I Don't Know What to Tell You
by Zach Marsh on Jun 5, 2020
“There are decades where nothing happens; and there are weeks where decades happen.”
“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.”
Four weeks ago it felt like we were re-living the pandemic of 1918. Turn the page and we jumped fifty years, replaying the civil unrest of 1968. If your head is spinning, and all you want to do is get off the merry-go-round, you’re not alone. The quote from Lenin takes me back to a conversation I had with my mom and dad in 1999. I remarked that the ‘90’s had been a pretty tame decade. I was 26 years old and sort of felt cheated out on the exiting, but tumultuous times that they had experienced. Twenty years later I no longer feel the same.
To borrow from Billy Joel, “We Didn’t Start the Fire,” here is a glimpse of some of the events we’ve experienced since the turn of the century:
Al Gore, George Bush, Hanging Chad, One month Still No Winner, Tech Bust, Twin Towers, 9/11, Bin Laden, Anthrax, D.C. Sniper, Afghanistan, Tora Bora, Shoe Bomber, Iraq, Shock and Awe, Hussein in a Hole, Uday, Qusay, Trillions Spent Fighting War, George Bush Re-Elected, Baseball on Steriods.
Greenspan, Low rates, Housing Bubble, Bernanke, Housing Bust, Lehman Bust, Madoff, Wall Street Bust, Obama, QE, Low Rates in Perpetuity, Janet Yellen, More QE, Bull Market, More QE, Fed Reserve, Wealth Disparity, The 99%, Trayvon Martin, Ferguson, BLM, Syria, Arab Spring, Endless Wars, Trillions more for the wars, Obama Re-Elected, Lance Armstrong Defrocked.
2016, Jim Comey, Donald Trump, Hillary Clinton, Trade Wars, Adam Schiff, Endless Investigation, Jeff Bezos buys the Post, Zuckerberg in Front of Congress, Jerome Powell, QE Infinity, Impeachment, Coronavirus, Lockdowns, Shutdowns, Shelter in Place, Trillions Spent on Stimulus, George Floyd, Ahmaud Arbery, Protests, Riots, Curfews, What Else is There Left to Say….
Ok, well, that’s enough. It didn’t rhyme, some of it was out of sequence, and there was a lot left out, but you get the point. The last twenty years have been jam-packed with world changing occurrences, and the four months have been a decade unto itself. None of these rapid changes has been lost on the stock market—in fact, the market just amplifies the speed by a factor of 10. The market collapse in March was the sharpest drop from all-time highs on record, the bounce back has been the quickest on record.
Since, 2018 we have witnessed three sharp, dramatic declines and three equally sharp, dramatic recoveries. Time is definitely not trapped in a bottle, rather it is speeding up. Market chart patterns are frequently described in terms of waves and the frequency is definitely getting higher and higher. Maybe this phenomenon is to be expected. Information is flying at us faster and faster. Technology has sped up the rate at which the sum of all human knowledge doubles from approximately every century in 1900 to an IBM estimate of about once every 12 hours today. That seems incomprehensible. If human knowledge doubles every 12 hours, maybe it’s not so unusual for the stock market to look past all of the chaos and move onto the future. In fact, if time is only relative maybe we are living in the past while the market is living in the future. Clearly, I’m spending way too much time thinking about these issues. But I’m struggling to with what F. Scott Fitzgerald described as the intelligence capable of “holding two opposed ideas in the mind at the same time.” What I read, hear, and see are completely at odds with what I experience, both inside and outside of the financial markets.
The major struggle for me and many like me out there is how is so much “wrong in the world” while the market is telling us there is so much right in the world. Is this a Tarzan market, “Fed buy assets, Me buy assets”? Or is there something more to this market rally? The adage is that the market is forward looking. That the market has looked past this crisis and moved onto the recovery. I get that, I honestly do. But…I guess I have one question to that logic. At some stage, that is simply a justification for the market to always go higher, and as a consequence to have no relevance to the current underlying economy or business climate. That type of logic only leads to higher and higher price to earnings multiples; or put another way higher and higher asset inflation. You see, forecasts frequently only focus on foreseeable things and dramatically discount the unforeseeable. The impact of deficits on future growth, for example, are greatly ignored in the market’s rosy future forecast—let alone events like we just experienced, rogue waves of global pandemics.
Asset inflation and Fed intervention seem to go hand in hand. Whatever the reasoning irrational pricing in the stock market is Depeche Mode, fast fashion. Some highlights from this week’s fashion show, Hertz Rental Cars, stock symbol HTZ is up about 200%. Hertz, by the way, filed bankruptcy last month and its equity is effectively zero. But go tell that to the irrational market, it doesn’t want to hear it. Another of this week’s fast fashions, Genius Brands, I can’t make this stuff up, stock symbol GNUS. This stock, as recently as April 4th, was trading for 33 cents/share. The company makes educational DVDs, remember those things? Yesterday the stock traded over $11/share before collapsing after its owners announced plans to offer $60 million of stock. Essentially the directors announced that if people are foolish enough to pay these prices, we’d be foolish not to sell it to them. These are just a few of the crazy examples out there right now.
While it’s easy to sit here and discount the irrational pricing of a select few securities, while rationalizing the pricing of large cap stock market indices, it is important to know that the spirits which drive the demand for these “crazy” stocks are the same spirits that drive the pricing of the overall market. Perhaps one of the reasons why we’ve had such wild movements since 2018 is that the higher the market gets the more unstable it gets. The common expression on Wall Street is to talk about the Federal Reserve “Put”, this is a reference to an option instrument which essentially says that the Fed acts as a protective measure for the stock market. If the market falls, the Fed is there to push it back up. The question that the market always seems to be trying to find out is at what level is the Fed’s put “strike price”. Or rather, how far down does the market need to go before the Fed comes to the rescue.
With the stock market, measured by the S&P 500, just a fraction below unchanged for the year and the economy, measured by GDP, far from a fraction below unchanged, it seems prudent to wonder how much more support does this market need from the Fed? The adverse effect of Fed action is “moral hazard,” or taking on too much risk by all market participants—risk by lenders, risk by borrowers, and risk by stock buyers. Moral hazard leads to bubbles and financial crises. Maybe the market should start looking forward to the potential damage caused by Fed action today? Maybe that is a more prudent question for all the future discounters out there now that we’ve completely solved all of today’s problems. Oh wait…
Thanks for reading,
Zach and Dave
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