes are magnified. That underpins the foundational documents of our country, the divisions of power, and the default to states rights over the federal government. This was baked into the inception of our country by the Founding Fathers. And while I doubt they gave much consideration to stock markets almost 300 years ago, they did their best to create a system that could absorb, account and adjust to the adverse consequences to these enumerated powers.
Today, we have a large majority of the country that actually wants the government to control more of their lives because they are unintelligent, weak and scared. The idea of being fully accountable for their own lives is terrifying, as it would be for a child. That's why the largest surrendering of individual rights always occur after a crisis like 9/11 and COVID. Those most afflicted by this lack of courage and self confidence are always the biggest fans of repressing others. And their sickness is both deeply intoxicating and highly contagious.
Now we are a society that voluntarily chooses to pay significantly more money for inferior products and services in failing sectors of the economy like sick care, education, law enforcement, national defense and any other product or service that the federal government influences or regulates. They happily trade their God-given natural rights that were explicitly granted to them and their state to Washington DC in exchange for the comforting promises of opportunistic politicians and less overall freedom. This is the fate of all Republics, a fact that was well documented and preordained by the Founders. In fact, we know from their writing that they did not expect their grand experiment to last this long. They thought we would destroy ourselves by now, but they underestimated their brilliance and human's capability to make decisions that would ensure a better life for their descendants.
Now we play on a different playing field, one in which we cannot find qualified groundskeepers and can't afford the fertilizer. We now reap what we sow. But my point is that this is a wonderful opportunity for those with intelligence, patience and capital. Today's broken country is reminiscent of the last time we dealt with similar political and economic circumstances: the late seventies. Not a single person alive and paying attention back then would decline to get into the [any] market during the Ford and Carter administrations. I will often tell clients that, "We had to go through Carter to get to Reagan. Perhaps we have to get through [this current leadership] to get to [a similarly brighter future.]" I would much rather invest when morons are in charge than savants.
Would you prefer to start investing before 1980, or after? I know which one I would choose, I want to invest into chaos and destruction. So I say bring on the imbeciles!
Point for me where on the chart the stock market hurt you.
In the next section, we review how we got here. If you made it this far, congratulations. Grab a coffee, take a bathroom break, grab a Xanax, and strap in for more sunshine blown up your portfolio assets.
TABLE OF CONTENTS
- Where we are
- How we got here
- What happens next
- What to do now