ASK BART: Shouldn't you be doing something?
The following is a new series dedicated to answering real client questions. The questions themselves, along with names and details, have been altered to protect the innocent.
READING TIME: Weeks..
TABLE OF CONTENTS
- Where We Are
- How We Got Here
- Where We (Grow) From Here
The title above isn't just 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 most investors have experienced in the stock market so far in 2022, especially in recent months. This is a topic I presume is occupying most investor's thoughts these days, as account balances whipsaw from day to day, primarily downward. Even some of my toughest, most tenured and battle-hardened clients are struggling to keep the faith, and a few have even contemplated turning their paper losses into permanent ones (translation: sell or go to cash.)
The simple truth- and this blog post in less than 1000 words - is that a general unease has permeated the populace during the past two years, and many are struggling to understand what has changed, and what it means for the fate of our country and economy, both where we are and where are going. This general anxiety feels like the apogee of a much larger phenomenon that has been building for many years prior to the COVID pandemic. Some choose to attribute it to inevitable (delayed) consequences of the government shutdowns and other dislocations in the country that have been festering, while many attribute primary culpability to the acceleration of technology and social media. Still others will choose to blame the 1/2 of the country that disagrees with them with all that ails our society.
It's reasonable to argue that the Western developed world was suffering from a certified mental health epidemic well in advance of the COVID virus arrived on our shores, but we as a culture have chosen to ignore this, either because we lack the competence and/or ethics to recognize it, identify the cause and work toward a solution. Perhaps a country of psychologically stressed citizens too focused on their own self-interests or deficient in both wisdom and character bestows certain benefits on certain political ideologies and/or corporate interests that would like to see the country and it's people in a weakened, confused and dependent state. Regardless, it would be hard to deny today that our condition has not exacerbated exponentially in the wake of the hundreds of thousands dead, economy injured and and millions feeling helpless and afraid of what might come next.
Some psychologists are attempting to frame our current zeitgeist under Mass Formation Psychosis (MFP), a term popularized on the Joe Rogan Experience podcast with Robert Malone in December during an episode most Americans have already watched by now (with more than 100 million views.) The Joe Rogan podcast is available on Spotify and is very long (3 hours).Unfortunately, in the months since airing, the concept of MFP has become deeply controversial and divisive, as it tends to be critical of Big Pharma and the vaccine program, two causes favored by left leaning Americans. This has resulted in almost completely censorship of the topic by Big Tech from the entire Internet, to the extent that even mention of the topic is hard to find except for mostly critical analysis (and that is by design). However, a reasonable and non-political primer for MFP can be found here for those unfamiliar with the topic.
Without a deep dive into the topic, Mass Formation Psychosis (MFP) is most easily articulated as a lost grip on reality and essentially represents a group hypnosis (commonly referred to as "group think") that emerges in a society when four conditions are met:
- Lack of social bond (Isolation)
- People experience life as meaningless or senseless (Loss of Purpose trending toward solipsism and nihilism)
- Free floating anxiety and free floating psychological discontent (Stress)
- Free floating frustration and aggression (Vilification, victimization and cocial unrest)
MFP has existed as a theory and studied closely for hundreds of years, and is one of the more scientific explanations that experts are introducing for why so many people have lost their dang minds. The reason I introduce it here is my belief that it may be at the root of why financial markets are in decline this year. I will expound on MFP's impact on the market in future posts, since the relationship could fill an entire book. For now, it's enough to simply understand that a.) you heard it here first! and b.) the chaotic, bipolar movements in the stock market may be symptomatic of a much larger trend manifested by a chaotic society being managed and perpetuated by a state of collective mental illness.
I'm not trying to be hyperbolic nor provocative, I'm very serious. You may be wondering what any of this has to do with your investments. It's my conviction that if investors fail to understand that these modern financial markets now reflect a new age of disorder, the volatility and vicissitudes of daily price movement will be extraordinarily stressful at best, and impractical for them to continue participation at worst. However, if one understands this "new normal" (something I have been warning about here for years) to actually be a tremendous opportunity for long-term investors, then there is a good chance that they can not only succeed but thrive, as wealth transfers from the reckless and fragile to the patient and anti-fragile.
“Four things need to exist or need to be in place for [Mass Formation Psychosis] to emerge. The first thing is that there needs to be a lot of socially isolated people, people who experience a lack of social bonds. The second one is that there needs to be a lot of people who experience a lack of sense-making in life. And the third and the fourth conditions are that there needs to be a lot of free-floating anxiety and a lot of free-floating psychological discontent. Meaning, anxiety, and discontent that is not connected to a specific representation. So it needs to be in the mind without the people being able to connect it to something. If you have these four things—lack of social bonds, lack of sense-making, free-floating anxiety, and free-floating psychological discontent—then society is highly at risk for the emergence of mass phenomenon. “ - Mattias Desmet, Professor of psychology - Ghent University
In the absence of much tangible good news anywhere at the moment, investors are understandably on edge. We are becoming increasingly rattled by the ineptitude of our leaders- and our society as a whole- to step up to make the hard, courageous decisions that have moved the country forward in the past. We're left wondering, "Where have all the real men gone?" I believe that COVID uncovered a lot of weaknesses in our large institutions (from government to education to health care) that has been shielded and swept under the rug over the past several decades, as the burdens and vulnerabilities of a large and struggling empire have grown exponentially. These specific conditions seem to have 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 America, as well as its economy and markets, are at a historic inflection point with myriad obstacles that must be resolved in a manner that remains true to the founding roots of the country while still accommodating new paradigms and a majority of the remaining sane people.
Like humans, generational societal "pivots" rarely manifest in good times (when many are 'fat and happy' and willing to overlook and ignore important problems). Change usually requires extraordinary conflict and challenges that require us to rethink how we operate our daily affairs- politically, socially, professionally and financially. And most important, personally. I am genuinely optimistic for the future, but I also recognize that the bridge from where we are now to where we want to be will not be without sacrifice and loss. Letting go of the things we cling to in order to embrace a new and better future will be paramount, and that begins within our own minds and our current perceptions of our world. We will need to awaken up from our current current stupor, while rooting out and improving upon the destructive elements of a social order that we've allowed to fester.
I know I'm coming out the gate hot with a lot of five-dollar words and ideas, but don't despair. The following post will layout a definite, somewhat offensive (to some), obscenely long (to all) and comprehensive framework for investors to understand where we are, 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.
Across the dozens of personal interactions I have each day, I have yet to encounter one client in the past year who is 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 disorienting, if not overwhelming. The last few years, many of us were led to believe that our mental health problems were the result of one man, one political party or some other singular entity. It's not unusual nor unprecedented for humans to fall for or engage in this type of delusion. All societies need to have a worthy villain, enemy or opponent - USSR, Ho Chi Minh, Castro... the Dallas Cowboys. And if an enemy is not easily found, then one will be provided for us. However, targeting of a single person, entity or idea that we don't like only often serves to prevent self-accountability or identification are own problems or agitators within our own walls. It can remove our agency because if our problems are the result of something else, then we're absolved from solving them. Anger dehumanize and resentment usually hurts the aggrieved most.
As I wrote in a post in early 2021, and Doris has to suffer through most mornings for the past two years, I predicted that many would discover that the real mental struggle wasn't actually with someone or something external, but inside of them all along. They were tricked. And that's a painful pill for anyone to swallow, especially those who have been wedded to comforting lies or ideology. Many never will understand or see this, and will continue to hold on to distorted and counter-productive beliefs until well past the point they stop serving them.
I have followed closely Venezuela's descent from wealthiest country in South America at the dawn of the 21st century to third-world status today. I remember the massive social delusion as a result of their collapsing society, even as the cost of fuel rose, small businesses were destroyed, stores shelves emptied, prices skyrocketed, and police reform led to mass criminality. Assets like housing and stocks were going up or staying up, but the value of their currency was going down faster, it couldn't keep up. This weird era is referred to as 'a crack up boom' by Ludwig Van Mises, a familiar character to anyone who has ever opined about capitalism or socialism online or to other people out loud. The crack up boom is a fascinating framework from which to view our current state of affairs in the United States, for anyone who has wanted to sound smart but lacked the confidence to do so.
Throughout it all, the socialist country continued to blame who the media told them (mostly big business and the evil United States) and believe in the power of their own government to save them. They eventually resorted to the predictable blaming of individuals ("they didn't do it right"), when it was their own retarded narrative and misunderstanding of people and economics that was the true culprit. Yeah, it's gonna be that kind of blog post- snowflakes and the easily triggered should bail out now. I mention Venezuela's decline because it offers a very important analog to our current financial market environment, and provides a roadmap on how to get out, and benefit financially (which is to do the opposite of what has been tried but always failed 100% of the time in the past.)
The consistent client commentary I have been hearing pervades across both sexes, political leanings and all socioeconomic strata, and it's clearly weighing heavily on all but the most obtuse or proactively disconnected. Angst appears to be the dominant "je ne sais quoi" throughout most of the Western World (and beyond) and the foundation of the cultural malaise currently infecting virtually every aspect of society and household finances. In my estimation, it all ultimately comes down to control (which is closely connected to choice), specifically the belief that we can maintain it in all aspects of our daily lives. We all want to believe that we are in control of our lives, our situation and our future. In my observation, many people today think they are their own God (although they would not articulate it as such and lack that level of consciousness even if they could). As a result, realizing how little they actually do control their situation is a violation of their own natural order.
The truth is that control is largely an illusion that has been gradually and carefully cultivated through many years of indoctrination and aided by our advanced technological and comfortable society. We are being conditioned to believe many of our perceptions are reality many are actually false representation. My perception- both personal and professional- is that the total autonomy and agency may 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, powerful pillars of modern life such as our government, corporations, religions and community organizations.
For instance, when cosmetic and healthcare companies want us to feel insecure about our bodies, they introduce solutions within our control (and budget) like hair color, creams, fillers, Botox, gastric bypass surgery, body augmentation and other options that lead us to believe we can control aging. Few are recognizing the toxicity in our food, water, physical activities, communities and sleep, because where's the money in that? Mega-corporations motivate us to buy their product by presenting images in commercials, ads and social media posts that offer up the one product or service we're missing to achieve that 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 conflicts like the "wars" on communism, drugs, poverty, disease, terror, climate change, health care costs, Russia, etc. They coordinate with their propaganda arms in the legacy media to saturate the market with buzzwords, bogeymen and dire media coverage that drives "malleable" minds that were educated in government facilities under their curriculum. The sometimes even subjugate entire racial/gender demographics into the benevolent arms of group think that do more to enslave then 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)
It's a common theme throughout humanity that one must believe they are in control in order to navigate this world without going mad. So when that illusion of control is shattered- be it a health emergency, personal loss, social disruption or stock market decline... i.e. when something bad happens to good people, an event that we suddenly realize we cannot control, the human brain struggles with a concept called cognitive dissonance. When the stock market goes down, for instance, but we really really want it to go up... or we believe we deserve to be enriched by it at all times.... or we were led to believe but then later discover that our trading strategy or preferred investment class does not work like some investing guru said it would... or we think our leaders are competent and virtuous angles because we voted for them (pick a party) and the economy should be reflecting their virtue but in reality it's just the opposite and we're all just stuck inside a giant dumpster fire being towed around by a clown car driven by children in adult bodies (with worthless certificates framed in mahogany on the wall) that we thought were our political messiahs but in actuality brought all of this upon us themselves and now can't seem to blame anyone else but still try to blame others anyways, until it just gets so absurd that even their equally-corrupt media sycophants hold them to account.... well (did that just happen?!?!...), then that's what modern cognitive dissonance might look like in 2022.
When confronted with cognitive dissonance, the inconsistency we cling to within our own minds requires us to do one of three things:
- Ignore it (the lazy approach)
- Change one’s beliefs or behavior to eliminate the conflict - accurate or otherwise (the painful approach)
- Maintain the conflicting beliefs, invent new ones and perpetuate one's prior mental disorder (the dysfunctional approach)
It's not too difficult to guess which options most Americans typically select. As a result, we as a culture and society still have yet to confront reality. Until we do, the economy- and the markets that reflect them- will continue to struggle. Some investors will understand the playing field of disorder and be wildly successful at taking advantage, while others will be crippled or misstep. Our response to this current economic crisis (of our own making) will determine the severity of the downturn and the division of wealth. The stark true is that there is currently an incomprehensible quantity of monetary wealth sitting in cash "on the sidelines" all over the world. Where it goes, nobody knows (for sure.) Fortunately, we live in America, which is currently "the cleanest shirt in the hamper" of countries and economies, and eventually capitalism will reassert herself (either the easy way or the hard way) when massive transfers of said wealth will occur. But we have to get to the roots of the problem before we can solve it. And since I don't need your money or vote, who better than me to present this situation and the solution in a hundred pages or less...
"Choice. The problem is choice" – Neo (The Matrix Reloaded)
When our leaders and the Federal Reserve want to control our financial behavior, like participation in certain sectors of the economy like the stock or property markets, they engage in clever strategies like financial repression, which is a combination of a.) forcing interest rates artificially low (which prevents savers from earning interest in bank deposits) and b.) printing money (quantitative easing, which debases the currency). Both seek to force people out of cash and into alternatives, while they slowly erode the value of money for everyone. But mostly for the poor, who are most vulnerable to liabilities and expenses. Which is to say our elected leaders- and the unelected bureaucrats that control them - employ techniques like financial repression to devalue the stored labor (in the form of financial assets) that workers previously or currently engaged in to earn the money in the first place. This is a complicated process so let me stop and use smaller words.
Let's say that you worked eight hours today. If you're like me, the District of Columbia will take 2-3 hours of that labor in the form of taxes, thank you very much. They will distribute it to others who were not involved in your work. Various levels of government will also take another 2-3 hours in other, less transparent ways because politicians can only steal and redistribute so much of your physical labor through taxes before their own lives are at risk. Or maybe that's just my mentality. That includes sales taxes, (sometimes state income taxes), property taxes, capital gains taxes, payroll taxes, social security taxes ("Who is FICA?"), estate taxes. Lest we forget excise taxes on fuel, building permits, vehicle registrations, tolls, sin taxes (cigarettes, alcohol, etc.) I even have to pay property taxes to Kerr County on my computer equipment at the office. Annually. Because Kerr and Gillespie Counties do what for that equipment I'm still not sure. But I bet you didn't know that was a thing. So for me, I know and accept that I have to work after dinner till about midnight to recoup the money I lost from 8 AM-12 noon. And that's a real drag. I would love to work less than 12 hours a day, and that's my goal for retirement.
Financial repression (as well as rising interest rates and inflation) is a particularly immoral method of tax, one could even argue (but definitely not me...) that those two strategies - suppress rates and print money - alone are collectively fairer than our current "progressive" income tax regime that takes significantly more from the most productive workers to distribute to the less productive). This is because in addition to their direct extraction of your labor, the government and the Federal Reserve also facilitate wealth distribution indirectly though inflation. The combined heist of inflation serves to take from all Americans fairly equally, regardless of income or even if you have a job at all.
It's easy to see how inflation is specifically designed to inflict the greatest impact on poor (with little savings and primarily liabilities and expenses) and the elderly, who cannot go back to work to earn more income and achieve more COLAs (cost of living adjustments). This is clearly (and surprisingly) the M.O. of our current executive and legislative branches. But in a more accurate way, it's probably just easiest to consider it all petty theft. (Or social justice, depending on your political leanings and the quality of your upbringing.) That's not my opinion, that's a fact anyone with even rudimentary knowledge of economics can deduce.
"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities..."
- Adam Smith, The Wealth Of Nations
Similarly, it's very important to all of our most powerful pillars of society for the citizenry to feel financially comfortable. This is because studies have found that people that feel broke don't spend as much as those who don't. The corporations need their customers to feel rich enough to buy their products without stressing over the cost. Counties need residents to believe their properties have increased enough in value so they continue to support municipal spending proclivities without too much "unrest.". More than anyone, the federal government needs citizens to feel financially safe and comfortable enough with the stock market to continue supporting our current version of capitalism, and frankly to maintain their jobs and physical safety. None of these manipulations are necessarily nefarious on their surface, if they are transparent and offer mutual benefit. Unlike vaccine mandates (for instance, in Ottawa), climate change legislation (Green New Deal) and police defunding initiatives (Minneapolis, Portland, Seattle); if something is effective, the mutually positive results are abundantly clear and will sell themselves without a lot of heavy-handed tyrannical behavior. These entities applying their will on the populace will simply be perceived as a guiding hand. If, however, the leaders think their constituents are an inferior gaggle of buffoons, or their own behavior is morally abhorrent or simply a power grab, they're likely to experience significant resistance. That is a big part of the narrative in 2022.
"I don't like the idea that I’m not in control of my life" – Neo (The Matrix)
Unfortunately, another problem arises when we're misled by disinformation to believe obvious untruths. One example of this is the stock market, which has averaged about 10-12% long-term (without much manual intervention by the investor themselves except for continued funding) and has been so far the greatest wealth-generating device in the history of the world, but is risky in the short-term (< 5-10 years). Like really risky. 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 needing to touch investments if and when they gyrate unpredictably every 5-10 years. And thank God markets are risky, because can you imagine if the stock market only went up and never went down? Then everyone - even the young, entitled, reckless and the stupid - would have as much success as their doppelgänger. (Do you get the impression my posts are like a galactic Scrabble match against myself?)
In a perpetually rising stock market with no risk, there would also be no fear, which would lead to increasingly larger and wilder speculation. On one hand, we'd all work like a boss to accumulate enough scratch as possible and put it into the market to grow nonstop. Many Americans would avoid overspending and financing everything they make (and then some) for obscene consumer purchases that they don't really need - like granite countertops - in order to impress people they don't even know or like. Everyone would be successful, and we would all come together every tax season to celebrate our shared bounty with the IRS, give thanks to our politicians for their generosity in spending our money (since "we didn't build that"), 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.
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 risk in the stock market, in 2022 all investors (and advisors) are rediscovering that we can also be irrational, illogical, and the market is not as easy as we've been led to believe. Before the modern Fed 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, 90-91, 94, 00-02, 08, 11 and 15. you get the idea...) The new Fed has successfully forestalled any major pain since 2008, so we've really been "in extra innings" the last few years of gradually rising markets and may have been due for a pull back. Trees don't grow to the sky...
I recognize that history and facts don't matter to a lot of people these days, and they think it's all ending. 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!
But 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 all the time and very lucrative for all involved. It's incumbent on their survival for investors to believe that all other participants are just like them- logical, rational, patient and good-looking. It's also helpful if you believe 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 10-20% of the time. They may be able to control Earth's weather, consumer preferences, health and beauty ideals and equality of outcome, but our leaders do a crummy job of letting the free market operate. 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 market is fair, can only go up, dips in value only for their benefit and only exists to cherish and support you. Like a Snuggie for your money. The truth is that - like the real world- markets can be merciless. Most of the time, they are calm and predictable. And they do usually go up. But every few years, they deviate from the expected and go down or sideways. 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 outside the norm or for longer than they are comfortable with. Newer investors often lose faith and investors approaching retirement are prone to panic. If it continues long enough- especially if there is a compelling narrative about why the market is down and might stay down forever- say, our leaders are the complete morons that we were always warned they would be - then our old friend, cognitive dissonance, can set in and sabotage even smart investors.
“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
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 that 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. 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 thoughts as well. Perhaps you're also feeling a little foolish about investing following this recent market sell-off.
Fortunately, those feelings 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 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. This is similar to my strategy with many 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, for instance, I know I've won 90% of the battle. And thus it is with my investments. 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, I don't experience this same kind of regret as investment losses because I know there will be a guaranteed payoff someday and soon. The positive result I receive is always a consequence of the effort, it's a universal constant. But when I observe account balances drop on paper, even though I know it's inherently built into the process - markets can't always go up, they have to go down occasionally- the losses somehow trigger a more painful neurological experience. I never know for sure how deep or how long it will go. I think human brains process this kind of sacrifice with investing uniquely because- although we intellectually know and accept that accounts will eventually recover and go on to new highs as they always have - our emotional demons still whisper into our minds, "what if it doesn't?" "What if this is the big one?" "What if [insert boogeyman] is the guy that finally drives us over the proverbial financial cliff?"
In addition to avoiding account statements like chocolate cake, I've also 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, so it doesn't hurt as much when it loses value. 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 a effective approach and b.) I have identified these as two proactive mental exercises that I can control that have always resulted in successful outcomes. The markets - and my investments- have always gone up 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.")
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 (and to) 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 consuming homes, vehicles, smartphones, computers, etc.. 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 enslavement, you get the idea... In those types of highly improbable scenarios, where even 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 your 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 spaceship. I know what happens up there.
So there's that.
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 honestly get a, "What if it all fails?" type-question at least once a week, 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 some of the conflicts in their worst-case narrative. Like how worried were residents of New Orleans about their Roth IRAs during Katrina? I mostly remember people in small boats looking for water and bullets. The groceries stores were empty, even the vegetables were already stolen by then. Refugees were using the Superdome as a toilet. Kanye West said George Bush hated black people. Half of them fled to Texas and never returned. Hardly manipulative, I see my script as a reliable process to explore where the source of underlying anxiety really comes from in order to determine if our perceptions, expectations and concerns are warranted. Many times they're not. Often we collectively agree that worrying about these scenarios is wasted time, that could be used doing something more productive, like giving me more money to invest.
The point from several chapter above is 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. I believe my mentality is only a slightly unorthodox result 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. The truth is that the time to act is almost always before the stimulus to act appears. 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 the once-a-decade drops. Our ancient and magnificent hind-brains are not designed for a stock market that's only a few hundred years old. 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) to your positions when markets go "on sale." Once a market enters a true market drop, especially if it's steep and/or without an obvious catalyst, the most productive action is often to decide when and how much to buy of your existing positions (not sell). In fact, one of my most important roles is to discourage clients when I feel that they may be acting on their own emotional impulses during those (typically and relatively) brief windows of time when market go down or sideways.
Some Historical Perspective
If all that fancy talk comes off as somewhat trite and glib, a.) that's practically my schtick and b.) here are some other colorful reasons why doing something is rarely the best reaction...
When digesting these numbers, keep in mind that these stats run through 2017, before we completely emasculated our society, abandoned logic and reason for an emotions-first, ask-questions-last culture that pushed an entire global population toward the edge of the mental cliff (and many over) in 2020. As a result, the frequencies and length time periods above are likely to be shorter - and drops deeper- in our new bipolar society. That's how mental illness works and if you understand that, you're on your way to better understanding modern finance. It's less Wolf of Wall Street and more Silence of the Lambs.
Consider for a moment a scenario where your investments fall 20% and stay there for another seven months from today- say, into next spring. After that imagine that they do what they've always done in the past several decades, just rise (roughly) every six years out of seven. In that mindset, you might begin to: a.) accept that market drops are inherent in all cycles, and b.) work to condition your brain for resilience in this future markets, so that if/ when it happens, you'll be prepared.
When investors are mentally prepared, they can be attuned to the new and profitable possibilities that invariably present themselves in every "crisis." For instance, if the residential housing market in your area dropped in value by 40% this year, would you become: emotional and irrational, and immediately run outside to plant a For Sale sign in your front yard before your neighbors to accept the first offer you got? Or would you ignore these values because a.) they're not the market and b.) you weren't even planning to sell anytime soon, and certainly not in a down market that favors buyers? Would you call your advisor and ask him, "Why is this happening?" "How far could it go?" or "When is the market going to come back to even?" Would you turn on CNN or MSNBC to find out what they think? Would you sell your house and use the equity to buy a new one in Facebook's Metaverse? (My cheeky equivalent to most cryptocurrency.)
I know what I would do. It would probably involve some version of yelling out loud, "Muahahahahahaha..." and then visiting my local mortgage lender begging for a loan before heading out to begin looking for foreclosures. If one were so inclined, plenty of folks might even lever up to their eyeballs to buy as many properties as they could get away with. (No, this is not a pitch for buying stocks on margin!)
Why? Because we've been there, we somehow have more faith in the housing market and we already (think we) know how that movie ends. The afraid, broke and over-leveraged get fleeced. The patient, opportunistic and flush get rich(er). As you can see from the chart above, the stock market goes down with far more frequency than the housing market... So what's the difference? Why aren't we more conditioned to expect it to continue doing so? Why don't we acknowledge and celebrate a stock market with more opportunities to build wealth? Why is every recession, "The Big One?" And do you really think Google, Microsoft and Amazon are going away?
This is the market that has scared an entire generation of investors to flee to cash in 2022?..
How do these past market losses in the grey bars above compare to your total loss in 2022? And does the depth of these past losses surprise you? They initially surprised me, and I'm responsible for a lot of investment accounts!.. When markets go down, it's death-by-a-thousand-cuts each day to me. Like "a great disturbance in the Force, as if millions of voices suddenly cried out in terror and were suddenly silenced." (Obi-Wan Kenobi) So you think I would remember these drops. But I honestly don't because the further these grey lines appear in my memory's rearview mirror, the less I can recollect the emotional toll they surely must have inflicted on me and my clients. Maybe I've blocked them out because of all the emotional trauma. When you look at charts like those above, what we're experiencing in 2022 starts to look downright normal for a healthy capitalistic system (albeit, run by crazy people for crazy people) and not something to worry so much about...
Explain to me again how the stock market is too risky. And cash in the bank is safe.
So why do we worry so much about market corrections again?
Studies show fairly conclusively that we humans are truly our own worst enemies and collectively terrible at investing (see below). (And another reason reason why warnings of the end of the financial planning profession kinda' make me chuckle)... In a country with 2/3 of the country living paycheck-to-paycheck and 40% of retirees living exclusively on social security benefits... How is that possible?!?!
Why do individual investors in the stock market earn so much less than the actual market they invested in? Like you, I initially blamed the patriarchy and systemic racism. But it turns out we're really just poor market timers.
In this series, I will lay out a thesis on our current condition (you thought I just did!!) and what to do about it. If you're looking for a short breakdown with bullet points, you should stop reading now and go over to the groundbreaking financial insights at The Atlantic.
For everyone else, the short answer for most investors- as you might imagine is no, we shouldn't be doing much of anything at this particular moment. Doing something/anything is precisely why the market is falling in the first place, based on the actions of a large supply of investors with less faith / more fear outnumbering those on the other end of the spectrum, thus creating an imbalance. Unfortunately, short answers are usually insufficient for matters of this importance and of course, I'm biologically incapable of providing quick and succinct responses to anything. But I'm gonna try...
- The stock market is down primarily because the economy is slowing.
- The economy is slowing because people are personally unhappy, chronically from many years of societal degradation and demoralization, but acutely because of the current state of affairs.
- People are in a bad mood primarily because their individual financial situations are becoming strained and in some cases compromised.
- Household finances are insecure because of the four horsemen of the recession, namely:
- Supply chain disruptions caused by government lockdowns
- Inflation caused by our government money-printing to fix the effects of the government lockdowns
- Interest rate increases enacted by the Federal Reserve to fix the effects of inflation
- Energy cost increases caused by our government (specifically the Executive Branch) to dismantle the fossil fuel industry based on the whims of the neo-left ('leftist) wing of their political base.
- *Bonus horseman* Loss of confidence in our government (specifically anyone with a .gov email address) to make decisions and act in the best interests of the country and it's citizens
- Leadership throughout the culture but primarily at the national level is increasingly being viewed as incompetent, feckless and desperate
- This perception also derives from the pandemic exposing underlying weaknesses throughout the critical pillars of our society (education, health care, law enforcement) but also due to increased access to information, accelerating transition to alternative news sources from the legacy media (also referred to as the "mainstream media" or MSM) that has lost control of their monopoly, influence and the national narrative.
- MSM has lost control and is dying because of competition, changing consumer preferences and options, but primarily their abuse of their (propaganda) power and authority, generally having surrendered their reputation and well as the respect, faith and trust of the American people. Across all demographics, media reporting of the most important topics is rarely considered objective anymore.
- Social media, technology and a host of other factors (defective parenting, toxic environments, food quality, drug use, loss of spirituality and purpose, disunity and division, greed, entitlement, solipsism, tribalism, class/race/sex warfare, just to name a few...) are producing or conditioning humans of lower quality. We are all susceptible but the primary outcome is that we are experiencing a character deficiency common in most historical progressive societies.
- We now live in a bipolar culture, and all aspects reflect that condition: politics, corporations, entertainment, media, sports, spirituality, geopolitics and our humanity. It should therefore come as no surprise that our financial markets manifest the exact same volatility as our populace, communities, organizations and governments.
- To be successful in modern investing, one must maintain a logical and rational perception of reality (in short supply these days) and integrate it with investing fundamental and a new ways of reacting to a market that is schizophrenic (or find someone who can serve in that role for them.)
In the next sections, I will expand on these themes, this thesis and the tangible solutions of how to think about the markets and react to them in a proactive and effective manner to achieve investing success
I won't lie. Even my own resolve can become tested in markets like this, as our current decline admittedly feels distinct from any of those from my previous 21 years in financial services. 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 rebuild my practice in the two wealthiest counties in the state (per capita). I did so specifically to work long days, nights and weekends serving as steward of the savings of several hundred clients (primarily successful and ultra-conservative Baby Boomers). I constructed defensive, ultra-conservative portfolios with a focus on principle protection. I changed firms four times in two decades searching for the perfect business structure for my clients, one that far superior to my competition at the wirehouses (who is basically any investment firm with TV commercials or online marketing.)
Throughout that journey from W-2 employee advisor to small business owner to Certified Financial Planner and finally to Registered Investment Advisor (RIA), I've faced professional challenges, betrayals and upheavals that one can't even imagine, experiences that I'm not even comfortable sharing. It started with knocking on 125 doors a day in the 100 F+ Texas summer just to keep my $2500/month job at Edward Jones... and then it got harder.
During that time, my M.O. has been conspiring with most clients to 'hit singles and doubles' as they approached and entered their retirement years, playing it prudent and knowing that we would likely surrender the tops of many market peaks to ensure that we would enjoy greater protection on the downside when markets inevitably corrected. Unfortunately, in the first half of 2022, that strategy has not worked out as well as expected (yet), for us nor almost anyone else.
Ask around. There are very few sectors that are not hemorrhaging in 2022. As in the early stages of most emotion-based market sell-offs like ours, everything is for sale and at steep discounts. The laws of physics do not apply and everything falls in value at roughly the same speed, because indiscriminate selling by novice or uneducated investors who may or may not distinguish between the merits of their existing holdings, causing a lot of "babies thrown out with the bathwater."
It's only when we look back months or years down the road that we can often view 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 understand how market prices can fluctuate so wildly during times of confusion, stress and anxiety. In reality, markets are fairly stable the vast majority of the time but can be prone to bouts of temporary madness. Kinda' like some of my siblings.
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 more aggressive positions 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 rich valuations for years. Stimulated by a lot of funny business (free money, low rates, quantitative easing, etc.) that would have been considered inconceivable to past generations of investors, 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 I made some defensive maneuvers late last year, but even those have thus far been relatively ineffective against the combined headwinds of inflation, interest rates, oil/war and the supply chain (what I call "the four horsemen of 2022.")
While I continue to harbor a strong conviction that a window of opportunity may be approaching (or may have even started), I also recognize that the prices we're seeing today are already deeply depressed 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 of whether we've seen the lowest prices of 2022 yet, and sincerely doubt that we have. I suspect you 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 "head 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 stock trading apps might just be to wealth creation what social media is to mental health. Once enough investors begin to 'capitulate' together, we'll then know 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. In this environment, those that refuse to sell generally dig in and stop paying attention, but many others instead choose to sell out before they 'lose it all.' We haven't seen that yet in this cycle, but I suspect we will soon.
I am confident that a big part of the extreme volatility we're witnessing is related to is a new generation of "market participants" - I stop short of calling all of them investors. Some of these financial whippersnappers got rich (and then poor) trading crypto-currency (i.e. Bitcoin). Other's initial market experience may have been Robinhood-gamified trading on their smartphones against large hedge fund short positions inspired by Reddit's Wall St Bets activism, or something in that spirit. They aspire to get rich quick, have very short-term time attention spans and horizons (less than 5-10 years), no defined goals aside from ambiguous vigilantism and little-to-no appreciation nor concerns for a company's true economic fundamentals. The easiest way to spot this demographic (including the infamous 'cryoto bros,') is that they're skeptical that wealth is generally derived from work. Achieving success from extraordinary effort is a foreign concept to them and they see no contradiction with the reality that the value of a crypto token only rises based on increased adoption (i.e. how many future participants Bitcoin owners can find to come in after them) and not human labor or intelligence. That feels a lot like a pyramid scheme to me, but what do I know. Maybe you can 10X your money in a year based on your superior genius.
Say what you want, most disciples of cryptocurrency are true believers, convinced that they see/saw what others don't (watching YouTube videos from their couch during the video, which is not exactly contrarian) and that their favorite digital asset is the exception to the rule and will eventually make them rich because they saw the light- often when they wake up after 9 AM- before everyone else. And they will never shy away from telling you about it. As well as why you should also see the light as well.
While recognizing and acting on opportunity is certainly a key component of most financial success and long-term wealth accumulation, in the history of humanity I have yet to find a wealth-generating strategy that does not carry with it a work component. Without one or the other, I don't believe anyone can achieve true and lasting wealth. It's not enough to simply watch a video and take a course- that's not work. And opening an account with Binance or Coinbase to buy crypto is not work, either.
Here's a dirty little secret (how many of these do I have?!?!)... the stock market is not a tool for achieving financial success on it's own, it's for growing wealth after you've first earned it. The vast majority of wealth is initially accumulated from income or benefits from a job, either one that is given to you by a company or created by you. Financial markets almost never make people wealthy, Warren Buffett and Charlie Munger being by far the rarest of exceptions. Some people become financially successful in real estate, but again the real estate they own almost always comes from income or assets from another productive venture. I don't think I have ever had a single client in two decades who could attribute their attainment of financial independence initially, primarily or solely through investing in the market. They almost always earn their wealth initially through WORK and then use the financial markets to grow, protect and diversify their wealth. I say this a.) humble myself and b.) to implant in brains a warning that if any influence- human, digital or financial- offers you the chance to achieve financial independence without real work and risk, then you should think of me and be leery (not because you're thinking of me, you know what I mean..)
Moreover, one of the major disrupters in this market today is that many of our newest market participants tend to operate primarily off emotion and hunches (like in their tragic personal lives). They will claim their behaviors are purely instinctive and innate, but that's a myth. Like men who can multitask. When I interact with some of this cohort and I discuss income statements, balance sheets and cash flow, it's sometimes feels like I'm talking to a wall. Their eyes glaze over and they want to tell me about 'new paradigms' or some video that they saw on YouTube. Here's a hint: if you are searching for investment strategies or advice on specific companies or sectors through online videos, you've already lost. You just don't know it yet. It's like getting your financial information from cable news networks. Or dating advice on Tik Tok. Or life coaching tips from people in their twenties. Or parenting from me.
A New Demographic Enters the Market
Our current economic and market downturns are both "firsts" for our two youngest generations, the much-maligned Millennial and Zoomers, now officially the largest age demographics in the country and Western (i.e. Developed) World. Their heft carries tremendous importance and influence in our society, but few areas have been more impacted than finance. One of the biggest 'challenges' for these digital nomads, and quite a few in our older generations that are equally gullible, is that they believe that screens are accurate windows into reality, when it's actually just the opposite. Few of them would articulate it as such, of course. But that's one reason a large proportion appear so misguided, misled and generally inept. That's not a knock on them, just a generational curse that many were handed- like student loans, three recessions and an impossible housing market. The biggest curse is no doubt simply bad parenting (for everyone but your kids, of course.)
Don't get me wrong- some of the smartest, hardest working and successful people I know were born after Reagan was elected. I have plenty of them as clients. But those are few and far between and both generations struggle with intelligence and work ethic. Perhaps you've noticed. If there was a less offensive way to state the obvious, I would. I could remain silent about this phenomenon, but pandering and placating is precisely how they are and have became such a problem in the first place. This condition seems primarily the inevitable result of being raised in an era of mass affluence and Dr. Spock parents wanting to be their children's cool best friend, all over the past forty-year period representing the greatest period of prosperity in human history.
As the first generation raised on screens and modern communication technology from a very early age- often as a replacement for good parenting- only a small percentage of Millennials and then Zoomers seem to know how to navigate the world effectively, interact with others, or understand the world or truth. They believe truth is a subjective concept, and that their perspective is their lived truth. Perhaps Sandy Cortez (AOC) articulates this best.
Years of entitlement have been deeply embedded into the psyche of a great many young people as they were funneled through government facilities in a conveyor belt, assembly-line structure quite similar to the schools of a hundred years ago, during the industrial revolution. Today, we have evolved much but our academic institutions are operating as if they are still in the previous century. We churn out a lot of workers that employers prize because they are docile, agreeable and easily enticed by a JOB ("just over broke.")
These enormous campuses are occasionally staffed by many well-meaning but ultimately unimpressive and overwhelmed glorified babysitters who spent 7-8 hours each day integrating Star Test / Common Core curriculum intermixed with flawed life concepts and nonsensical ideology during their formative years. You would have thought the kids could have looked at these messengers and determined for themselves if that was someone that should be opining on anything outside of a textbook. The education industrial complex should strive to create a final product of better humans. But instead we've produced plenty of spoiled, underdeveloped adult-children ("kidults") who are now often confused, vulnerable and sanctimonious - never a good combination.
Before the founding of the Department of Education in 1979, the US was ranked #1 in the world for education. Now, with their abject graft, corruption and malinvestment of resources - namely my property taxes on former employees who have left and are no longer productive members of the workforce, the United States has fallen to 27th best country for education. That's quite a fall, and one very few want to acknowledge, much less talk about. The reason is because letting the federal government control education is about as effective as letting them control families. Some people will blame our dramatic decline on insufficient spending, but that's ideological claptrap that plays well for people that real articles on social media (Facebook, mostly) but it's a theory with no basis in reality. I've learned more in a couple years of videos and podcasts than I did in college. And I earned arguably the hardest undergraduate degree on the planet (a computer engineering degree from an enormous state school) while playing a sanctioned collegiate sport and working part-time. And I ain't that smart.
That is a lot of money to be spending per student. It's definitely not about the money. It's always and forever about families. Namely two parents.
"Per pupil spending for elementary and secondary public education (pre-K through 12th grade) for all 50 states and the District of Columbia increased by 5.0% to $13,187 per pupil during the 2019 fiscal year, compared to $12,559 per pupil in 2018. This is the largest increase in more than a decade. Data for this report covers the fiscal year before the COVID-19 pandemic. The spending increase was due in part to an overall increase in revenue. In 2019, public elementary and secondary schools received $751.7 billion from all revenue sources, up 4.5% from $719.0 billion in 2018." - Annual Survey of School System Finances 2021
Translation: Virtually all domestic education is a scam. I could create twice the value for half that cost by myself. And I'm borderline illiterate.
When folks with the kind of upbringing our youngest generations enjoyed are confronted with a real world that operates contrary to their distorted, solipsistic self-image and belief system, they often lack the proper discernment and critical thinking skills of previous (analog) generations. They must instead construct their own narrative of the world, one typically lacking the intellectual underpinnings and experience that might hinder existing delusions and frequently results in a life largely divorced from reality. Their perception of what is true is more influenced by social media and screens than parents who only see them for a couple hours a night, at most. Many parents I work with and know seem to be serving as unpaid chauffeurs for the myriad sports teams and other extra-curriculars that they foist their children into year-round. Our youngest generations are then reinforced by online communities like Reddit and 4Chan that condone what can be most closely described as mental illness. How else to explain Furries.
When so much untruth is held as fact (CRT, multiple genders, men can get pregnant, multiple new 21st century sexual identities and preferences, preferred pronouns, erasing history and replacing with fantasy, and of course politics), one is bound to run into some trouble when their narrative contradicts with their daily existence. Repeated exposure to this dichotomy inevitably leads to anger, frustration, unhappiness, and occasionally a desire to tear down the existing structures of society simply to avoid having to reconcile one's own cognitive dissonance.
Discovering that most of their life up until that point has been akin to a lie at worst, and a success limiter at best, is painful. One can only deny reality so long before being forced to confront and accept the consequences of their failed value system (for instance, high gas prices, empty store shelves, rising crime, hyper-inflation, declining marriage and family, record depression, drug use and suicide, etc.) As the brain attempts to spin a scenario where it can both retain previous flawed beliefs, avoid admitting error and still navigate the world effectively, the mental illness that invariably ensues is liable to consume the host and result in unpredictable, counter-productive and sometimes dangerous outcomes. Taken to its extreme, this condition can and often does lay the foundation for tragedies like mass shootings.
The reason I emphasize this phenomenon is not to play Debbie Downer. It's that the symptoms and outcomes of our current youth upbringing protocol is greatly impacting investing and financial markets as well. You see, we older generations began to observe and identify this retarded (the clinical definition) maturity (i.e. arrested development) in our youngest Americans as early as the 80s and 90s. We all pondered (and feared) what would happen when these young folks entered an adulthood composed of immutable and universal laws that perpetuate and sustain modern life but also threaten to shatter their flawed notions and behaviors.
What we failed to properly account for years ago was the possibility that the newest generations would seek and succeed in imposing their delusional narratives on our reality instead of the other way around. Because of their immense size, influence and lack of sufficient parenting, 20th century youth became 21st century adults who in effect flipped reality on it's head. Because I prefer not to be cancelled- at least this early in a blog post- I will abstain from expounding about the absurd falsehoods we're all now forced to swallow about biology, nature, science, human relations, gender roles and other "social constructs." Suffice to say that the reason many feel so disoriented with modern life, gaslighted about what were obvious universal truths up until 15 minutes ago and noticing that so many areas of society (social, political, professional, media, entertainment, sports, etc.) are spinning out of control, is because they are.
Truth has been hijacked by "the lived truth" (i.e. subjective) of severely damaged people who have lost their bearings on reality and are bound and determined (unconsciously, but sometimes even consciously) to bring the rest of society along with them on Mr. Toad's Wild Ride, whether we like it or not. As a result, their views about the world of finance - for instance, what is fair, what assets have value and how much, and how markets should perform for them - are impractical and distorted.
Up until 2022, these fictional perceptions of markets tended to jive with the market itself. It was 'all-good.' Like so much of their life to date, there had been no opposition. Now that markets aren't working out exactly the way they had originally expected, instead of the critical self-evaluation that tends to unlock true enlightenment, so many investors just pout and quit. They melt like snowflakes. And when enough people quit a specific market, it drops in value. This will someday be true of higher education and we're already seeing it with legacy industries like media and entertainment that won't exist in their present form in another ten years. The reaper of reality is also almost certain to come next to industries like housing and transportation, both being currently being upended by the changing tastes of the new generation (who value mobility, "experiences" and don't want to own anything.).
To reiterate, this is nothing inherently unique to Americans born since 1980, they're simply overrepresented in this mentality. I think we all know older friends, family and coworkers from earlier generations who still can't see the world for how it really is. Unfortunately, some never evolve to even the stage of recognition of how so much of their life has been premised on a lie. This only opens the door for accelerated mental illness disguised as ideology, specifically political. For so many, politics has replaced and become their religion, with celebrities and "experts" their deities. Their programming has been so comprehensive and effective, and administered so consistently at such an impressionable age, that most are unable to ever revisit and fully reprogram their flawed beliefs. They are in some respects disciples that instead must continue down the same counter-productive path yielding them little traction in their life objectives as their predecessors. Some are then forced to double-down on their fantasies- continuing to think, act, behave and vote in ways contrary to their best interests, as well as their fellow man and country.
And that's how you end up with a generation buried in crushing debt they don't think they should have to pay, an unattainable housing market they believe is rigged, debilitating addictions from permissive childhoods and fleeting opportunities to participate in The American Dream. It's also how so many are drawn into- and intoxicated by- instruments of financial destruction like crypto-currency, Non-Fungible Tokens (NFTs) and meme stocks. They are what Goldman Sachs refers to as Muppets, and as you can imagine that's not a compliment.
Muppets on Parade
So what does this have to do with our current market???
A lot, actually. Behold the "trophy generation" who was told they were special and could never fail. They were watched over, protected and bailed out. But now they are confronted with market losses for the first time in their adult lives, it all seems cosmically unfair (like elections, house prices and student loans) and they don't know how to process the experience and respond appropriately (Trump election, January 6 riots, Supreme Court memos, etc.) For many, their "lived experience" of market losses simply reinforces the perception they were programmed with in their homes and government-daycares that they are victims, which robs them of the critical agency to recover from failure. I suspect that a collective lack of wisdom, experience, perspective and self-discipline from this demographic may now be contributing at least some amount to this most recent market dip, and pulling the rest of us all down with them. Anyone who was not an active investor 13-14 years ago- which is almost everyone under age 40- is experiencing the first full stock market downturn of their adult lives. Every time the market has dropped since 2008, we have seen a relatively quick and dramatic rise toward new highs. Lacking any formal, legitimate, real-world investing acumen- but with an actual self perception completely that belies this fact- many of our newest investors are doing exactly what you might expect them to do, which often involves engaging in the absolute worst decision possible: selling into a dropping market (or more accurately, rebalancing into cash).
Such investment strategies succeed in stopping the pain as well as the cognitive dissonance between their own self-image of perfection and the reality that they have made bad decisions that have resulted in unexpected and unwelcome outcomes (which we used to call 'life.') In their failure, TikTok stock market gurus, Reddit boards of complete strangers and day trading apps like Robinhood all step into the (lucrative) breach to exploit and compound their ineptitude. And the spiral continues downward. Since this the first stock market correction to integrate this new generation, the final chapter has yet to be written. But for those who sold their investments and turned their paper losses into reality over the past several months, this was a major opportunity to build resilience that they may miss and therefore never properly learn from.
To date, Millennial stimmy-check meme-darling, AMC is down 80% from it's 2021 peak, and GameStop is down 63%. Apparently, r/WallStreetBets got bored with torturing hedge fund managers in 2021 or simply got distracted. Indeed, one of the weirdest aspects of modern culture is that the typical news cycle of even major stories lasts about two weeks and most people- especially younger- have the attention spans of goldfish. That's why the terms Occupy Wall Street, MeToo and Black Lives Matter have sadly become punchlines. It's not that the original premise was flawed (although all were) as much as you just can't build a movement behind a demographic that still lives with their parents. Their ranks are filled with many who lack the software to focus on anything long enough to affect true (and in my opinion, necessary) social change. They are slaves to their dopamine receptors and when they wear off, they're on to something else.
Perhaps you have a young person in your life that behaves like this, just try to imagine them investing in this stock market and you're well on your way to understanding the first two quarters of Q1-Q2 of 2022. You might dismiss this demographic as too young and too small to matter to a global market, but recognize that their oldest are now in the early forties- they are not insignificant in society nor the markets. They play a leading role in the chaos we're all witnessing in both areas in 2022. And it's liable to get worse.
Of course, I can't pin all of this on young day-traders investing stimulus checks- as much as I'd love to. That's an overly-simplistic and inaccurate generalization and there is always enough blame to go around in every economic and market swoon. The truth is that some of my smartest and toughest clients are under age 40. But my offices are in Kerrville and Fredericksburg and my younger clients are certainly NOT representative of the greater population nor that generation. That demographic doesn't need no advisor because they know it all and trade accordingly. They think I'm a dinosaur, which I admit is kinda cool. When I used to knock on doors, people used to tell me to come back when I looked like the guys in the wire house brokerage commercials.
As a result of their fragile investment strategies, each month this year- and right on schedule- Wall Street has stood by, ready and more than willing to accept those unwanted, dropping and discarded stock shares in exchange for some of that free fiat currency of rapidly decreasing value from the Federal Reserve. Our newest market participants are prodded by investment banks analysis reports, planted stories in the media and internet investment fear-mongering that the sky is falling and it's going to get worse. When I see this content, I always ask myself, "If you were an investment bank with compromised ethics and an enormous (think billions) incentive to buy stock anonymously for much less than today's prices, would you push your analysts to publish market analysis that the economy, market and/or a company stock is going to go up or down?
If it was me, I would claim it's all going down. Way down. And never coming back. And that crypto is the better bet for the new markets. My report might be titled something ambiguous like... I don't know... Recession Risk is Very Very High.
Here's another little secret: when the big banks are providing free market analysis to the public, they're not looking for accolades. They're planting snares and looking for marks. When financial websites do it, they're not looking for validation, they're looking for (greed/fear) clicks. Like social media, when the service is free, you're the product.
The World's Most Efficient (Legal) Market
In most of my conversations, I find that few investors ever stop to truly appreciate the magical ease with which we transact in securities whenever and wherever we want, or contemplate why someone else would be willing to buy them at the price we are selling. 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 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?
- 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 one person thinks that they 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 generally priced at the exact combined average global opinion of its underlying value. It's as absurd a proposition as say, thinking 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 feet on what is the best path for their lives. (Sadly, for some Americans having their lives controlled by a master who makes their decisions for them feels safer and preferable than actually living free but burdened with the responsibility of one's own life. That is literally the theme of 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 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 lack that level of self-awareness and march right into the slaughterhouse of an engineered market correction. They play right into the hands of their opponents on Wall St. In that moment of selling, the predominant thought seems to be, "Thank God I have someone to buy these shares off of me" and that should instead be a red flag and opportunity for serious self-reflection. Which is rare when your trading platform is a gamified app on your smart phone. 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 was. Today we judge those people harshly, but if you've ever sold shares out of fear that they might lose more value, then that's you.
I wonder if retail investors transacting in investment shares directly with a machine and devoid of intermediaries has removed the humanity from the experience (a blessing for market efficiency) but also prevented us from occasionally failing to fully consider whether we have all the information we need (or at least more than the other party), whether the trade is either prudent or necessary, and whether we should 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? (Before COVID, of course. After the government shut down companies- and then when they reopened, pressured those same companies to fire their unvaccinated employees- it created some 'unforeseen' supply chain problems. Who could have predicted that... Now vehicles now go for well over MSRP by default to a lot of imbeciles. Which is why voluntarily buying a new or used car in 2022 should be considered an act of financial insanity.) Of course we would never do that, because we all know that those markets are rigged against the public and the first price offered is always the worst price offered. Yet this is how far too many investors now approach modern markets, which sets many for
This is important because it has resulted in what I perceive to be a period of massive indiscriminate selling, it often seems like all assets are in a state of freefall. Even bonds- a reliable harbor of safety in past corrections- were down almost as much as stocks until just a month ago, and still have lost more in 2022 than in the past 45 years. All International markets are down several multiples of that, partially due an ever-rising dollar (did you know that China's markets have been down for the past 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. Now sitting in cash is the only guaranteed loser of 2022. So-called uncorrelated assets (translation: those pitched as moving independent of - or even contrary to - the stock market) like commodities, crypto-currency and even real estate funds, are all declining at an even faster pace.
This is an mutual fund outflow report. It shows investors fleeing literally every single category of the stock and bond markets. It almost always acts as a contrarian indicator which means that when 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. But it certainly argues to not be selling when everyone else is selling. "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, in some sort of self-perpetuating spiral. Very few experts have a credible explanation of 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 rate are rising but still historically low. Supply chains are compromised but improving quickly. Inflation is at a 40-year high but expected to moderate this 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).
War looms large in Europe but the most likely scenario is still a peaceful resolution before year-end. 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. Maybe you noticed the uptick in paper license plates these days. Full price for a depreciating asset and financed?... Ouch! When I was a kid, paper license plates and fancy cars meant you were somebody or had accomplished something. Now it usually just represents the culmination of a series of bad life decisions (just like tattoos).
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 they are exacerbated by declining investor sentiment and emotional selling. My guess is that most of the sellers 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." Which I always find to be an interesting response to falling prices. Like, have you ever known someone who sold their assets - home, vehicles or possessions- specifically because it had recently dropped in value?"
Probably not, because that reaction is loco and only happens in the stock market, where many people often and voluntarily buy high and sell low. They claim they want to do the opposite, 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 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 mine, 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, but nary a mention on the front pages of any news site these days (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 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 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. Kinda' like cable television or professional sports, which are almost headed for almost certain default. If anyone is still consuming either post-COVID, I honestly just feel bad for them. 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 explicitly is all the evidence you really need to know they're state-sponsored Pravda. They seemed quite diligent in their reporting during the last two corrections of 2008 and 2020, so their refusal to acknowledge not only reality, but the most important news in the country seems ponderous, no doubt.
It made me laugh last week, when I counted nine (9) references to former President Trump on the front page of the Washington Post website. Not total, but on the same day. Yes, this was May of 2022. I even did a browser search for the words "George Bush" and "WMD" before moving on to a more legitimate news source. And yet I know people who still pay to have newspapers delivered to their home or Inbox. Heck, I've even offered to happily deliver something of similar value and at least as grotesque on their porch for half that price. But still no takers. Caveat emptor.
Compounding this is an ever-growing media drumbeat for war in Ukraine, a country that no one I know has ever visited nor could not identify on a map before this year and one the media hated up until last year, due to neo-Nazi nationalistic tendencies, dizzying corruption and multiple controversies surrounding the Biden family. Suddenly it seems that the matters of foreign countries have suddenly become more aligned with the preferred narrative than highlighting and investigating the true source of our own country's true (including economic) troubles. With the media, it's rarely what they report but more often what they do not report on that exposes their true agenda.
- Why is that?
- If even a borderline illiterate hick from Central Texas can see that Russia is purposely slow-rolling (i.e. sand-bagging) this conflict to inflict maximum suffering on not only Ukrainian but also the rest of Europe in the fall and winter (when temps drop and they will have drastically reduced energy and heat), thus breaking the EU's snowflake-resolve and destroy the remnants of NATO and US influence in the region, then surely the MSM on the ground understands this, too?
- Why would they aide and abet Russia's evil campaign by lying about Ukraine's chances to the American people? Cui bono?
- Why would President Biden purposely maintain ~$120/barrel WTC that funds the Russian military, knowing full well that < $50 oil brings this war to a close by the start of the school year and saves the mid-terms from a historic defeat?
“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
A Decline in Confidence
Suddenly, almost every corner of the economy seems to be facing new and significant headwinds, and many investors appear to believe that things could get worse before they 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 war in Eastern Europe. But make no mistake that the problem is mostly leadership. And yet each year, each administration and each "crisis," Americans voluntarily and enthusiastically relinquish more and more control to a government that can't even manage it's own affairs. At this point, the federal government is largely a jobs program, kept solvent by the country's dwindling supply of producers. At this point, government leadership is just about the only place people past the age of retirement can work are (and Walmart.) This is all an interesting paradox... unless you are a mentally disabled. As a result, new opinion polls from the government's own compromised surveyors at Galliup hint of the ominous conditions ahead...
How many of these worries do you believe were created by our political leaders? And how many were created by capitalism and free markets? Should holding a real job now be a prerequisite for elected office?
So if you are wondering why the stock market is down, it's crucial to understand the the foundation of our dilemma is massive collective angst about our current personal and financial (household) situations... in the context of greater frustration with our national (federal government and regulators) situation... as a result of actions performed by (elected) leaders that we chose. 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. For years, people were led to believe that President Trump was the source of their problems. This is at the root of the mass formation psychosis that we referred to in the introduction.
While many simply lack the intellectual capacity to see beyond that and/or continue to view their political ideology as their primary "religion," a few others are starting to realize they were gravely misled. (And this from someone that did not vote for Trump.) This is not dissimilar to our experience during the Obama administration, when so much personal anger about the decline on the country was laid at his feet, when it was really Congress that did the vast majority of the damage. Today, we've turned our focus on President Biden, a candidate that - as has become apparent to virtually all by now- was tragically (s)elected to be thrown under the bus, a fact that crystalizes more and more each day, creating greater and greater cognitive dissonance, political tension and social unrest from his base: Were they misled?.. Did they mislead themselves?.. Has their life improved and is this really better than the alternative?.. Could there have been anyone outside of his DNC primary competition (who they recognized were unelectable)? Has their folly cost them another decade of power and more liberal Supreme Court replacements?..
All important questions that must be asked to repair the damage that has been done, forestall the nightmare scenario hurdling toward them, in November and trying to avoid the dividing of the party in the aftermath.
How We Got Here
To best understand the environment we're in, let's take a walk down memory lane, shall we...
Most of the investors that I work for have experienced plenty of longer and/or deeper market declines than this in the past. For instance, in February 2020, the market dropped over 35% in less than one month in response to the outbreak of the COVID pandemic. (As of this writing, the market is not even down half of that.) That may surprise some readers, due in large part to the rapid response of the Trump administration and the Federal Reserve ('Project Warp Speed') to quickly approve sending large checks to virtually every American and small businesses in April of that year. I spent most of that month hiding under my desk in the fetal position. But when I emerged, the first thing I told Doris (and those clients unfortunate enough to come near my office) was that, "This free-money program is criminal, and will hurt the poor the most. Because it's run by the government, fraud won't be a glitch in the system, it will be a feature. Like handicap placards or Disabled Veteran license plates. It was the half-century legacy of LBJ's Great Society all rolled into one month. Recipients will end up paying twice the amount of their combined government check(s) in grocery bills next year."
And so it was...
I'm not bragging, and I'm certainly no genius. I just know that most of the time when the government creates a program, they overwhelmingly and invariably end up hurting the people they profess to help. Years later, they will create new programs to attempt to fix the problems created by the original program. The only problem they usually solve is creating more unproductive jobs for Americans that are unemployable in the private sector. Take for instance, consider the police force at the U.S. Capitol on January 6, 2021. They had one job to do, and only had to do it right one day in their entire career. It did not go well (unless opening doors, standing aside and ushering in rioters is standard protocol for government building trespassers.) If they were protecting the offices of Stevens Wealth Management, I would be paying their unemployment insurance by the end of the week. But when you protect and serve the most powerful politicians in the world, I guess everyone keeps their job, gets a pension and a lifetime of trauma.
Even Hunter's Biden's favorite prostitute got $20K for her "female owned sole proprietorship,"
I think we can all agree that the wars on drugs, crime, terror and poverty have not only worsened each predicament but disproportionately hurt those most afflicted as well. Despite this, our federal legislators now think they can win a war against Earth's weather (by moving fossil fuel pollution to Venezuela and Iran?). They're also fighting on two other fronts- inflation and Russia. Through government intervention. Because that always works out so well exactly 0% of the time. Let's see how those wars turn out. I have a pretty good idea. And I'm setting up a line of credit for anyone who wants in on this action.
I mention all this not to embarrass the federal government (they're frankly doing a better job than I could ever conceive of) because for the first time in the history of mankind, our leaders in 2020 attempted to sever the historical connection between the labor (productivity) that they had outlawed and the value (money) that derives from the labor. In essence, the government honestly believed that they could generate wealth without work. So they decided to experiment with Modern Monetary Theory (MMT), which theorizes (and I use the term loosely) that 21st century governments could simply print money out of thin air without any consequences. Arguably one of the silver-est linings of the tragic pandemic is the death of the MMT fiscal model. RIP MMT...
To be fair, MMT is a very intoxicating concept for the very lazy and uneducated. No longer would we need to increase productivity or increase tax revenue to enjoy greater prosperity. Under MMT, when we need money we can just wire it into people's bank accounts and take the rest of the month off. Kinda' like when Transportation Secretary Pete Buttigieg went on dual-maternity leave with his husband
for two months in the
beginning middle of a national supply chain crisis and no one noticed. Or Hunter Biden's entire life. I secretly suspect that's one reason why the Greatest Generation had to pass away for MMT to see the light of day... Like HillaryCare when it was rejected by the Greatest Generation in the 90s, only to be resurrected and codified into law for their children twenty years later as ObamaCare, another wealth distribution scheme for the 21st century. And it's interesting to note that we're not the only country that engaged in MMT folly. Like most things financial and terrible, Japan did it first and with similar results. So much so that even our debased US dollar is still trouncing the yen by 30% in the last two years...
In this case, such MMT quackery could only have been hatched in one corner of the economy- academia, a fantasy land where unicorns poop gumdrops on streets of gold and where kooky theories are espoused by
lifetime tenured professors who tweet their fiction and thrive, free of any opposition in the minds of hypnotized young minds lacking enough real world or work experience to cry, "Horse Hockey!" (I would use different words).
For a political class made up mostly of folks who've never held real jobs in the private sector (much less run a business nor created a single job in their entire life), MMT in 2020 was an idea who's time had presumably come, and had been gaining steam ever since it was unleashed onto the unwashed masses on the Bernie Sanders campaign trail (not a coincidence) and thereafter promoted by intellectual heavyweights like The Squad, led by Alexandria Ocasio Cortez (AOC), her Boston College Economics degree and extensive post-collegiate work history as a bartender. Which, all jokes aside, is still a far more prestigious resume than lifetime-grifter Bernie Sanders, a man so lazy that he was actually expelled from a hippie commune. And yet still would have likely beat Trump in both 2016 and 2020 if he hadn't been railroaded by the DNC. America, what a place.
Needless to say, MMT in reality hasn't worked nearly the way that professors envisioned, and the whole world is shocked. Maybe Zimbabwe and Venezuela weren't outliers after all, and governments can't produce wealth (only confiscate it.) This is a big reason why we don't hear much from Bernie Sanders or AOC anymore. For one, the DNC doesn't want to lose any more counties this coming November than they already have. The early line is - 23 vulnerable seats in the house. Secondly, the idea of replacing labor with money printing was mercifully squashed before we got to the mass genocidal killing stage that symbolized the 20th century regimes under Lenin, Stalin, Mao Zedong and Pol Pot. It's also why just a few months later, even famous liberals are praising former-DNC pariah, WV Senator Joe Manchin, for his heroic stand against President Biden's potentially catastrophic Build Back Better, a plan that would have made our current inflation nightmare look tame in comparison.
Instead, we've learned a lot (the hard way) in the last two years. The most important economic lessons were:
- Countries, companies and individuals should still provide value in exchange for money. Crazy, I know! Highly-educated Millennial and Zoomer brains are exploding all across the galaxy right now, they've been duped by their Econ professors. But wait... It gets worse, kids....
- This money earned from work should also be commiserate with the value provided and- I hope you are sitting down- a free market composed of billions of free participants should determine what specific work is worth, not government bureaucrats who haven't worked in the private sector in my lifetime, vote for their own income and benefits and make their living off of other people's labor. Talk to your doctor today about whether productive work is right for you.
- When you sever or pervert the relationship between work and compensation for said work - for instance, creating money out of thin air- then be prepared for bad things to happen. Like hyper-inflation. Or unsustainable interest rates. Or supply chain breakdowns. Or Build Back Better. Or government boondoggles. Or student loans forgiveness. Or (most) pensions. We all know that giving people something for nothing is easy, fun and popular. But sometimes leaders- like parents- must instead do the unpopular thing for the ones they love, and those that will follow.
- Despite the sharp decline in math and financial aptitude in this country over the past 60 years, the laws of economics still apply in certain areas of the economy, which has left us with some uncomfortable truths and consequences from our brief and catastrophic foray into MMT. This problem is compounded when we elevate and delegate decision-making to an elite class of political leaders lacking a shred of real-world business intelligence (which admittedly goes back multiple generations, due to the fact that successful business people generally lack the desire to rule over and bully others, as well as other sociopathic characteristics).
- Even after finally electing the first President in a century with an actual business background, the outcomes weren't much better. Apparently starting life on third base, becoming a television celebrity and running multiple companies into the ground exploiting the bankruptcy system weren't quite at the level of a Lee Iacocca or Peter Drucker, nor did they prevent former President Trump from increasing the money supply by 40% in a year. Of course, when your Treasury Secretary looks like a James Bond villain (along with matching wife), you can't act too surprised.
We'll never forget you, Steven Mnuchin. And your wife, Pussy Galore. And your creepy henchman. These people are beyond parody at this point.
- As sometimes happens when money is received that is neither earned nor needed, lots of people went out and passed along their money to big corporations so fast you would have thought it was on fire. A national shopping spree by design. This spending orgy helped cushion the financial blow (for about a dozen companies) from government's attempt to turn off the entire economy for a couple of years. If you thought the free money were used to cover life necessities, you would be dead wrong. I sincerely hope that all the STEM majors in the US Congress (I think there are two of them) have more success repairing the ozone layer.
- Some people used their new and unlimited free time during the lockdowns to consume sketchy content from YouTube market gurus, develop overnight expertise in global finance (despite dubious academic credentials) and applied their free money to Robinhood accounts (what I call "Robinyou") to buy all manner of speculative products- including options, cryptocurrency, Non-fungible tokens (NFTs) and meme stocks that are meant to impoverish, bored the young and gullible. That also hasn't worked out so well- for them, the market or greater society. We'll come back to that later, under the section titled, "What Could Go Wrong.."
As a result, by the time people received their quarterly brokerage statements in the fall of 2020, a sizable portion of pandemic market losses had already been recovered, thanks to massive consumption unleashed from the caffeine-like high from the stimulus. By the end of 2020, those who had stayed the course and avoided jumping off the market rollercoaster were back to even again and then some. It was a remarkable, unprecedented market recovery. As usual and quite understandably, many investors - both new and old- may have become conditioned to believe that such immediate bounce-back behavior was "the new normal," instead of an anomaly. And like in real life, the money handed out to almost everyone ended up in the pockets of the top 10% within a year. Gee, isn't that an interesting phenomenon. I feel like Adam Smith might have mentioned something about this topic in the past.
"The natural effort of every individual to better his own condition...is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations."
- Adam Smith, The Wealth Of Nations
In eras with a more enlightened populace, one might argue the pandemic was a perfect short-term experiment that upended over sixty years of flawed monetary theory about the allocation of wealth without commiserate labor in less than two years: less people working and more wealth inequality. (Seeing a pattern here? Or does your bias prevent it?) Neither problem can be solved by transferring the stored labor of one person to someone else. While the adverse consequences can be masked or even ignored temporarily, doing so robs the producer of his full potential to improve society while also robbing the recipient of their dignity, and therefore their full potential to change society as well. In the end, everyone loses except for those who control the medium and terms of labor exchange - i.e. the distribution of wealth (politicians). It may sound pedantic, but it's one of the most basic laws of human nature.
To everyone's shock, the short-term panacea benevolently bestowed by government bureaucrats came with a steep cost, one we would dodge temporarily but someday have to face at great expense (pun intended). That day is today.
This should be on the memo line of the COVID stimulus checks
The Paradox of Thrift
The Saver's Paradox (or the Paradox of Thrift) dictates that "what's good for the country is often bad for the individual" and vice-versa. For instance, what's best for the individual is generally to avoid all consumer debt and maintain a healthy emergency fund, as virtually all personal and national problems are fundamentally the result of excess debt and insufficient savings. But in a capitalistic, free-market economy like ours - especially those using a fractional reserve currency- if everyone lived within their means and flush with savings, the economy would collapse overnight. The actual amount of currency is circulation would be simply insufficient to maintain our current system.
As such, the future prosperity of America is incumbent on a substantial portion of the populace living beyond their means, poorly capitalized and highly-leveraged. In other words, elevated debt and negative net worth. That's one reason why real estate is such a privileged sector of the economy, full of a lot of unique goodies bestowed by the government yet unavailable to virtually any other industries (like 1031 exchanges, deductions, depreciation, etc.) It's also a big reason why land and property valuations have continued to grow exponentially over the last forty years, roughly in line with the explosion in overall debt in the last 40 years. Property is indeed the perfect asset to lever up many multiples of what one's income (i.e. their labor) can rationally justify because it serves as excellent collateral, aids social stability, is tangible and is relatively illiquid (i.e. it's much easier to find and repossess). However, like all government largesse, it has its dark side.
This is relevant to the topic at hand because the Baby Boomer generation was the first generation in American history to fully embrace debt as a necessary component of life. For the first time in our history, it could be utilized beyond the purchase of land. I personally believe that the vast majority of American economics revolves around the Baby Boomer generation. I tend to notice that most people are less aware and appreciative of how influential this group is to American life. As those born between 1946-1964 began to hit their peak earning years and accumulate wealth/debt between 1980-2000 (below) you can clearly observe their fondness for bigger and more expensive housing (i.e. McMansions) growing exponentially compared to earlier generations (below). It's hard for people to accept that a house was not always an investment, and was barely an asset for hundreds of years until Boomers flooded into the market in the late 90's. Their conspicuous consumption is not necessary a bad thing from a personal perspective and certainly not a knock on them. Without Boomers, I'm probably unemployed right now. Deriving directly from the immense wealth of this demographic (on the backs of their own above-average work ethic and their parent's immense sacrifices) and along with their accompanying debt load has come uncomfortable abnormalities. Like the housing market, for instance..
"I'd like to move $100,000 from my retirement account into an illiquid residential housing project because the stock market is overvalued and risky."
A Generational Curse
It's my conviction - and hardly hyperbole - to point out that our government has tremendous incentive to maintain a sufficiently large collection of debt-serfs in order to survive and grow. Suffice to say that if everyone lived within their means and did not spend more than they make (i.e. no debt except for paid-off income-generating real estate), then our current quality of life would not only be reduced, but impossible. So when the housing market collapsed in 2008-2009, along with all the mortgage/HELOC debt along with it, the disappearance of financing represented not only a painful shift for potential home owners, but an existential threat to the country's very existence. The nation's combined mortgage liabilities couldn't just dry up, it had to go somewhere.
You see, debt is to our economy what motor oil is to an engine. Without it, both will seize up and die. Due to stifling government regulations, increased female reproductive rights (and now the massive collapse in small businesses and labor participation due to government lockdowns), America simply cannot produce enough goods and services- nor children- to support our current standard of living. We have to fill that gap with increasing household, corporate and government borrowing.
Entering 2022, there was a general sense of ease from investors, politicians and even everyday Americans that we had "gotten away with it," dodged the inflationary bullet and MMT could perhaps serve as the bedrock of a brilliant new economic system aided by the next big government innovation (following in the esteemed footsteps of public schools, USPS delivery vehicles, mail-in voting and the new 988 mental health hotline rollout). This new way of funding the expanding budget offered a new ability to continue funding useful agencies like the Departments of Energy and Education without all the annoying work and sacrifice (or taxes on the work and sacrifice of others.)
The only problem was that the market drop of 2020 wasn't a true recession nor a correction in the literal nor figurative sense. It was primarily a health crisis that governments around the world introduced in their biolabs and then transformed into an economic crisis (for right or wrong.) By turning off the economy for more than a year to attempt to control the outbreak of their virus, our leaders compounded their folly by generating both a labor (lockdowns) and a debt problem (money printing), a strategy successfully lifted straight out of the playbook of many past Presidential administrations, most notably President Obama's controlled transition of national mortgage debt into higher education in 2008. I wrote an entire article about it for those who still believe student loans were meant to help students and the country, and should be forgiven for the good of both...
As with mortgage and student loans, there exists a possibility - albeit remote - that there were some within government whom may have originally had the best of intentions with their brief and tragic dalliance with Modern Monetary Theory (MMT), but simply lacked the intellectual capacity, courage and/or real-world experience to foresee the full ramifications of their folly, respond appropriately when the program was deemed irreparable or begin working on suitable alternatives to the quandary that both the Executive branch and the CDC found themselves in once they realized the permanent destruction they were inflicting on the American people.
But our government doesn't work that way. A bureaucracy is literally defined by it's specialization of functions, adherence to fixed rules, and a hierarchy of authority- all characteristics which prevent anyone involved from ever being held accountable for their actions, no matter how egregious. The problem (among many) in this situation is that after a certain point (usually early-on), there comes a point of inflection where any remaining supporters of even base-level intelligence should be able to identify the dubious foundation of the program, the disastrous execution and/or the inevitable crippling effect on the U.S. economy.
When this occurs in the private sector, there's usually a process of reflection, regroup and replanning then a defined pivot towards a viable alternative solution. Or the business fails (as 20% of all small businesses fail within the first year, over half within five years and two-thirds by year ten. Unfortunately, the government lacks the capability or resources (people, money, time) to do any of these things. So they tend to devise and enact new, larger and more expensive programs instead that both cover up previous mistakes and allow for the expansion of size and scope.
The student loan epidemic is and has never been beneficial for the country, outside of one fairly unproductive sector (that could have been better squandered almost anywhere else, like infrastructure)For a . Unfortunately, politicians aren't (s)elected to perform that function anymore, they are oftentimes chosen based more on their soothing words and charisma and what they promise to do right now that will make people happy today, or strong tomorrow.
The problem is that in life often what feels good in the short-term (cupcakes, in my case) is usually not the best long-term strategy- and vice-versa. Giving someone what they tell you they want (as opposed to what they actually need) rarely truly fulfills them. This applies to teachers, parents and managers, but also to greater society as a whole. Ultimately, if you can work from a (jaded) perspective that we have largely become a nation of children, so much of the chaos that envelopes us all today - including and specifically, in the financial markets- makes a heck of a lot of sense. The decisions being made are so short-sided and poor that if the markets were suddenly turned over to your local middle-school students to run for the summer, I suspect they might look a lot like the one we have now and you might not even notice the difference.
Protecting American from their lockdowns by printing and distributing free money was more like mom and dad bailing young Hunter Johnny out of jail the day after they've been arrested- a scary experience, no doubt, but not especially impactful to his overall, long-term investor psyche. Once again, government's compulsion to think (and be screamed at by their unhinged constituents) that they must act - when the best course is often to do nothing at all- has almost guaranteed that the natural recovery portion of this particular market cycle will be much more pronounced, chaotic and delayed than it would have been if left to the free market and the financial markets. Our advantages over politicians is that a.) we still have our souls (presumably) and b.) we don't have to act when a pack of screeching hyenas hyperventilate about climate change, social injustice, various "isms," wage gaps and other Nazi threats to our first-world lives. My unsolicited advice is to permanently discard the victim card and narrative so that you're not a guaranteed lifetime loser, since the two concepts are mutually-exclusive. Or you can just travel to any other continent in the world to figure this truth out for yourself- you will never complain of social justice another day in your life.
Your politicians and local political activists know that if they have to choose between the powerful victors and docile victims, they'll choose the latter every day. Without losers, both are out of business. All parasites need willing hosts that do as their told, collect a paycheck, enslave themselves in consumption and debt and don't ask too many questions. That's why large global conglomerates LOVE Ivy League graduates and spend so much time and effort interviewing on their campuses. It's why PACs are always headquarters in the core of large urban centers. My advice is to put both schools and activist organizations out of business. Don't surrender your God-given agency just so that some organization of losers can accumulate members, donations and tax dollars. And don't let your children finance college. Set them up for success, not failure.
The Ideas In Our Heads
"No one in this world... has ever lost money by underestimating the intelligence of the great masses of the plain people. Nor has anyone ever lost public office thereby. The mistake that is made always runs the other way. Because the plain people are able to speak and understand, and even, in many cases, to read and write, it is assumed that they have ideas in their heads, and an appetite for more. This assumption is a folly." - H. L. Mencken
Here's another (related but open) secret: The vast majority of cryptocurrency is a scam, on par with ESG (Environmental & Social Governance) investing, another contrivance cooked up by investment bankers to extract more wealth from crudulous retail investors. If you're unfamiliar with the sudden rise and imminent fall of this pseudo-asset class, it's worth a read.... I wrote an article expounding on the ESG racket recently to ...
If you are unfamiliar with ESG, a.) congratulations, and b.) in my estimation, ESG is arguably one of the biggest and most recent scams in finance, and it's been perpetuated by at most about a dozen investment bankers that may control significant swaths of the stock market. As heads of some of the largest mutual funds (think Fidelity, Blackrock, Vanguard), these extraordinarily wealthy individuals control the fund companies that manage the mutual funds and Exchange Traded Funds (ETFs) that largely control the most important decisions at the majority of the largest companies in the world. Which means they control the economy and the world, so this is not an insignificant situation. When contributing to a mutual fund, most investors (happily and usually unknowingly) transfer their proxy voting privileges to them as well. And in my experience, exactly zero percent of my clients care even three squirts of a cow's utter about losing this privilege. Even explaining to them what they're losing is usually wasted breath, like accepting the Apple user agreement. But they should care.
You see, when buying a share of stock in a company, you are now an owner. And that ownership entitles you to a single vote at their annual shareholder meeting. When you own a mutual fund that owns a share, depending on the size of your investment in the fund, you own a fraction of a share of ownership in the companies it invests its assets into. So by default, mutual fund investors are (very) small owners in the companies that the funds select. However, the nature of mutual funds means that your use of the mutual fund transfers your ownership in the component stocks to the fund company. Each individual investor ownership is relatively small, but when combined with all the money contributed into the fund by all other investors (i.e. why they are called 'mutual funds') gives them control of a significant amount of proxy votes. And that in turn gives them significant control of the individual companies themselves.
As investors have piled into these funds over the past 13 years during an unprecedented, easy-money, buy-the-dip stock market bull rally, the ownership of companies have transitioned from individual investors to the fund companies themselves, or said more accurately the managers of these fund companies. And by controlling the largest mutual fund companies in the world, that control the largest funds in the world, which control the largest companies in the world, the managers of these companies are in effect now some of the most powerful investors in the world. This makes them some of the most powerful people in the world, because even though managers have boards of directors and shareholders of their own, most managers - especially of well-run and very profitable firms, operate somewhat autonomously and with few limitation (think Elon Musk and Tim Cook.) In a world where justice is disappearing (or at least rigged for the benefit of the chosen few elite - think Jussie Smollett, Michael Sussman and Paul Pelosi), these people do what they want. The regulators aren't smart nor courageous enough to go after them, and with the economy moving more towards a version of fascism than a free market, those elite of a certain political persuasion are in effect above the law because they are largely protected by the federal intelligence community (DOJ, FBI, CIA) and the legacy media. That's a harsh indictment but easy to prove. That admittedly sounds morbid and depressing, but that a.) that's the way the game is played and b.) it won't last forever.
The important point to understand is that the power held by the largest mutual fund companies is immense, so much so that even legendary investor, John Bogle- who founded Vanguard, launched the lost-cost investing revolution that we all take for granted and changed the world of investing more than any human in the past century- publicly expressed alarm at what amounted to a consolidation of power into the top bosses of these firms is both impressive, staggering and could be dangerous to the free market and capitalism themselves. If they were to get together and decide that they would only allow investments in companies that (hypothetically) have rainbows in their logos during Gay Pride month, have commercials with biracial couples, or contribute to a certain political party, that would in effect be a "sanction" of sorts (similar to the US response to Russian aggression in Ukraine), which would block capital investment into these companies, isolate and ostracize them.
I may have failed to mention before, but it's really hard to run a company of any size in 21st century. Think of the average job. Then imagine it was 20x more difficult and stressful and add 3-4 hours of work each day in the office. That's what just it's like on federal holidays like Juneteenth. If that's a bad example, you can pick another day- federal employees get 44 paid days off per year, in addition to the 100 days off for weekends. That's roughly 150 days off out of 365. Annnnyways, my point is that being a business owner is really hard. It's much harder to manage a larger firm with people, and every business is a challenge to manage in the last few years when the government made it illegal to work for all but the most politically well-connected, like Amazon, Target and Best Buy. And even they had their problems with customers breaking in to them and stealing all of their merchandise (Use code "FLOYD" for free shipping and 100% discount up to $950. Double coupons on Juneteenth, limit ten purchases per day- or whatever you can carry..), which far exceeded the benefit of being a beneficiary of the federal government's attempt to make them monopolies in 2020-21.
personally direct the vast majority of investor money nationwide through their mutual funds into the companies that they believe they can control. So when they decided ESG should be a new moneymaker (like crypto), they dictated that all companies that wished to receive their money must adhere to their personal opinions and whims on climate change. As a result, this created a massive investment distortion in capital markets that starved a lot of good, viable companies out of significant investment. If companies didn't achieve sufficiently high ESG scores (which are decided upon by whomever makes that decision, kinda like the credit agencies and the China social credit systems), then they would not be eligible for any investment whatsoever from the world's largest mutual funds. Which would be like denying you water and air. As you can imagine, this racket was directed at and certainly included energy companies like Exxon and Shell that make modern life livable (since only 44% of oil is used in vehicle/ transportation and the remainder used for other forms of fuel and as well as components of devices like the one you are reading this article on and almost every other physical entity in the room you are sitting in now.
Going for the Jugular
So the next time someone tells you that oil companies and their greedy executives are to blame for higher gas prices, a.) agree with them (that's not entirely untrue. Drive around the Woodlands and tell me how their execs are struggling to put food on the table), and b.) ask what effect the Executive Branch blocking hundreds of billions of dollars in capital investment over the past decade might have had on the industry they personally work(ed) in. If that someone says anything along the lines of, "a lot," "mass layoffs" or "certain insolvency," then congratulate them on their honesty- perhaps they can begin to understand why our entire oil and gas infrastructure (and more importantly, the rest of the Western world, specifically Europe) was unprepared for the US government's efforts to remove Russian energy from the world market, why energy investors and industry CEOs are a wee bit hesitant to simply start committing billions of dollars of cash and loans into capex now, and why President Biden is begging other countries to give us more oil, presumably because their pollution isn't as bad for the planet as our pollution? (The most powerful country in human history is also begging them for baby formula but that's another story - or is the same story? Talk amongst yourselves..)
How many people don't even have six figures in cash in the bank, and are complaining about Exxon's reticence to commit billions of dollars to an industry the government is actively trying to destroy, just not for another 6-12 months?
These people really have never worked a day in their lives. Even their own media is calling them out.
Prostituting himself out to a country that President Biden labeled "a pariah" earlier this year is truly remarkable, and hardly a great look for our President or the country. Either the House of Saud is a strategic ally or the worst human rights violator of the century, I feel like you have to pick a side. Groveling for oil that I have under my house makes America look weak, and serves as yet another humiliation for an embattled administration that cannot get out of its own way and seems intent on self-destruction. DC Mayor Bowser is gonna need to hire President's Biden's fence contractor to protect DC before this is all over with. (The abject hypocrisy of our political class writes it's own jokes these days, you truly can't make this stuff up anymore.)
The incoming leadership famously knew from CIA "intelligence" that Russian aggression into Ukraine was imminent and certainly understood the massive disruption that their own Russian sanctions would cause in the global energy markets. At the same time the administration was scheming to dismantle US oil and gas production (and our energy and military independence in the process), it surely also knew that a coordinated and purposeful crippling of the average American household budget would unleash unpredictable an unnecessary human suffering and be catastrophic for the country, the mid-terms and their legitimacy to rule. It simply makes no sense.
This leaves only two possible conclusions: a.) Susan Rice and her team truly doesn't care or b.) she really is that incompetent. Like most Americans, I go back and forth. Bill Clinton's brilliant strategist, James Carville said it best exactly twenty years ago, "It's the economy, stupid." Even if Rice eventually throws Biden under the bus (my prediction, probably after the midterms and certainly no later than 2023), the damage to the country and the Democratic party will already be done. It's not like these people are new to politics- Biden was a witness to the Lincoln assassination and you don't represent 'the banker's state' without learning how the game is played. Granted it's no secret that his staff is in charge and possibly taking orders from President Obama. If you're in your third Presidential term, you've clearly become quite deft in the political arena. The District is full of political animals, they only understand power, and are literally unemployable anywhere in America outside of large coastal cities. And yet, regardless of your ideology or what's perception vs. reality, no one can deny they continue charging into certain political disaster, and continue to do so even today.
To be honest, I feel most sorry for them. When this is all over, they won't even be able to find work on K Street. I come from a very long and proud line of Blue Dogs Democrats, but Kennedy would take a flame-thrower to this party (not that he nor MLK would be allowed in this party.) America needs a strong Democratic party, one that cuts off its cancerous 15% fringe degenerates and returns to its pre-Southern Strategy roots of tolerance and compassion. Cramming inflation, interest rates, $5 fuel and a broken supply chain up our (ear) is not compassion. This grotesque facsimile of Camelot more closely resembles Alice in Wonderland, a true Mad Tea Party. At this pace, I sincerely doubt it survives the current incarnation past 2024. No matter how many apparatchiks we pump out of the university system or how many unskilled migrants we dump into the heartland (I've got clients living across the street from the INS bus stops and unless you've seen that with your own eyes, you know nothing about what's going on with immigration). Neither demographic will be enough to overcome the economic masochism being unleashed on our country, and applying more stupid to a problem has never been a viable solution anywhere but Jonestown.
If you consider yourself "green," then where was the benevolent and skilled invisible hand of government intervention between 2004 and President Biden's 2001 inauguration when the XOM stock price (i.e. greedy shareholder profits) went exactly nowhere FOR SEVENTEEN YEARS? (While the stock market rose 5X)?... I'm old enough to remember when XOM stock lost more than two-thirds of it's value in just five years leading up to COVID? And now they're executives are being painted as greedy, as Washington has doubled their stock price in 12 months? If that's a green new deal, no thank you.
When Exxon lost $20 Billion (with a B) in 2020 (under a Republican administration), I do not remember many howls about price gouging and demands for price caps...
President Biden, the most powerful man in the free world just got humiliated by the House of Saud AND taken to the woodshed publicly by one of America's top CEOs all in the same week. This was in response to his surreal letter (clearly written by someone who has never prepared a P&L statement in their life) that singled the company out for price gouging, when any rational person knows this is his mistake alone. It's my conviction that the time has come for us as a country to a.) step back and re-evaluate whether our leadership would be better situated in a nursing home or halfway house (can I still use that term in 2022?) and b.) for smart investors to rewire our brains to begin looking for investment opportunities to specifically exploit stupid. In other words, it's time to start looking at our elected leaders (and their constituents) like the credit card companies, banks and Wall Street view us. And go for the (investment) jugular by gladly taking advantage of their missteps and investor's responses (selling off), so as to bring the price of WTI back down to it's rightful 2020 range of $40-60/barrel and make some profit in the process.
I know that strategy will offend some people. It's uncomfortable to consider taking advantage of feckless leadership and unskilled and inexperienced investors. But personally, when someone decides to invest in the stock market, they've signed the liability form. It's hard to argue they are still an innocent party or a victim. For example, If you were to show up at Kyle Field in College Station on a Saturday afternoon in the fall unprepared and/or unqualified, and your team is losing by three touchdowns to the Texas A&M Aggies, if you're embarrassed and upset that they keep their well-paid semipro varsity squad on the field for more name/image/likeness (NIL) royalties, then that's on you. No one marched you into the slaughterhouse. If you thought it was going to more akin to a pillow fight, then perhaps the real error occurred further up-stream.
It's not the Aggies' job to go easy on Sam Houston State, run out the clock or bring in their backups. On the contrary, the most caring act of love is to continue to keep their foot on the (proverbial) throat of their opponent until the final whistle. That's how humans learn, grow and improve. If your outmatched team is getting paid millions of dollars to be eaten by the lion, then it's your job to play better, or die (metaphorically) trying. The Bearkats are the problem, not the Aggies. And if you weren't prepared for the reality of the situation, then maybe you should have stayed home. Maybe you should have studied/practiced more and harder. Maybe someone should have exposed you to risk and loss earlier in the process. When the student is ready to learn, the teacher will appear.
If a generation of investors is suddenly realizing they don't know what they're doing, investing is harder than they thought and this game is not for them, better for them to learn that in little league then once they're lined up against a 340 lb defensive lineman named Shemar. Who's more to blame... Aggie head coach, Jimbo Fisher? Or their coach?
Similarly, it would have been better for new and unskilled investors to understand the markets before losing all their money than afterwards. They can instead learn from the experiences of others (which is the second-best method and way easier) and not be led to temptation to trade based on free money, gamified apps, free trading and an inflated sense of self-worth.
Investing in the market is still very much a game (as all modern warfare is), but the specific components involved are anything but trivial. This is your (financial) life and it's no one's responsibility but your own to play the game well. Many have been (mis)led to believe they can constantly monitor and outsmart the financial markets (composed of thousands of institutions with huge research teams, very tall buildings, front-running algorithms and Jerome Powell on speed dial), without any formal education, lengthy experience - especially in declining markets- and an honest and objective understanding of their own investor profile. It therefore does little good to tell new or unskilled investors that they're special, can do anything they want, or enable further delusion.
Telling me in high school that I could have a future as an offensive tackle in the SEC (at 5'10" and 170 lbs.) would have been not only absurd, but dangerous. Carried to it's extremes, I could have lost a limb. But when it comes to mental and intellectual prowess, promising someone that they can't beat Vanguard and Blackrock- much less the market- is still considered offensive by many people. What do you mean someone can't have/do/say something? But that, ladies and gentlemen, is America- where few are ever told "no," many lack an understanding of (or much recent history) true market risk, their distorted view of reality or their infinite, unquenchable capacity for "b.s." I would love to tell them otherwise, but I care about them too much and I want to see them succeed. A nation of enlightened, experienced and resilient investors that have been put through multiple (economic) recessions and (market) corrections is a stronger nation.
Enabling the approach towards investing that we've adopted since the Great Financial Crisis in regards to investing disposition and behavior is literally why we're in this mess in the first place- in some ways we've become a nation of children that have been coddled our entire lives, resulting in mass speculation in gimmicks like Non-Fungible Tokens (NFTs), most forms of cryptocurrency and meme stocks. These are all "investment categories" that should not and would not have existed if not for a fragile, gullible culture that frankly wasn't spanked. Now we have a not-insignificant percentage of participants cashing in their chips at the slightest hint of economic turbulence and going to cash.
For a market to operate efficiently, someone has to be on the other side of that trade to buy or sell your shares. No one is holding a gun to investor heads as far as I can tell. So if another investor wants to buy high and sell low, who are we to stop them? Our responsibility is to win the game (retirement, college, estate, insurance, etc.) and that requires buying low and selling high. All of which involves being on the "field" of Wall Street and mimicking the big money by thinking long-term, being patient, having cash (and some stones) and being ready and available to exchange stock shares from those that sleep better at night holding fiat currency losing 15% per year indefinitely. Or at least until the varsity team shows up to lead this country.
That sounds harsh, I understand. It feels like I'm punching down. But no one got rich playing down to the lowest common denominator (except the Texas Longhorns). I think we need more harsh in our world. We need to be reminded that we have vast reserves of potential that are untapped because we think we're good enough. When you look around at all that society has accomplished in this modern world, it can be easy to forget that we still live in a world largely awash in stupid. You know how I know this? Because even in 2022, Hertz has to put this disclaimer in their annoying Tom Brady commercials where he recharges himself like an EV:
Tell me again how we're not just slightly evolved chimpanzees in fancy clothes?
The fact is that apples never fall far from the tree. I take it as my own personal mission in life to to instill intelligence, resilience and fortitude into our national financial markets if we hope to create the next generation of great investors, those that value earnings and dividends over hope and faith. This post was originally over 150 pages in MS Word, so perhaps you can believe me. But we all have a collective responsibility to gird ourselves to be smarter, more rational and more antifragile investors.
“You can’t let a youngun’ decide for himself. He’ll grab at the first flashy-with-shiny-ribbons-on-it-thing he sees. It’s difficult for him to tell the difference between right and wrong. When he finds out there’s a hook in it, it’s too late. The wrong kinds of things come packaged in so much glitter, it’s hard to convince him that the other thing might be better in the long run. All a parent can do is say, “Wait…trust me”…and try to keep temptation away.” - Andy Griffith (some old dude from the 50-60's.)
We have a fundamental breakdown in economic intelligence in this country that has been festering and compounding for a generation. And we've made some very poor judgments about the people we allow to run our country. We compounded this by becoming complacent about surrendering the culture to the mentally ill and those with a desire to dismantle the greatest society in human history. I recognize that fact also probably offends some people. I'm deeply concerned about that and when someone provides another culture that has accomplished more, I'll gladly surrender my position. The truth is that the United States was specifically designed to be run on stupid, but not inept and immoral. With one person = one vote, the system is designed to protect against that and has been successful over time. I once thought the Founders had a blind spot for that eventuality, but it turns out America life expectancy has exceeded all of their wildest expectations.
I also doubt they ever could have foreseen an entire population kept so comfortably numb and willfully ignorant by technology. One might even begin to suspect we're being kept ignorant about finance at the personal, community and national level on purpose. We're being lied to so often, so blatantly and so often that it doesn't seem to even register anymore. It's 2022, and half the country is still thinking about Russian collusion and unarmed imbeciles in Viking helmets stealing Nancy Pelosi's lectern.
The bad news is that anyone anticipating a top-down solution to our most pressing problems is going to be sorely disappointed. This isn't a case of time or resources, its re-enlightenment. The good news is that it's 2022, more information exists in our smartphone than all the mental capacity of the entire world a couple hundred years prior. As such, it is now incumbent on each and every American to accept that our current leaders aren't getting any smarter from here on out. They're too old, too ideological and too corrupt. No one is coming to save you, which feels scary but is actually quite a liberating mindset for you (and your trusted financial counsel) to build and protect wealth together by understanding how the game is now played, eschewing all external noise to focus on reliable and time-tested principals of money management, and positioning wealth in strategic and prudent ways to (legally) take advantage of the dysfunction in the financial markets and financial illiteracy of the majority of the populace who struggles with logic and reason to win at finance, investing and life.
The government allows for the existence of most crypto-currency for many reasons, but one of the most valuable ones is it permitted the 2020-2021 stimulus money to quickly flood into the crypto universe (i.e. early adopters, or HODLers). I wonder if the Fed's hope was that what hasn't already evaporated into the ether this year (i.e. to the early investors at the top of the crypto
Ponzi pyramid) will eventually and slowly drip back into the economy on a more controlled and gradual pace, as to avoid even more massive inflation than already exists. Now that we're in hyper-inflationary 2022, perhaps it's become necessary for the Fed and it's primer dealers to pull some of that stimulus money back out of the economy... hence the current collapse in virtually all crypto digital assets.
To many that's not conspiracy theory, that's by design. Otherwise, why would an asset and currency that is supposed to be non-correlated to the US dollar and stock market fall by over 70% in value in a single year, during hyper-inflation and an economic contraction? If crypto was performing as promised, it should be actually rising in the face of a currency debasement and market correction, not falling off a cliff at 3x the speed.
Protecting American from their lockdowns by printing and distributing free money was more like mom and dad bailing young
Hunter Johnny out of jail the day after they've been arrested- a scary experience, no doubt, but not especially impactful to his overall, long-term investor psyche. Once again, government's compulsion to think (and be screamed at by their worst constituents) that they must act - when the best course is often to do nothing at all- has guaranteed that the natural recovery portion of this particular market cycle will be much more pronounced, perverted and delayed. Our advantages over politicians is that a.) we have souls and b.) we don't have to act when a pack of screeching hyenas hyperventilate about social injustice, isms, wage gaps and other Nazi threats to our first-world lives. My unsolicited advice is discard the victim card and narrative so that you're not a guaranteed lifetime loser, since the two concepts are mutually-exclusive. Your politicians and activists know this. Without losers, both are out of business. (Hint: don't give up your God-given agency so that some organization of losers can collect donations and tax dollars.)
The Great Financial Crisis
The collapse of the housing market during the Great Financial Crisis (GFC) started in 2005, was already weighing heavily on the economy and pushed the stock market down as early as 2007. Stock prices continued falling through 2008 and market fever ran it's course through March 2009, at which point the market and most investors were down much more (over - 50%) and for much longer (17 months from the all-time highs of October 2007) than we are in this current economic situation - and for an actual legitimate reason (as opposed to today's general angst about current conditions and future outcomes).
By late 2008, most investors were sobering up to residential real estate's myriad and rampant excesses (as made famous in the remarkable book that became an even better movie, The Big Short). The financial sector that had funded it was also at genuine risk of collapsing in on itself, banks large and small were staring down insolvency and investment firms were closing up shop left and right. The nightly news was running an ongoing slideshow of well-dressed white-collar professionals standing on the sidewalks in Manhattan with their careers in a cardboard box, crying and talking into their cell phones.
Part of the red-hot growth in the housing market today is due to the immense carnage inflicted on home builders and developers in the aftermath of the GFC, an environment of low building that perpetuated for almost a decade following the bottom of the stock market. Our domestic housing inventory shrank to minimal levels so that up until now there has simply not been enough houses being built- even with absurd valuations, obscene materials costs and the specter of crippling property taxes for new homeowners or those upsizing in the past few years.
Even at the current pace, it will take many years to catch back up from the dearth of building from the decade preceding the pandemic, and rapidly rising interest rates are likely to extend that timeline even further. This is one reason that building is likely to continue well past the point of prudency over the next few years. Real estate is a unique industry in that the only alternative to building for some professionals (in a market where few can afford to move into a new and higher mortgage rate) is going belly up, so it creates a distortion that often results in boom-and-bust cycles very similar to the energy industry.
The Dot Com Bust
Last but certainly not least, we would be remiss to ignore the 2000-2002 recession, a period in which the market seem to bounce aimlessly from crisis to crisis. The collapse of mega-hedge fund, Long Term Capital in 1998 was soon followed by Y2K hysteria of 1999, to be followed by the dotcom bust (with the tech-heavy NASDAQ exchange losing over 80%!)... followed by 9/11 and the "War on Terror"... followed by the collapse of Enron and WorldCom.
As a result, that correction stretched well over three full years, butchered an entire generation of investors and still seems worse to me than our current environment, for reasons that I cannot completely explain (publicly anyways... although I have my theories.) I suppose that we've different people now, and guarantee that we're different investors.
So why are investors that have been through much larger and more serious corrections in 2000-2002, 2008-2009 and 2020 so much more concerned about this market decline? Have markets changed? Or have we? Is it just enough to say we're older and inherently 'closer to our financial goal timeline?' Or is there more at play?
Even my clients in their 60s and 70s (who can look forward to decades more of quality living) still openly confess to me that they "don't have the time to recover from another correction." I hear that literally every day and I do understand it, at least the premise (if not the reality). Others- even investors during the Jimmy Carter administration- still fear we'll never recover from this presidency either.
I'm also being told, "this time it's different" with increased frequency, a phrase that is famously the most dangerous words in the stock market. Somehow this most recent downturn feels worse to many of our clients, and that's why it's worth exploring why this recent "yard sale" - my words- in the market (where investors are communicating through their actions that, 'everything much go at any price!") has been so much more stressful than in the past.
Where We Are Today
Maybe it's true that this time is different, or maybe it isn't. Of course, history never repeats itself but we all recognize that it does indeed rhyme. Perhaps we're at the bottom of this cycle, or maybe starting a sustained move downward. It's impossible to know the short-term outlook for certain because the market is at it's most-fundamental core represented by the combined "intellect" (and neurosis) of several billion self-interested parties of varying skills and intelligence, all trying to make the best decisions for themselves and their future, while also attempting to balance and control the twin market emotions of fear and greed.
"The man of system…is apt to be very wise in his own conceit; and is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it."
- Adam Smith, The Theory Of Moral Sentiments
I don't claim to know the future, nor can I know the outcome of wars. I don't sit in the boardrooms of America's most successful corporations (well, except my own.) I certainly can't predict the decisions of our leaders nor the future outcomes of our elections (though I have some hunches!) What I do have is some perspective based on history and the evidence that suggests that:
a.) CNN (and other mainstream news outlets) are virtually ALWAYS wrong about most things, but nothing more than investing and the financial markets (uh oh, here we go again...) It's not that their stupid, at least that's not the full explanation. It's because they're biased humans with an agenda. And like politicians, they rarely go much deeper than the surface for facts because the modern news cycle is so brutal and rushed. They have to get the story out quickly to get the views and clicks, and that prevents them from fully utilizing logic, reason and accountability. Which is convenient because most of them are journalism majors.
Even if they were accurate in their conveyance of fact, they would be hampered by their lack of intelligence and an impossible dictate for them to act and report prudently and patiently. That's why their influence on the culture has been so devastating the last few years and they're going out of business so fast. Their self-destruction is a self-perpetuating cycle, one they happily (and desperately) extend to their audience. But it doesn't have to be your cycle nor destiny. You can not only ignore them, you can live life and trade investments against them.
b.) Retail investor and CNN consumer sentiment is actually one of the most reliable contrarian indicators in existence. For any Texas Aggies (whoop!), that means what NOT to do. This is because - like many news sources today- what they call a journalist in modern parlance is really code for an activist (the same phenomenon also exists at MSNBC and Fox). Most of us know that already, and few are deluded enough to think that Sean Hannity or Joy Reid are any more credible sources of objective journalism than say the cast of The View.
If you're unfamiliar, The View is like The Jerry Springer Show for the 21st century, primarily programmed by men towards unemployed women, and hand-downs the dumbest show on television. But every once in a while, the software in the heavier hosts short-circuits from a toxic combination of cat litter and boxed wine and they threaten to go on sex strike if no one listens to them. Which seems like an odd strategy, but hey work it if you got it.
As a result, these talking heads read off a teleprompter an agenda that is linked at the hip with a delusional narrative of how they think the world works from their million-dollar condos on the UWS. Most of my clients are aware of my love for journalist on par with politicians, as I consider the majority of modern news content akin to young adult fiction. At this point, it's just journalism majors literally making stuff up out of their head, to justify bad parenting and a lifetime of poor choices.
Weird that I don't see a single black person in this racial justice protest in Seattle
c.) When they are promoting either fear or greed, investors would literally become better assuming that truth is the opposite of whatever it is they're saying. I'm convinced the media hates investors.
For instance, what do you make of CNN's current agenda below and at this link? What would be an contrarian response to this 'information?'
Who do you trust more for your financial news, Warren Buffett or Brian Stelter? Who would you invest your money with? For that matter, who would you let into your house?
I doubt five people on the planet know what's going to happen in Ukraine next week. Putin could fall victim to blood cancer, or he could launch a nuke (or both.) Sustained conflict could cripple the world food and energy supply, or a sudden ceasefire in Ukraine could bring the price of oil crashing down overnight. Europe could run out of oil and natural gas before this winter and end up going medieval by 2023.
China could decide that now is the time to claim Taiwan, or it could continue to keep their own economy shut down- unleashing untold suffering on their people - just to watch Americans melt down over the loss of two-day shipping. (That's my response, anyways). The Biden administration could impose price controls and ration fuel. Our domestic and economic challenges include so many variables that a comprehensive and palatable solution to today's problems makes my college Differential Equations curriculum look easy.
That's partially why we will have to go through painful contractions as we give birth to the next evolution of this country, politically and financially. Rise and falls are literally built into the system. It's not a glitch, it's a feature. That's also why the founding fathers of the republic were and always will be i(n my humble opinion) the smartest Americans that ever lived. They designed the system to work with and for an intelligence-challenged population. (How's that for political correctness?)
Perhaps that's why their likenesses and legacies must be removed from public view, because if you can't get rid of the memory of a better time, you can't understand the problems with today and you therefore can't hit rock bottom. In America if you don't do that, then complete reversal of this status quo dumpster fire of impotence and hubris can't commence.
So where am I going with this?
I suspect all of this is closely related to why the market is down right now- which is for no good reason. Stupid is built into the equation. And it took me a long time (roughly twenty years, in fact) to realize this. See, I used to be a libertarian and I basically still am at heart. Hell, I was the chairman of the party for Kerr County from 2008-2010. (This fact does not score me as many dates as you think it would.) I learned pretty quickly that such an impractical ideology would only work if everyone in society acted perfectly, like me. But none of us are perfect people- present company excluded, of course- and we're not a perfect society.
Our founders knew this. So the system - both political and financial- was set up so that every so often, we: a.) would have to be reminded of that (enough that it really leaves a
scar impression), and b.) would have to understand and accept that excessive swings in all aspects of our society- politics, spirituality, entertainment, and finances- are a healthy and unavoidable sub routine coded into the software of democracy and a republic.
In my estimation, a Fed Funds rates still below 1% was insufficient reason for a market sell-off. An uncomfortably rising cost of living (or what I call 'cost of lockdowns') in 2022 equal to and even exceeding the dollar value of multiple stimulus checks we enjoyed in 2021 also does not justify nor fully explain it. A crippled supply chain that is struggling to match supply and demand (both with materials and labor force) doesn't tell the story either.
War in Europe and the likely impact on energy and food are very serious matters, but they are solvable. Lastly, a dysfunctional political class being chauffeured around in a clown car of corruption isn't new and also not enough to bring us down. Those with enough age and wisdom under their belt recognize that these crisis too will pass given with enough time.
It should be clear to most that our current leadership across both aisles doesn't know what they're doing, and doesn't really care to know- which feels eerily similar to the previous administration (and all the ones that came before it.) I often wonder if the primary difference today is that we're just a more skeptical and cynical audience than our ancestors. Or maybe that's just me.
I suspect we've seen too much in the last six years, we've been lied to so many times that it's hard to not feel like gaslighting has become the national pastime. The Russia hoax that is unraveling in front of our eyes in the Michael Sussman trial and the Hunter Biden laptop scandal are both communicating to Americans that they are going to have to dig deeper than their elected (and unelected) leaders to find truth.
Our politicians and leaders now deceive with such skill and sincerity that it's easy to think you're seeing things. Biden just claimed publicly that vaccines weren't available before he came into office already vaccinated. Donald Trump and Stacy Abrams are still trying to claim victory in their last elections. We're being told that men can get pregnant, and that words are now violence (but silence is also violence, proving that you really are "damned if you do and damned if you don't.") The same people that wanted to imprison antivaxxers in internment camps just last year are now protesting for full body autonomy outside the houses of Supreme Court judges, including ones that support their cause. And now, Machine Gun Kelly and Megan Fox have professed that theirs is a true love.
Aversion to truth has become one of the biggest problems in our society right now. As we've systematically (and some believe, purposefully) dismantled the nuclear family, it's not a coincidence that we've also supplanted logic and reason with emotions and feelings. We've replaced parents - specifically fathers- with government-subsidized single-parent households and anti-American groups with mission statements proclaiming as much.
A nation of fatherless (or father-challenged) homes, and a lack of real leaders and heroes who will tell us what we don't want to hear even when it's good for us, has become anathema. We've attacked and all but eradicated healthy masculinity (and it's feminine equivalent) and with it the courage and resilience to endure hard times, or even times that are simply "not awesome." We've become the opposite of Taleb's anti-fragile.
As a result, a profound sense of disquiet has enveloped the republic and many citizens are feeling tremendous unease at the realization that they can longer trust what they see (deep fakes) or hear (soundbites out of context). Many seem convinced that the media is no longer a purveyor of objective information. This is leaving Americans confused, suspicious and rattled by even the slightest agitation. As George Bush, Jr famously quipped, "“There's an old saying in Tennessee — I know it's in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — uh, um, uh.... you can't get fooled again.”
By the Way: Am I the only one old enough to remember when George Bush Jr. flattened the entire country of Iraq into a giant parking lot in order to 'free' it, and his only punishment was someone throwing a shoe at him? Now Senate Majority Leader Chuck Schumer publicly and in scripted and rehearsed remarks is threatening the lives of Constitutional experts on the Supreme Court for their interpretation of (wait for it...) the Constitution. On a similar note, is it weird that our Presidents only want to liberate countries with fossil fuels (Iraq, Libya, Syria)? Yet leave the most oppressive countries in world history (for instance, Saudi Arabia) alone? Is that related? Should I stick to economics?
I definitely have gotten that question this year! So I shall digress...
Sometimes, I wonder if we're all experiencing some form of collective cultural amnesia, like casually forgetting how incompetent George Bush Jr. truly was, arguably as much as Joe Biden and at a much younger age. I recognize that statement annoys and hurts a lot of feelings. No one appreciates discovering that they voted for a moron in the last seven presidential election cycles ("s/he was the lesser of two evils.") The cognitive dissonance is just too tangible, I get it. But my advice is to never let feelings interfere with the truth, and that's something we've definitely lost as a country. It seems a lot of people actually want to be lied to. Otherwise, how else can you explain the continued existence of cable news and newspapers? My friends, family and clients who do not watch it are significantly more enlightened (not to mention far happier) than those who do, and yet half of society has failed to catch on to why.
And if you needed any sort of reminder or validation of what feckless leadership looks like, yes the following video is real and yes it happened JUST LAST WEEK...
We're being ruled by fairly
clever smart people with very distorted view of the real world for a very long time. For instance, do you realize that Bill and Hillary Clinton haven't driven a car since 1996? President Biden entered Congress before the combustible engine was invented, yet claims to have been a commercial truck driver.. And do you think President Trump is rolling around in a Rav4? Do you think that any of these people make their own food or dress themselves? Are they are being told by their trusted advisors how the cow ate the cabbage? I think not.
If you think the Kardashian clan has lost touch with reality, consider they weren't even famous before Kim's sex tape... THAT WAS RELEASED IN 2007... And look how mentally damaged that family is. So just imagine if you were so famous that it extended into a previous century, or so famous that you've never had to deal with people like me on the road. Or go to the DMV. Or negotiate a legal settlement. Or lose power in your home. Or even stand in line? Do you think that all that comes with fame and/or politics over multiple decades could distort your perception of the way the world really works? Then perhaps you can begin to understand how these people can make some terrible decisions and why it's going to take us some time to work through them.
“The investor’s chief problem, and even his worst enemy, is likely to be himself.” - Benjamin Graham (Father of value investing, Warren Buffett mentor and author of the The Intelligent Investor)
As a result, when a big and scary universe that falls outside the control of media or government suddenly exerts itself (global pandemics and stock market crises, for example), I believe a disproportionate number of Americans don't really know how to react anymore. We're become comfortable always being able to retreat to the comfortable confines of our own confirmation bias in our favorite local news sources and propaganda.
But this time is different. With crime is rampant in the streets, gas over $4 and rising, and stores shelves empty, even the most indoctrinated and delusional zealots are beginning to struggle to make sense of it all, to reconcile their narrative with the reality on the ground. They're forced to ask, "How could this injustice be happening to me? In my safe and comfortable cocoon / narrative / ideology / psychosis, this current reality couldn't be possible. Could it?
So perhaps it's no surprise that we - and especially and specifically our youngest American - recoil from exposure to the truth so quickly and aggressively. Perhaps that's the primary reason when the world doesn't go the way we want... be it politics (Supreme Court judges or judgments), athletics (blaming refs, claiming the MLB or NFL is racist (which is HI-LARIOUS), female athletes subsided by the men's teams demanding more of their earnings, mobs destroying cities when their teams lose), entertainment (actors assaulting each other on television, disqualifying movies from recognition unless there is sufficient gender and racial quota, the marginally employed opining on Twitter and Facebook during business hours, despite having no credible knowledge of the topic), media (projecting the corruption of one US President onto another President), grade inflation in the schools and universities, or other entitlements we think we're owed (free money due from other's labor, refusal to pay back student loans, insistence on high-paying jobs, positions of authority, validation, signs of appreciation, bonuses and fulfillment at our first jobs out of college)... a certain segment of the population is struggling to comprehend, adjust and thrive.
It's enough to make anyone crazy, both those who know what's wrong and even more so those who don't. In fact, studies are now confirming that those who cannot or will not reconcile their flawed view of the world with the true reality are the ones struggling with their delusions the most, and it's getting worse.
What's The Point?
I bring all of this up because I suspect at least a portion of our shock at the stock market's drop is due to modern conditioning. I'm suggesting that maybe when the stock market goes down for just five months following a 14-year (168-month) bull market, perhaps some investors might be overly vulnerable to premature selling for no good reason at all, simply to stop the pain or prevent them from facing the truth that sometimes markets don't do what they want, things don't always go their way and sometimes we buy things that can termporarily go down in value. Maybe we don't control everything, and that's okay.
I further suspect that's what's going on right now in the financial markets- where virtually everything (except for notably, real estate and energy)- is falling suddenly, hard and dramatically. Personally, I want markets to go down so I can buy more shares of my favorite investments cheaper, because I thought they might have been a bit overpriced at times during the last few years. But I recognize and acknowledge that's easier said-than-done when you're supposed "conservative" portfolio is falling at the same terminal velocity as much more aggressive investments. For many, these kinds of drops shock our sense of justice and fairness. We played by the rules, we didn't engage in speculative or risky investments, and we were patient.... yet we are still losing so much money. When is it gonna stop?
The truth is this current market and this recent April-May selloff feels like a gut-punch to me as well. Below, I hope to convey the response I give to myself each morning when I ask myself,
- "Should I be doing something in the face of this market sell-off?"
- "Should we join the herd and move to cash, so we can ride this out?"
- "Or should be double-down on the eventual recovery and go for broke?"
This is the response I typically reiterate to my clients. It's what I firmly believe.
You probably thought the above was the article, but it was just the prelude.
You've probably noticed that financial markets - and portfolios- are currently in the throes of a series of challenging headwinds in the economy both domestic and abroad. It certainly seems likely we may be headed for an official recession (two quarters of negative GDP growth) and a correction (-20% drop from highs) in the S&P 500. The economic slowdown and resulting impact on the stock market is largely due to forces that existed in 2021 as a result of government policy and actions initially launched in 2020, but have been culminating throughout the majority of 2022 and seem to have accelerated in the last 30 days.
Suddenly the inflation, rising interest rates and compromised supply chain that we've all been aware of for some time are all colliding simultaneously with many American's pocketbooks, and people are reacting. Unsustainable real estate valuations went exponential starting in late 2020 and show no signs of abating. Ford trucks and SUVs are selling for $80K in the face of $4+ fuel, neither of which is a new development for most Americans.
The store shelves have been thinning for quite a while now, and it should have been obvious to most- at least our leaders- that the potential loss of access to Russian and Ukrainian energy and agriculture resources could have drastic impacts back home. So what's changed? And why is it affecting the stock market so much and so suddenly?
Americans are starting to buckle, in both their spending and their investing habits. What is most disappointing is that both the recession and correction are effectively man-made crisis - yes, at least partially caused by foreign leaders- but also by leaders that many Americans still trust.
Government first started curtailing oil and gas production, closing small businesses and factories, and sending out stimulus checks in early 2020. But it's only now that the effect seems to have finally hit the mainstream, or more specifically the consumer. And with our economy being the largest in the world, and consumer spending representing more than 70% of it, our personal spending habits are therefore one of the most important factors in the world's economy. Our reliable addiction to new cars, technology devices and elective health care help drive a powerful and dynamic economy that often pulls many other economies along with it, like moons around a planet. So pat yourself on the back the next time you buy a cheeseburger, smartphone or vacation because our profligate spending has literally pulled billions out of poverty over the last forty years.
I predicted in a post written well over a year ago that Q1 2022 would likely be the moment when the average American truly felt the discomfort from government decisions made in 2020-21. Few listened to me because a.) honestly, who cares what anyone thinks anymore?, and b.) people are generally averse to any random predictions spouted by some dude in the sticks about something so obscure and misunderstood as inflation. Besides, Kim Kardashian just recently left Kanye West and is now dating Pete Davidson, which is way more interesting than global economics.
In all fairness, government hasn't introduced this level of inflation since the 70s, so Americans could be forgiven for becoming somewhat complacent about the topics of monetary policy, the inflation it engenders and the side effects of both.
“Inflation is always and everywhere a monetary phenomenon.”― Milton Friedman
Translation: Inflation can only be created by the Federal Reserve in collusion with the Executive Branch. This is basic Economics 101 and not debated. The question is whether it's purposeful or by accident (i.e. mistake), why is it being done, is it effective (based on past evidence) and who stands to gain/lose? Which demographic is hurt most by rising prices- rich or poor?
How Did We Get Here?
At this point, you're probably wondering, "Didn't we go over all this in your March
The short answer is, "yes." But I get paid by the word, I have new jokes and still encourage you to keep reading. Don't give up on me now. Just like Marvel movies, the back story is critical if you are to understand the present and be prepared for the future.
It is imperative to understand at a deep and existential level that the reason the stock market is down right now is that people want to feel like they are in control, not only of their own lives and circumstances, but also their future path. Right now, more and more people are starting to wake up to the reality that they not only don't have as much control of the present and foresight into the future as they thought they did, but that they never did and never will. And that is a troubling concept to work through, one that most never will.
Most of us are familiar with the expression, "ignorance is bliss" and I'll go out on a limb to suspect that in the past few years you've secretly entertained that idea more than once. For some this can be liberating but for most, this epiphany creates mental stress in the subconscious mind that can weigh heavily on their mental health. It did on mine for many years. This overarching paradigm can also apply to your money, and we'll come back to this idea later.
Suffice to say that the less attached you are to your money (which before the stimulus used to represent your labor), the more successful you will view and employ it. To maximize your profit, it will be beneficial to consider that investing is a game and the money is not real.
It's All In Your Head
I'm fully convicted that before 2020, Western society was already decades deep into a massive mental health epidemic brought on my the level and pace of change and stimulus, technology, social media, and the acceleration of forces that destabilized society- outsourcing of labor, environmental toxins and degradation of our food supply, sedentary lifestyle, mass adoption of pharmaceuticals, depravity pushed by the media and entertainment, bad parenting and coddling of 2 1/2 generations, feminism and changing gender roles, equality of outcome, diversity and most of all, the promotion of self over all else.
Then the pandemic and lockdowns came, and whether it was misguided or part of a bigger plan of unravel the fabric of the country, they pushed a lot of people to the edge of their mental and emotional capabilities. Many people got pushed right over. And now it feels like we're all living in an insane asylum. One that's a.) extraordinarily expensive ("where is all this money coming from?) and b.) experiencing a labor shortage ("where did all the workers go?)
It's gotten so bad that this past week, my cryo salon told me they were so understaffed that I would now be expected to manage my own session. I'm 100% not making this up. Look at a normal cryo chamber and ask yourself, "what could go wrong here?"
While this is certainly a first-world problem, this is where we are.
All I can think about is the karma I'm inviting since making fun of Antonio Bryant, (formerly) the dumbest player in the NFL (which is saying something.)
So that's the wide and shallow foundation of the pyramid. On top of that layer, people are losing faith in our leadership across the board. I'm not just talking about the political situation, which does feel like your local Chick-Fil-A has been taken over by McDonald's. For the past thirty years, each successive Presidential administration has been worse than the previous one, and that's not an accident. As President Obama said, “People have a tendency to blame politicians when things don’t work, but as I always tell people, you get the politicians you deserve." Which seems an odd comment from the sitting President, but who am I to object?
I'm also talking about losing faith in our capitalistic, free-market system. You know it's bad when Americans consider real estate a better investment than stocks for the long-term - despite requiring massive upkeep, crushing property taxes, and only growing 3.7% (compared to stock's average of 9.5%) between 1928 and 2013. For that paradox, we can thank the Boomers and their extraordinary "enthusiasm" for homes, land and debt starting in the 21st century.)
It's even worse that more than one in four Americans consider cash, bonds and gold - all deeply negative for the past decade- as the best investment for the long-term.
And people claim financial advisors are obsolete. LOL...
Even though a physical property was originally - and is still fundamentally- a depreciating asset akin to a liability (i.e. its materials decline in use and value over time) as well as most homes taking income instead of producing it, our oldest Americans have somehow convinced themselves and their children in this century that it's now an investment. Part of that is societal programming of course, but a much more important aspect is attributed to the self-perpetuating cycle of the Baby Boomer generation's propensity to acquire multiple homes to enjoy or rent out, which increases demand, limits supply and pushes the cost of home ownership beyond the capabilities of successive generations.
This vicious cycle perpetuates renting as the only option for GenX, Millennials and Zoomers, many burdened with student loan debts at least partially attributable to Baby Boomers and GenX's blind and misguided worship at the alter of expensive higher education with equally dubious ROI. As a result, the country is now digesting a generation of young Americans entering adulthood with crippling debt, poor credit scores and unaffordable housing. So they continue to rent, thus driving up rental income profits and home price appreciation, and so the cycle begins again. Which leads us to the third layer of the turd-sandwich that is our national finances...
We Huff and We Puff
A country's wealth is arguably defined by it's Gross Domestic Product (GDP) and in a perfect world this would be heavily influenced by the growth in the population and their productivity. I spent a lot time harping on that in my last series, Don't Fear The Bear. As we've discussed many times in the past, the largest component of GDP is consumption. This is a good thing. The good is that we as Americans are addicted to spending, it's our national pastime. It's also what has pulled us out of every recession ditch we've ever driven into, and it will do so again in this current cycle. We love to buy stuff, and we will do anything necessary to afford it (or at least finance it.) The problems should start to become clear.
First, we spend more than we make, a lot more. To fill that gap, Americans maintain significant (and unsustainable) levels of debt at the household, corporate and government level. That has made us vulnerable.
In addition, we've transitioned from a manufacturing-based economy (making stuff) to a service-based economy (typing on keyboards and creating PowerPoint presentations). That has made us weak.
We've also perverted a lot of the components of GDP. Government spending is the most egregious, directing tax dollars away from productive projects like roads and bridges and more towards outlays that provide no or low social utility and ROI- namely, interest on debt, welfare spending, government salaries, generous pensions and retiree benefits. We also send a lot of money to the military and other countries, but let's not go there today.
In addition to Government, business has been equally poor at capital allocations. Instead of investing profits in research, development and employee training, they've used a healthy portion of their profits in lavish C-Suite salaries and financial chicanery like stock buy-back programs. I think most will agree that those do little to create real value and improve society. In their defense, they are just responding to the questionable and damaging government strategy of financial repression.
I mention all of this because while the United States is still the best and most powerful country on Earth, and likely to remain so for some time, we are nonetheless becoming poorer. And that's by design. Our leaders know we cannot continue to lead the world if we are less productive, and productive at all the wrong things (i.e. too many liberal arts major and not enough STEM graduates and blue-collar workers, too many working in fast food and food delivery as a career instead of entry-level employment.) Our labor costs are too high and uncompetitive because it is so expensive to live here. And that's because wages and per capita GDP (household income) cannot keep up with the government's spending and their inflation.
Like GDP, unemployment and many other metrics, the government lies about inflation, to the point of absurdity. They do this because if they acknowledge how much they are debasing the dollar, they would have to increase their entitlements like social security, Medicare and Veterans Benefits. By 'downplaying' the loss of purchasing power, they can slowly erode American's cost of living without major social unrest. If it becomes too great, people may stop blaming and attacking each other based on superficial differences and realize that the hand that feeds them is the hand that holds them down.
No matter how much revenue they bring in through taxes; our city, state and federal governments always consume more. It's not new and it's not necessarily nefarious, it's just built into the system of a republic. Especially one in which more and more Americans are no longer employable in the private sector. I'm not taking a shot at anyone in particular, I doubt anyone considers the DMV, TSA, DOT or NPR as harboring our best and brightest. All of those departments are certainly better automated (or at least outsourced to the private sector.) They're primarily jobs programs masquerading as civil service. Mostly because more Americans are no longer able to sustain themselves on their own current skills and resources, and so we must distribute labor (i.e. taxes) from a shrinking productive slice of the population (as well as the not-insignificant ill-gotten gains of modern day robber barons) to an expanding un/der-productive class that's been left behind by a plethora of poor jobs, a refusal by many Americans to reskill (i.e. "learn to code"), a crumbling educational system (where most of the money is siphoned to pensions) and deficient home environments that are the primary (and painful) arbitrators between success in life (and not the color of one's skin, despite a fiction that many have determined as fact with zero evidence).
And all that's also by design, either by politicians and greedy corporate fascists that facilitate a Latin-American style economy or a combination of both working synergistically to aide and abet the destruction of the American economic system.
"In a free society, [we] enter adulthood with three major responsibilities: at least finish high school, get a full-time job and wait until age 21 to get married and have children... Our research shows that of American adults who followed these three simple rules, only about 2 percent are in poverty and nearly 75 percent have joined the middle class (defined as earning around $55,000 or more per year)." - Brooking Institute, 2013
Can you spot the problem in our national finances?
This is a very complex and controversial that definitely won't endear me to many clients, so I'll abstain from further commentary. Regardless of the causes of the current situation, it's crucial to understand that this bedrock of financial 'imbalance' is indicating foreboding challenges ahead for many Americans who are beginning to struggle under the impacts of the government lockdowns and government money-printing. Tragically and as expected, the following government own surveys demonstrate rather conclusively that the government policies promoted as helping lower- and middle-income Americans are hurting precisely those demographics the most.
- Americans' Financial Worries Tick Up in Past Year
- U.S. Personal Finance Ratings Slide Amid Rising Prices
Pushing through the Green New Deal and Financial Repression through executive action proves to be a risky political gamble for the current administration
While this trend appears to only be beginning, the greater existential threat is deteriorating conditions in these families will likely inspire them to demand (and receive) additional government assistance, which will only spur additional economic hardship in a self-perpetuating cycle of our elected leaders offering solutions today to problems they created yesterday, which will then invariable become the problems of tomorrow. Each day, it seems Ayn Rand's classic tomb, Atlas Shrugged, has become the federal government's new playbook. It's going to take a major overhaul, and time, to return the country to solid economic footing.
If the primary priority for your administration is causing the primary problem for American families, it's time to repent and pivot. Hard and fast.
We Have Met the Enemy
On top of the mental health epidemic, loss of faith in our government and economic system, and our own personal finance anxieties, we must hoist the final top layer of national stress: ourselves.
The reason we are in a economic quagmire right now is that from time to time, we as a country lose our minds and collective bearing. During times of crisis (Y2K, 9/11 and the GFC), we often put on hold prudence, common sense and long-term perspective precisely at the moment that our (perceived) personal health and livelihood to be at greatest risk. That's because the "we" is nothing more than a collection of humans, and humans often are most susceptible to these dynamics. Without any supporting evidence, we are quick to assume that our first and emotional perceptions are accurate, our actions are appropriate and that our leaders know better than we did. They did not before, and they do not now. That's not necessarily a dig on our leaders as much as it an indictment of our own permissiveness.
All too often we are prone to trust politicians who tell us what we want to hear and distrust those who don't, which is more of a flaw of the human condition than a conscious choice made by fully rational beings. It's not fully nature, it's actually more nurture. Or said differently, it's conditioning. For instance, if you're a child of the Greatest or Silent Generations (pre-1946)- i.e. a Baby Boomer- then Fourth Turning theory argues fairly convincingly that you were likely raised to trust the authorities (well, except for the 60s and 70s, when many in your generation 'forgot' that during the counterculture social revolution), what Fourth Turning terms The Awakening. But as the Boomers became wealthier in the 80s-90s, many suddenly moved away from their hippie days and gravitated back towards their preference for conservatism and social conformity in addition to being ruled over and adhering to the authorities. That was certainly on display during COVID.
If you were born after 1980 (Millennials and Zoomers), a similar generational framework predicts that you were inclined to adopt similar beliefs about politicians, at least the ones that you agree with. But that conditioning was largely hoisted upon you through parenting or educators of previous generations, and exacerbated by the advent of mass media's and it's enhanced reach and control.
In contrast, my generation's (GenX - 1964-1980) most formative early-childhood years were heavily influenced by the transgressions and failings (and eventual decline) of the four main pillars of modern life (termed the Unraveling, where society begins to pivot or deviate from past social or structural systems):
- Government - Murky JFK assassination fallout, LBJ's Vietnam and The Great Society, Watergate, Ford and Carter's economic missteps and stagflation
- Corporations - Declining corporate loyalty and responsibility- including the death of unions and pensions- and the move toward outsourcing jobs to Asia (first to Japan in the 80's, followed by India in the 90's and China in the early 21st century.)
- Spirituality - Vatican II, Catholic sex scandals, Time Magazine's "Is God Dead?" issue and a forty-year decline in religious participation.
- Family - Gender roles changing dramatically for the first time in modern civilization- feminism, birth control and contraception (the pill), abortion (Roe v. Wade) and no-fault divorce, all of which supported the decline of the two-parent household and nuclear families. Overwhelmed single-parent households and father-less homes that require government support and have since led to deficient and ill-informed progeny who are easily influenced by fraternal substitutes like entertainment, media and the state.
As a result, GenX is often considered a generation defined by skepticism, cynicism and distrust of leaders. Epitomized by Elon Musk, Joe Rogan and (unfortunately) Alex Jones; and defined as "pragmatic, free-agent persona and Survivor-style self-testing " Those born after us (Millennials and Zoomers) are more likely to shed individualism for community and conformity. Highly engaged in "rising civic engagement, improving behavior, and collective confidence." and ushering in an era where, "civic authority revives, cultural expression finds a community purpose, and people begin to locate themselves as members of a larger group."
Naturally, our youth align with and gravitate towards political parties that mimic previous indoctrination (by design, like a catchy brand jingle) and begin to see their leaders and ideology as infallible, rigid and in possession of the singular truth. Indoctrination in the education system accelerates that trend and leads to a degree of their self-righteousness that I confidently qualify as undiagnosed sociopathy and fertile ground for the introduction of
anti social media; intolerance; and misguided, incoherent and contradictory social justice.
The primary problem with our final stage of the Fourth Turning (i.e. the Crisis stage) is that in a free-market republic, by definition our elected representatives almost never know more than us nor the collective because they don't operate in reality. This is also why the oldest or longest serving representatives (majority and minority speakers are a good example) are the least qualified to speak, much less act- yet hold the most power.
I suspect that's a core reason why politicians historically have been removed (either by compulsion or chance) from the private sector and enter public service to... serve the public's interest. You don't ask your pet or housekeeper or your oven how to live a successful life, yet we tend to hold our elected representatives to a level of esteem which is typically unwarranted (like who really cares what AOC or Adam Kitzinger thinks) and highly dubious. Which is why they work for us and not the other way around.
Yet in modern life where we have elevated our politicians to stations significantly above servants, they are no longer scared for their livelihoods and think they are allowed to tell us. You can finish that train of thought because the problem is obvious. Somewhere along the way, we forgot who worked for whom. And we trusted experts who knew less than we did. And so it was with the COVID pandemic.
It's been said that history always looks different through the rearview mirror, and one would hope the spectacular and myriad miscalculations in our past might facilitate renewed and improved reflection and humility. Instead; it seems that our collective fears, arrogance and seemingly infinite gullibility continue to resurrect during each crisis to teach us the same lesson again and again. Stockpiling food and water in 1999... trading away civil liberties in exchange for a new federal bureaucracy of 17 over-funded and under-worked national intelligence agencies following the Patriot Act of 2002... unqualified homeowners walking away from their homes through foreclosure and short sales in 2009... hoarding toilet paper in 2020... hoarding fuel in plastic bags in 2021... all actions that seemed rational to so many otherwise-intelligent people back then but now look downright ridiculous.
So, too have the actions taken on our behalf over the past couple of years already begun to take on a different sheen in the rearview mirror of history, and taken us down a different path than (I hope) was intended.
Everyone knows how I enjoy picking on the government, it's practically a hobby. But that's only because it's so easy. (I prefer the term, "shining a spotlight," and believe our founding fathers and greatest Presidents would condone a healthy and cynical view of government.) When the Wuhan lab virus officially arrived on our shores in early 2020, Americans should have been more discerning and skeptical of government
dictates offers to help fix the problem that they initially denied but now admit they created. Alas, our species seems perpetually destined to repeat past mistakes.
In response to their error, another department in the executive branch, the Center for Disease Control (CDC) soon thereafter - and for reasons still unknown- assumed the authority to shut down my small businesses and others of similar size (but notably not Target nor Wal-Mart or Amazon). In response to those errors, the Federal Reserve quickly moved to cut interest rates to zero- making money effectively free again and thereby exacerbating the mal-investment and profligate spending that always occur when borrowing money carries effectively no risk. They did this because to them periods of temporary economic hardship are bad. (Unless of course you have strong spending, saving and investing habits- in which case it can be an exceptional opportunity.)
In response to most governments shutting down their economies, our Federal Reserve then coordinated with the Executive branch and the US Treasury to mail out checks to most businesses and individuals as compensation and as a bribe to obey- because trophies for everyone is good. (And because they also know that the new currency will eventually end up in the pockets of America's largest
lobbyists companies and the big banks.
We know this because if the government had instead simply offered the same amount in tax breaks, it would have had greater impact on people, and produced dramatically less fraud. It also would have prevented the levels and length of our current hyper-inflation. But no one ever mentions that idea because a.) everyone loves free money, b.) most of the country doesn't pay taxes and c.) and our national civics and economic intelligence has been neutered by the public school system.
A year later, the new Presidential administration approved several more rounds of money printing (including one that was mercilessly defeated), while also proactively shrinking domestic energy production, thus perpetuating or directly initiating "the four horseman of the post-pandemic apocalypse:"
- Supply chain disruption - as a result of global government lockdowns instituted as a result of the pandemic as a result of quality control failures in joint government-funded GOF projects in Wuhan. In which not a single person nor government has yet to be held accountable.
- Inflation rate increases - as a result of money printing in response to the government lockdowns. Perhaps I've mentioned that already.
- Interest rate increases - as a result of inflation, as the Federal Reserve raises the Fed Funds rate to tame inflation, but also increase the cost of borrowing for all Americans (except for college loan borrowers, who have been deemed 'essential' to the approaching mid-term elections. And who's debt is being inflated away 1-2% every month without anyone even noticing. In four years, student loan debt will be debased over 60% through compounding inflation, and don't think that's by accident.
- Oil price increases - as a result of executive actions by the President to move forward on Green New Deal policies that were defeated by elected officials in the Legislative Branch. With the goal of replacing fossil fuel production in the US with that of our geopolitical mortal enemy regimes in Venezuela, Iran and Russia. Presumably because international pollution is less dangerous to the environment- and global peace- than domestic pollution (which represents a 15% contribution to global pollution.) This is frustrating to many Americans, as most now understand that most Green New Deal initiatives like Electric Vehicles (EVs) actually are more damaging to the environment than internal combustion vehicles and therefore dismantling the fossil fuel industry is not only more damaging to the environment and the country, but also makes our country- and therefore the world- less safe.
As a result of the above, American's mistrust of our leaders is at an all-time high. Errors in judgment in economics, health, science and geopolitics have left many Americans confused and anxious. If you haven't figured it out, the Executive Branch is where the government hides many of the people and departments- CDC, HHS, NIH, etc.- that are unqualified for employment anywhere else in the public sector.
The vast majority of them are appointed by other bureaucrats and unelected, and that's not by accident. They are staffed by a lot of over-educated people with graduate level degrees in dubious, non-STEM fields that don't have a home in the overall economy. If you've ever worked for a company that hires family members to leadership positions, you have an idea of the quality we're paying for. Right now, our executive branch resembles a Chick-Fil-A that's suddenly been taken over by the local McDonald's. I bring this up only to reinforce three very important points:
- Disclosure: My retired civil servants will be the first to tell you how "challenged" their employers and some of their fellow employees are. In my experience, my clients are very bright people - some of the smartest that I know. They could have absolutely survived and thrived in the private sector. But they are unicorns and the exception. At some point, they weighed the benefits of the public service and weighed it against the stupid before determining it was worth it to stay. Over a soda, they regale me with stories and systems that defy comprehension.
- Most of our crisis are man-made, which means that so will our solutions be, as well. As quickly as they've caused these problems, we the people can fix them. They simply require realizing the errors of our ways and pivoting back to the policies and people that make this country great- employees and employers in the private sector who go to work everyday so that the electricity turns on when we flip the switch, the gas stations fill our tanks, and the food gets delivered to the store.
- The American system and way of life are designed to absorb and fix mistakes and crises. That's how wealth gets passed through the generations, where 79% of the millionaires are first-generation. That's why the republic and the free-market have produced some remarkable progress for not just America, but the world. We make mistakes. From time to time, we (s)elect the wrong people to lead our families, companies and country. We are all taught flawed or incomplete narratives about how the world works and adopt the wrong ideologies, and it usually takes us 40-50 years to realize it. While few of us like to admit when we're wrong, we also tend to vote with our pocket books and feet. If we didn't operate in a Federalist system, we'd all still be wearing masks, socially distancing and listening to unelected (and elected) power-mad bureaucrats telling us who we can eat Thanksgiving dinner with.
If it weren't for Texas and Florida, entire countries like Australia would still operating quarantine camps. If each of us was not free and able to pick up and move from tyrannical states ruled by the clinically insane, Texas wouldn't be thriving. My real estate wouldn't have doubled in the last three years. Beto O'Rourke would be skateboarding into the Governor's Mansion right now, with Wendy Davis as his Attorney General. If we allowed the entire country's economy to be controlled by Washington DC and its financiers in Big Tech, then 2022 would be just the beginning of a long marched toward Chinese totalitarianism. I certainly couldn't make jokes about Governor O'Rourke.
Today, those who misled us for two years are nowhere to be seen, seemingly erased from the media and public discourse. Leaders and politicians who are the most culpable for our current situation are facing a historic reckoning in November. Without the Build Back Better money they needed to prop up their failed policies and programs until the next election, states who made rash and misguided decisions have accelerated their own demise and moment of self-reflection and change for the good.
Hundreds of thousands of transplanted residents who took their companies, jobs and taxes and are never coming back are now supporting states that want them. Companies that were gutted by the government shutdown are bringing jobs and factories back to the United States, where they are going to find an energized workforce that has spent all of their sabbatical money and are ready to begin working at enhanced wages. And most importantly of all, Americans that were initially detached from economic reality are starting to reconsider that the changes necessary to get this country back on track will be coming from the bottom-up, not the top down.
It all seems rather problematic in retrospect- as most emotional and rash decisions do. Historically, when Americans become stressed, we can become distracted, drop our guard and open our loving arms to the sweet warm embrace of Uncle Sugar. Sometimes we demand the hug and don't want to let go. Now, the money printing that ensued in 2020-21 has come home to roast in 2022, leading to the inevitable inflation that has spurred the Fed to begin raising interest rates. To fight the inflation that they caused.
Jerome Powell & Co. are attempting to channel their inner-Paul Volcker and rediscovering monetary religion to raise rates at the fastest pace since 1994. (For perspective, this is roughly akin to cutting off an alcoholic from booze in the middle of a bender.) Dual fears of inflation and rising interest rates are starting to cause genuine concern about industries and sectors historically dependent on borrowing, such as real estate and energy exploration. And that has markets a bit spooked.
In order to provide relief at the pump, President Biden just begun releasing more oil from the Strategic Petroleum Reserve (or SPR), created to protect our fuel supply during times of national emergencies and war (and usually not to protect political parties in approaching Congressional midterms.) His administration claims this is in direct response to Russia's invasion of Ukraine, but his releases started in November 2021, several months before the war began.
The administration knew that shutting down domestic oil production would increase fuel prices and boost electric vehicle (EV) sales - that was the whole point- and a direct nod to those Americans most concerned about the environment and global warming who helped elect him. The fact that these vehicles are vastly more expensive and environmentally damaging than internal combustion vehicles seems to be an inconvenient truth for many.
Even today, President Biden's administration continues to close or block the expansion of large sources of oil supply, which appears to be creating some stress and confusion in regards to their overall strategy, as well as where prices will go from here and for how long. Clients often quiz me on why the President is now simultaneously releasing oil from the SPR to bring oil prices down if he originally wanted them up. I am the first to admit that it does seem hypocritical to both reduce the supply of current and future oil to drive prices up (to push EV's and other alternative energy sources) while simultaneously releasing oil into the market to drive them down. It's enough to wonder who is going crazy, our leaders or us. (For the record, the answer is yes.)
The energy sector has been almost the only bright spot in the stock market in 2022, mostly because investors are communicating their conviction that the government will ultimately be unsuccessful bringing energy prices to bear. Even Warren Buffet, who tends to lean fairly progressive for a 95-year old man, appears to be doubling down on his energy holdings, presumably based on the belief that these high prices are here to stay. While I anticipate the price of oil should retreat a bit before year-end, the truth is that medium- to long-term commodity prices are almost impossible to predict reliably.
One of these industries is not like the others in 2022 YTD. Can you tell which one?
Where Are We Now?
The vast majority of American corporations, money managers, financial advisors and their client-investors are now collectively suffering though the fifth month of deteriorating economic conditions, souring investor sentiment and the resulting slow and painful declines in in almost all financial markets. This is an environment currently unlike anything investors have seen since the Great Financial Correction (GFC). That market drop started in the summer of 2007 with the collapse of two Bear Sterns hedge funds and ended in March 2009 with the passing of the Emergency Economic Stabilization Act (EESA).
What we've experienced so far is nothing like those brutal two years, but based on conversations that I am having with clients, one would think that our current 16% drop in the S&P 500 in the last five months feels at least as bad as that 18-month drop of over - 50%.
How quickly we forget.
So far in 2022, stocks are down, bonds are down, international stocks are down and cash is losing purchasing power every month due to inflation. Expected hedges like precious metals (gold and silver) and crypto-currency have fallen even further. Commercial property looks a bit risky given the lack of people who will ever return to an office again. Amazon can take over only so many shopping malls and convert them into warehouses. Real estate is down or cooling outside of residential housing in certain hot markets, mostly southern states and rural communities and suburbs. Most experts believe it's heading towards it's own day or reckoning, as mortgage rates are rising almost as fast as sale prices, which still seem untethered from reality for most Americans. It feels like a bit of a bloodbath out there right now.
What Should We Do?
- Don't panic
- Be grateful
- Keep perspective
- Play the game
Some other comments I've received from very smart clients in the past few weeks...
- This is different. I didn't have as much money back then (in previous market corrections)? I know, it's grown exponentially since then, that's a good thing...
- This is different. I'm retired/ing, I don't have time to recover from this correction? Are you planning to leave us in the next 3-5 years? How much of this money do you plan to withdrawal from your account in the next 12- 24 months? How much do you have in cash in the bank? I bet we have enough cash for a year or two between us.
- This is different. We have even bigger morons in charge this time? That is true, the folks running our country are genuine goobers. But America, free market capitalism and a democracy were literally designed to be run by morons, like Tesla full self-driving cars. We should welcome recessions, because they are a crucial aspect of all three of the above systems. Trees don't grow to the sky (and a lot of other clichés, until clients make me stop..)
It’s understandable for those in or approaching their retirement years to be experiencing elevated anxiety right now as stock markets swoon and each account statement balance seems to drop lower than the previous one. April and May have been gut-wrenching experiences for everyone except for oil wildcatters and home construction contractors. It's the nature of their business. Most of my clients held up quite well up until early April, but losses seemed compounded for the next several weeks, even with historically safe investments.
I can’t help but wonder if billions of investors were opening their April statements (most only receive quarterly statements – Jan/Apr/July/Oct), panicking and then logging into Robinhood or Fidelity (or calling their broker) to move their accounts into cash or something- anything!- that is NOT losing money. Maybe that's why they call them brokers, that's what they make you. Which is why you should only work with Certified Financial Planners. I get at least one email every single day that asks, "Where can I put my money that is NOT losing money right now?" They never like the answer, it simply does not compute that there is virtually no alternative securities sector in some alternate universe that I can move them to that I just hadn't gotten around to telling them about.
- Sure, investors could move into energy stocks, but go back just a couple years and review the 10-year performance numbers. Exxon is up 53% in 2022. In the sixteen years prior to this year, it lost money. Repeat: It made NO MONEY over sixteen years... (Not six months like your IRA.)
Sure investors could move to some type of real estate partnership or crowd sourcing fund, but isn't the point of investing to 'buy low?' And does the real estate market feel low to you? "But Bart, you're just sour grapes. Land is doing a lot better than the stock market, and it's the only thing that's not falling!" Yeah, that's what happens at market tops, when money is free and when everyone is piling into one investment. That's like everyone standing on one side of a ship at sea. That's the definition of a bubble. If people saw them coming, they would never pop. There has to be a narrative so compelling beyond a bubble for it to draw in really smart people, because dumb people don't have enough money to inflate it. (Except for GameStop. And Dogecoin. And RVs. But you get the idea.)
How's this gonna work out?
I can’t predict when this current market decline will end, but I can safely predict that it will end someday. I recognize that is a bold prophesy. But hear me out....
I'm also predicting that few will know when to get back into the market or will be quite late doing so. People typically get out of the market when things look bad. But the paradox arises because the best time get in will be when it looks the worst. But it's literally impossible to know the worst in the future or present, only while looking back in the past from the future. So you're left with three options:
1. Guessing when to re-enter (don't bs a bs'er... if you're basing your decision on present conditions, it's largely a guess.)
2. Recognizing the guaranteed indicators of a market bottom- 9/11, Lehman Bros, Enron, COVID- and agreeing to put all your chips in when that happens. The problem being that markets don't always collapse, sometimes they just go down and then bounce back. Like 2008, when the market dropped almost 10%. Or 2019, when they dropped
You probably forgot about those corrections. Why is that? Because they were so short that you didn't have time to freak out before they started climbing. But if 2018 took two months to recover, and 2019 took three months to recover, and 2020 (COVID) took six months to recover, please explain to me why five, ten or twenty months is somehow more than you can handle? It's an interesting paradox, no?
3.) Abandoning any delusion of knowing and acting in perfect unison with the market bottom and just resign yourself to riding this out.
You know my preference, but ask yourself, "Are the other two ideas really smart?" If is possible that Wall St/ The Universe/ Joe Biden/ George Soros/ The Bilderberg's are playing a game where almost every year they fleece investors? And the only way to win the game is to not play?
War Games, 1983. A great movie and reason #209 that GenX had it the best
When this economic malaise that we're presently enduring does finally end- and it will end- there's an above-average chance that another new generation of investors could be experiencing a deep sense of regret that they made emotional reactions to short-term gyrations- namely selling out and going to cash in the last few months- with the expectation that they will know conclusively when to get back in. This despite the fact they didn't know when to get out. But I digress...
I speak to quite a few clients these days who are seriously entertaining the idea of selling out and moving their accounts to cash. The problem with jumping out of the market are obvious and well-known to most readers. You are probably familiar with those as well, and they probably play on a running loop in your head these days. But because I get paid by the word, here are but a few more risks of selling into a falling market that you may not have thought of...
First, indiscriminate selling is a big part of why the market is going down in the first place. Perhaps the biggest. As more and more people log in to their accounts online or receive monthly statements, they are consciously or unconsciously making themselves vulnerable to committing the cardinal sin of investing: buy high / sell low. They run the risk of reacting emotionally to paper losses and selling for reasons entirely disconnected from the state of financial market, company fundamentals, or their future financial goals. In fact, almost without fail the most common reasons of clients who've liquidated holdings recently are as follows:
- No/low emergency fund, resulting in increased anxiety about the ability to cover short-term bills if there is a disruption in their personal situation (which is unlikely)
- Insufficient assets or savings (relative to their current or future financial needs) and feeling they "cannot afford to lose what little they have left" (their words, not mine).
- Too much or uncomfortable debt, and a fear they won't be able to pay it off before markets recover
- Insufficient income through other means (work, investments, pensions, social security) to fund their current lifestyle in order to "ride out" a market correction without needing withdrawals.
- Projects (usually discretionary home improvement or upgrades) that they were wanting to complete in the future that they now fear they may be unable to pay for.
In summary, most of people are making investments decisions based on their personal finances. Which is rarely a good idea. In some ways, these investors are being penalized by the investing gods for deficient finances. Economic recessions and market corrections are perceived by many as constant reminders of the value of maintaining sufficient and strong balance sheets (assets and income) to navigate lean times.
Without these critical aspects of a healthy economy- for instance, during a 12-year bull market
engineered steered by the Federal Reserve's ultra-ultra-accommodative policy in the aftermath of the GFC - investors are at risk of becoming too complacent towards the inherent risks of investing. Instead, the risk operating their lives and finances 'priced to perfection,' a term I plagiarized from market analysts describing stock prices of companies that enjoy high valuations as long as nothing ever goes wrong.
"The survey found that younger investors were more likely to panic-sell. Nearly 70% of Gen Z investors pulled money from the market along with 57% of millennials. At the same time, 49% of men sold stocks due to a negative event, compared to 24% of women." - Magnify Money 2022
Without a doubt, the #1 mistake I've observed in my career is how many people live their financial lives 'priced to perfection,' a state in which they maintain a budget and financial plan that are designed to work perfectly as long as nothing ever goes wrong. You think I'm joking, but I'm not. This is how most people structure their lives, with minimal consideration of what could wrong and how to respond. As a result, just like companies and governments, when misfortune does eventually arise they wing it. These folks are the first to curse their luck, blame anyone but themselves and make quick, impulsive decisions that rarely age well.
Grown-ups are familiar with the possibly of challenges and calibrate their probability better. They prepare for the worst and pray for the best, and when they go through the valleys of life, they come out in a better position- not only compared to peers but sometimes in a better position than their previous situation because they are able to take advantage of previously-unavailable opportunities, like distress decisions of those who did not prepare and as a result, act impetuously and often against their best interests. As a result, these people not only welcome events like recessions and corrections but thrive in them.
We've already shown that roughly 2/3 of the country could not cover a $1,000 emergency with cash. Unfortunately, in the real world, most people will experience some degree of misfortune every few years that carries with it an unexpected negative financial consequence- i.e. health, family, career, personal, car/home, etc. All too often, they fail to consider those situations and emergencies that they can't (or have never) seen.
When it happens, the problem is often solved via suboptimal means - like borrowing money or liquidating long-term assets. If you've ever met someone who has cashed out an IRA or 401k, you know what this looks like. Maybe that's you. Either way, it acts as a double-whammy because...
a.) Withdrawals or debt often involved interest, fees, penalties or taxes. Dave Ramsey calls that "stupid tax," most of us have done it and the banks love you for it.
b.) They almost always impedes or delays future financial success (just plug in an amount into this investment calculator for 40 years to really feel the sting of your last run-in with "stupid tax.")
We all know people who live their life priced to perfection. They have a $2,000 mortgage payment, but the kid's college isn't getting funded. They have a $600 car payment, but don't fund their Roth IRA. They order food delivered, but lack an emergency fund. They fail to contribute to an Health Savings Account, but have a pet. Then, as hardship invariably arrives when the universe deals them that surprise/inevitable financial blow with $0s on the end, they blame it on bad luck. In reality, these things tend to happen to all of us with unfortunate and frequent regularity, and it's rarely all bad luck.
Have you ever known someone who bought more house or car than they could afford? Had to sell off assets to cover a short-term emergency? Made an impulsive decision that cost them 'stupid tax' to unwind? Sold investments at or near the bottom of the market? Sure, most of us are at least somewhat familiar with this situation, either from our own past behavior or someone we know.
We recognize that in most scenarios, injecting even just a small amount of time and space into the equation can often prevent turning problems into major calamities. Indeed, that is essentially the benefit of meditation- separating out the response from the trigger. Indiscriminate selling of quality investments that are meant for long-term goals well into the future are almost a mistake. If you liked the company or fund at a certain price in the past, you should like it more if it's value drops, not less. What other people think of you or the investments are irrelevant.
If selling decisions are based on intuition, so will any future moves. Over the last several months, as in every market downturn, I've begun hearing story after story of someone's buddy or brother-in-law who "saw the collapse coming and jumped out" last year. For one, it's not a collapse if the banks are still open and the gas stations aren't rationing. They just avoided a 20% market correction, calm down. Second, in most instances, those involved can rarely point to specific fundamental market factors that inspired them to get out; it's usually just degree of speculation, guessing, intuition, a hunch or something anecdotal. They can't pinpoint the length or depth of the drop, nor buy or sell signals, only that they had "a feeling something bad is going to happen." Yeah, me too. It's called life. (Or more specifically, my dating life.)
Every day things happen to all of us. Some are good, some are bad. Last year, I had more than a half-dozen fairly smart clients call me separately to warn me that Trump was going to be installed as President by the military. They all said they knew someone that knew someone in special forces with special knowledge of the situation. They clearly have never spent time around members of the the special forces. They're amazing people, they're very skilled at killing and subterfuge but they're rarely brilliant, they aren't privy to much intel beyond their immediate missions and they sure as hell wouldn't be telling the public about whatever covert plot is being hatched by so-and-so.
This year's rumor is that Biden is a stooge puppet actively planted to destroy the country and move us toward a one-world order and currency. I get plenty of those emails with friendly demands to respond. Here's a hint, if you received a call to action involving the end of the country/the economy/the market either unsolicited or from a forward, please let me know and we'll bet against it and make millions.
For too many people, reading some 'free' doomsday e-newsletter from an unsolicited email that required your email address and that you received with a link to a video that you could not fast-forward through, somehow constitutes secret stock market guidance. Very few of these market prognosticators are referencing price-earnings ratios, Sharpe ratios, 200-day moving averages, inverted yield curves or any other objective measurements that professional managers use to gauge market valuations. Often it's someone with a larger platform than you telling you what you already want to believe. Most of the time they reference someone who knows someone else that sold out of the market in October/ December/ March / Etc and "here's how to do it yourself to protect your life savings..."
Intuition is not a a strategy in the stock market anymore than it is in a casino. It's largely an illusion based on a misconception, wrapped inside a faulty premise. Does intuition exist? Absolutely. After 6 million years of evolution, I believe we behave in fairly reasonable ways based in innate and genetic predispositions. For danger, for deceit, for love. But for trading slips of paper that represent ownership in publicly-traded corporations? I think not.
Stock markets only go back to 17th-century Western Europe, not nearly enough time for the human mind to develop any type of affinity for opportunities and threats we envision based on our vast knowledge of thousands of companies worldwide. In fact, when it comes to the stock market, you'd usually be better off (especially if you have testosterone) to acting against your intuition.
It's what everyone else is doing (i.e. 'FOMO'). As we've discussed ad nauseam, success in investing and the stock market is usually not the result of doing what everyone else is doing, but instead doing the exact opposite. If you want to get more than everyone else, you have to be willing to do something no one else is doing. And I guarantee you that the vast majority of investors today are fearful, and many are selling.
It's therefore incumbent on each of us to ask ourselves, "Do I know anyone (besides Warren Buffet) who is actively buying? Of those selling, do I value their financial and market acumen? Do they have some fundamental knowledge of financial markets or past experience with market timing, or were they simply uncomfortable with something culturally (politics, war, more for-sale signs, etc.) and drew a conclusion that the end money is nigh? Have they consistently guessed right about the market in the past, (i.e. are they doing doing their selling from their own private island?")
If not, I'm not interested in their newsletter prognostication that they are sharing with me out of genuine concern for my well-being. The crowds isn't often wrong, they are almost always wrong.
- The crowd texts when they drive.
- The crowd finances vehicles, toys and appliances.
- The crowd rolls over credit card balances each month.
- The crowd does not have a budget.
- The crowd considers Social Security a key component of their retirement.
- The crowd can't cover a $1K emergency and is one paycheck away from bankruptcy.
- The crowd pays taxes.
- The crowd is only putting 10-20% down on real estate purchases.
- The crowd makes horrific mating decisions throughout their twenties and marries too early, and often more than once.
- The crowd rarely volunteers, except for other family members.
- The crowd doesn't have a passport, never travels overseas, unless it's a resort.
- The crowd does not go to the gym or have a consistent and effective fitness routine.
- The crowd does not get enough sleep.
- The crowd watches television, specifically cable television.
- The crowd eats in restaurants.
- The crowd gives their children smartphones with data plans.
- The crowd supports their adult-children (also know as "kidults").
- The crowd does not attend church (or worse, attends ultra-progressive church).
- The crowd invests large sums (or borrows) for non-STEM degrees instead of hard work, mentorship or employment in the field of raising good humans.
- The crowd mutilates their body with ink and piercings, and wears skinny jeans, tops that show their stomachs and other ill-fitting clothing.
- The crowd consumes terrible music, film and other entertainment. They ruin all the best shows and movies from the 1980-90's.
- The crowd is obsessed with everyone's genitals and skin pigment instead of the content of their character.
- The crowd believes they are victims of circumstance, the patriarchy and Nazi terrorists, despite being born in America.
- The crowd elects politicians to positions of leadership instead of successful, ethical people who have run businesses.
I could go on, but you get the picture. And I've hopefully offended everyone at least once. In virtually every aspect of American life, the majority of people are struggling with their journey. (Is that politically correct enough?) In almost every situation, we would be better off doing the exact opposite of what everyone else is doing. And yet you're going to care about and react to their collective decisions in the stock market?
Here's a novel concept: wake up every day and try to go in the opposite direction of the crowd. If the market looks bleak and the headlines are universally negative, laugh and buy a share of stock. If everyone is getting rich, sell some of them back. If you think the leader of the country is a moron and the evidence is mounting that you are correct, be excited that you're not the only one and it's going to impact Mr. Market. If you do that long enough, you will fall into success (or bankruptcy, so be sure to run your financial plans by your favorite Certified Financial Planner. Or at least your mom.
Selling is the easy thing to do right now because it feels good. It feels bad to stay in the market and watch it drop. It feels good to sit in cash and feel protected. It feels bad to have no control over the market's daily vicissitudes. It feels bad to not know what's going on in the markets and economy. But it feels good to feel like you know what's going on. It feels bad to remain ignorant to the media's incessant doomsday narratives, but it feels good to feel like you have some secret and special knowledge about topics of interest.
Like the above, ask yourself how often in life the hard choice ultimately ends up being the better choice. It's easy to leverage your finances to go to college, it's hard to enter the workforce before entering academia or become an apprentice. It's easy to finance a car you can't afford, it's harder to drive something that is beneath you for a temporary period of time, save up and pay cash. It's hard to find the money to save for retirement, but it's easy to find it for vacations and other forms of recreation.
It's also easy to walk out on a job, it's hard to stick it out until you find another one while still employed (though it's almost always easier to get a job while still working). It's easy to quit on a relationship by ghosting someone without enduring the pain of a formal breakup. It's easy to send out a mean tweet or social message without sleeping on it. It's easy to eat fast food then preparing your meals at home. It's sometimes easy to lie than tell the truth, and it's even harder to read it (you tell me!!) It's easy to stay at home and play video games or consume social media. And let's be honest, going to the gym to lift up and set down heavy things suuuuuuucks.
The point is that doing what's hard is almost always the superior option in this country. That's part of the reason our
oldest younger Americans are in such a mess, they've been coddled and misled their whole life about how the world works. And now we as a country are seeing the results of three generational, financial and social welfare. No, you're not a unique and special snowflake. You're just soft. No, you're not repressed, you just had bad parenting. No, you're not being denied opportunity, you're just lazy.
As Tom Hank's character, Jimmy Dugan, says in the classic A League of Their Own, "It's supposed to be hard. If it wasn't hard, everyone would do it. The hard is what makes it great."
If the stock market only went up, everyone would do it. (Actually, that's not really true. The market goes up more than 95% of the time (see below), but still only about 58% of Americans choose to participate in the greatest wealth generating system in history.) But you get the idea. Your first thought when you saw those dismal numbers was the same as mine: it must be racism, bigotry or the patriarchy (or some combination). But studies show minorities are more active in crypto than white Americans, so that can't be it.
In addition to one's financial situation and level of intelligence, I suspect the third determining factor in investing is simply the self-discipline to risk your capital in the stock market in the first place. So when you arrive at one of the many forks in the road of investment strategies, and you must decide between the hard path and the easy path, take the one less traveled every time.
Trading is now free. This one is important, like really important and I suspect you haven't even thought about it before. The last recession was 2008-09. Perhaps I've mentioned that several times above, in every post for years and forever and ever, Amen. That's thirteen years.
It's worth acknowledging and appreciating that if we are indeed in or going into a recession and/or a correction in 2022 (or frankly, whenever it happens), this will be the first time in the history of financial markets that investors can literally make their own trading decisions in their own self-directed accounts on their own personal smartphones, tablets and other technology devices, without anyone's permission or counsel. Or said differently, this is the first time you can destroy your financial life from a device in their hands in seconds. And it's free, since online transactions fees no longer exist for most custodians.
Think about that, it's implications to you and it's likely outcomes to the markets and society. Do you generally find online and immediate social media access and capabilities to be a generally positive or negative to human communications. Putting aside all the amazing things that the internet allows (online bill pay, ease of information, plethora of entertainment options), do you believe that people are more or less likely to make better decisions with their lives, finances and their trading by controlling their own money without any speed bumps, curbs, barricades or obstacles to reacting to something they've seen or thought?
Or is it possible that an entire planet of investors with the power to move their assets in and out of investments and the market freely and immediately will improve the overall and collective level of intelligence, discernment and/ or stability in the market?
You know the answer. Just look at social media and ask yourself if it's improved human relations. May I submit Twitter as evidence. Or Facebook. Or (insert any technology app that serves to remove the obstacles between your thoughts and words / actions. At this point, you probably know where I'm heading. Is it possible that at least a portion of the market's behavior this year is due at least in part to short-term, rushed and reckless decisions made on smart phones from trading apps designed to mimic slot machines (Facebook, Robinhood, Reddit, etc.)?
If so, then would it not be potentially beneficial to accept this new reality of bipolar markets that turn -5% drops into - 20% drops? If our people have become so bipolar, and our politics, and our entertainment, and our sports, and our (insert any aspect of American life) has seemed to reach max dysfunctional, is it such a leap to assume that our financial markets will resemble it as well?
If any of this resonates with you, then how could the prudent, patient and intelligent investor do anything but the opposite of what this new business model facilitates and incentives? Is there an argument for doing nothing at all?
We have two generations of Americans "investors" that have never been through a correction or a recessions as an adult with money (and I use both terms generously.)
We've all been conditioned
My two local communities are deep red, yet both are anchored by hospitals with more than 75% of their revenues coming from federal government entitlements (primarily Medicare and Medicaid).
Don't Fight the Fed
People are doing this on their own now, - FinTech revolution. It could only end this way, with a nation of people who thought investing was easy for the past 14 years- EFTs, meme stocks, FAANGS, etc.
We're probably closer o
What are you going to do with the cash?
CNN fear index
Real estate in trouble
Uncle Warren is buying...
We may have time
If the world ends - You might think this is an odd
It's Raining Securities (Hallelujah)
It's virtually impossible to know when to both jump in and jump out. And no one alive has proven to have that ability more than once in a lifetime. It’s also worth noting that the last market correction that began in February 2020- at the beginning of the shutdown of the economy - only lasted a few months, and was already recovering by the time clients got their July statements. By that August (less than 6 months from the March bottom), investors who held on were already back to even, thanks to the government throwing money at anything moving (and plenty that was not) to bribe them to stay home and watch Fauci and The View all day. I believe the Russia narrative was still in the headlines. Unfortunately, a few million Americans forgot to go back to work, but that’s a conversation for another email!
Recessions are historically shorter than you might expect. And they're getting shorter. How long can you hold out? As long as those tough as nails investors in 1873? Can you believe they had investors back then? Maybe this has all been done before?
The valley below was only six months in length, and was already rising within one month of the February pre-COVID apogee. That’s far different than this last five months of torture that we’re currently enduring. To me, this market grind downward has been especially brutal, and even smart and experienced investors like you (and many others) expressing angst is completely understandable and predictable.
You put yourself in stupid places
Yes I think you know it's true
Situations where it's easy to look down on you
I think you like to be the victim
I think you like to be in pain
I think you make yourself a victim
Almost every single day
You say they taught you how to read and write
They taught you how to count
I say they taught you how to buy and sell
Your own body by the pound
I think you like to be their simple toy
I think you love to play the clown
I think you are blind to the fact
That the hand you hold
Is the hand that holds you down
- Everclear (Everything To Everyone)
What should we do?
Not surprisingly, my advice for most clients in most situations is to stay the course. If you are not experiencing true economic hardship (i.e. months on the Ford Bronco Raptor waiting list is tragic but not a hardship) and/or you do not anticipate needing this money in the next 2-3 years, then most people are likely to be better off ignoring the media, ignoring what the statement tells you the market values your investments at, be patient and go out and live your life. In essence, do the opposite of what many panicked sellers are doing or contemplating doing. Warren Buffet has said that "the market is a voting machine in the short term, but a weighing machine in the long-term." What he means, of course, is that daily and short-term fluctuations are worth what people think they are worth based on their...
... Circumstances, which are not yours
... Perception of the global economy and stock markets, which are usually inaccurate. I work for a lot of clients, and none of them have done a stint at the IMF or IBS. I promise you that none of us has a complete perspective or intelligence to properly evaluate 500 or more US companies. (hint: if the Federal Reserve doesn't know what's going on, you don't either)
... Biases, which usually have little basis in reality and are more emotion-driven or flat out dumb. Humans are biased based on evolutionary psychology, and I promise you that they have not evolved to thrive in picking which company's stock will outperform. Well, maybe women have. But you know what I mean.
... Emotions. If you're like me, 100% of your decisions are rational, logical and well-thought out. You brain performs like a robot, devoid of any emotion and that's why your outcomes are always perfect. And your spouse and siblings all agree. But for the rest of the world, every decision they make is first filtered through a primarily irrational, impulsive and intuitive mind. Only later (sometimes fractions of a millisecond) do we develop largely automatic rationalized justification for those decisions. It's very difficult to sell an investment that is up in value, and very hard to buy a stock that no one wants at almost any price, like when Ford (F) was selling under $2/share. Yeah, that really happened. On Wednesday, GameStop (GME) surged almost 30%. None of that is logical.
Most of my clients have extremely conservative portfolios, ones that would have been laughed at just a year ago. And yet they are down almost as much as some accounts twice their risk level. From my personal perspective, this singularity of outcomes just reinforces how ridiculous this market selloff is, where everything is falling at the same terminal velocity. To prove it, I’ve uploaded a list of the largest holdings of one of my most popular models. I encourage anyone to review it, ask themselves which of these companies are poorly run and probably won’t be here in 5-10 years. And then call me to tell me yourself, so I can make a mental note to follow up with you in a few years.
The truth is that if they exist then, they will be worth more. If for no other reason than inflation will make their shares more expensive. But I have other reasons, like the fact that the US population grows by roughly 0.6-0.8% each year. And that doesn't even include undocumented aliens, who add another 10%, I presume they are consuming a lot of milk and honey, and will probably be nationalized before the end of President Biden's tenure in 2024. Forgiving student loans will also free up trillions in annual payments that will likely be spent on a lifetime of Door Dash and Uber, which be recycled back into the economy to buy more Instagrammable trips to Bali and BLM donations.
My personal belief is that a large and disproportionate portion of the market volatility that we're witnessing right now is panic selling by new, young and/or overly fearful investors who don’t know what to do, so they just sell. Some are selling to get ahead of potential Biden tax code changes, but that's not a given. Others realize they need that stimulus money for the rent. Some are trying to 'bury the bodies' of their misguided and beautiful youthful arrogance.
By the way: when stock loses value, we know where it went- beanbag chairs and massages at Facebook and Netflix headquarters, etc. Sometimes new hires and buildings, research and development, charitable donations, you get the idea... But when crypto value is destroyed, do you know where it went? Much sits in the (cash) wallets of early adopters selling their tokens. Gee, call me crazy, but that sounds a lot like a Ponzi scheme to me. Who would have ever expected JP Morgan to be facilitating the sales of the "picks and shovels" to these digital gold miners.
The government allows for the existence of most crypto-currency for many reasons, but one of the most valuable is it permitted the 2020-2021 stimulus money to quickly flood into the crypto universe (i.e. early adopters, or HODLers). I wonder if their hope was that what hasn't already evaporated into the ether (i.e. original investors at the top of the crypto
Ponzi pyramid) will eventually and slowly drip back into the economy on a more controlled and gradual pace to avoid even more massive inflation than already exists. Now that we're in hyper-inflationary 2022, perhaps it's become necessary for the Fed and it's primer dealers to pull some of that stimulus money back out of the economy... hence the current collapse in virtually all crypto digital assets. To many that's not conspiracy theory, that's by design. Otherwise, why would a currency that is supposed to be non-correlated to the US dollar and stock market fall by over 70% in value in one year, during inflation and an economic contraction? If crypto was performing as promised, it should be actually rising in the face of a currency debasement and market correction, not falling.
I personally refuse to mimic what those demographics do, because- like many of my clients- I don’t need this money any time soon. And (disclosure...) I’ve sold into so many down markets that I don’t even want to think about them. The following two charts haunt me, and I want them to haunt you:
Feel free to print these out and put them on your fridge. Or at least over my face on the dart board.
If you stay, it would also be beneficial to NOT look at your accounts for another month or
six more if you can handle it. When markets sell off like this- indiscriminately and for no obvious reason (i.e. no Lehman Bros, Enron, dotcom meltdown, housing bust, etc.), it tells me this is an emotional-based reaction that is neither rational nor justified. As such, it pays to ignore it, have faith in the US economy and refuse to buy into the temptation to do something when we know from history that the right path is usually to do nothing. In short, do the hardest thing, because the easy path is what most people do and that’s rarely the most lucrative.
There are only a few large economies in the world, there is a TON of money sitting on the sideline waiting to get back in. It ain’t going to South America and will NEVER go to Africa. Canada is America’s northern suburb and has a GDP smaller than Texas, so it is not going there. Europe is FUBAR. I know you don’t want to hear this, but they should have listened to the fat orange man back in 2018 when he told them to build up their defenses and disconnect from their Russian energy addiction. Now they’re one winter away from going medieval. Russia is and always has been a one-trick pony with terrible demographics. It’s also a dictatorship, which rarely incubates innovation and economic progress.
China is a serious threat, but their stock market is still trading at the same price it was in 2014 (imagine that email from you!). Australia showed during COVID it’s basically still a backwater country, a future province of China and frankly, irrelevant. I know this because you can’t name one large company based there. (Hint: their largest company is called Wesfarmers, you’ve never heard of it, and it would be ranked 195th largest in the US. Economically, India has almost 5 times the amount of people as the US but their average per capita GDP (annual income per person) is almost 10% of ours. If you think your paycheck is small, imagine living on $8K/year and working 20 hours a day in squalor!
Aside from China, the only countries that have strong investing opportunities are not surprisingly, the same ones that America saved in the 20th century, and that’s not an accident. So unless Earth starts creating new countries, or we start having to rebuild new countries through war, or Antarctica experiences a growth spurt, our economy and stock market are going to receive a fair share of the dollars sitting on the sidelines right now. And when that happens, I suspect the companies in the attachment are going to see some of that.
But know this: You will not win by sitting on the sidelines. Unless you are an NFL kicker. Or possibly Colin Kaepernick
If I had put out an ad in the newspaper last Christmas offering the largest companies in the world at these types of discounted prices, there would have been a line down the block. Now, I can’t give them away. I’m fielding a lot of unhappy calls these days, but not one person in a hundred is asking me, “Why is Amazon selling at 2/3 it’s price in December?” of “Why is Ford down 1/3 if there are 125,000 people on the Bronco waiting list?” I’m only getting, “Is now the time to get out?” and “What do we do?”
My advice to you and most clients is to do the same thing we do when the new Star Wars or iPhone comes out: “Let these (damaged people) react emotional, ridiculous and illogically, it’s all just a symptom of the times. Life is short and we’ve got more things to worry about.”
P.S. Here’s a comprehensive list of every industry in the US stock market, ranked in decreasing order of 2022 market performance (last column). As you can see, it’s a bloodbath out there and you have to go wayyyyy down to find a sector that is not down. This is what a broad-based market sell-off looks like, no one is bifurcating the good from the bad. I often refer to it as a ‘yard sale’ because to most retail investors, “everything must go.” And unlike during our parents and grandparents generations, it’s so easy (and free) to go online and just press the SELL button on your trading app on your smartphone. Humanity has never had personal weapons of financial destruction in their fingertips before. So I’m not surprised that so many people are taking advantage of the powerful dopamine hit that they get from knowing they’re ‘out of the market.’ They genuinely plan to get back in when everything looks safer. Which is like buying real estate in 2021 -feels good, but likely to be horrible timing.
We're nearing capitulation, because there are some days I can't keep up with all the clients insisting that we bail out into cash.
Since I’m not as skilled as some in Texas at finding the needle in the haystack, I’m just gonna “buy up everything in the front yard for $1” through a broad-based, high-quality and low-cost mutual fund.