Travel is back! We were in the Dominican Republic last week, our first international trip since COVID. It was...refreshing, in a lot of ways. The flight out of Logan crack-of-dawn early, so we stayed in an airport hotel the night before. There was a line at check-in, and the parking lot was completely full. Also full - the 4:30am shuttle bus to the airport in the morning. Literally every seat. Not "every available socially-distanced seat", every single seat in the thing. And the airport was the busiest we've seen since the Sunday after Christmas. The line for Cinnabon in BWI was a solid 30 people deep. Also, Terminal A in BWI is now open again, which it wasn't in June, November, December, or January.
Perhaps the most striking thing about the fellow passengers? It wasn't Spring Break week, the airport wasn't packed with families and little kids. It was mostly older folks. A lot of white hair, and way more Columbia, sneakers, and backpacks than Hugo Boss, oxfords, and briefcases. Have vaccine, will travel.
(As an aside, to get back into the States from overseas requires either a negative COVID test within 3 days or documentation of a positive test and recovery within the previous 90 days. Even if you've had COVID and recovered, we'd highly recommend going the negative test route. Watching the airline check-in employee try to make sense of a random lab printout and equally non-uniform clearance from a random state health department leaves a lot of room for translational errors. Just go with the standard lab report from their own country's labs that they're used to seeing.)
Relatedly, have you noticed how almost every restaurant or retail shop has a 'Now Hiring' sign posted in the window? At least they do up here. It makes us optimistic for what could be a rather booming economic recovery this summer, especially if vaccinations continue apace.
Which brings us back to the disconnect between financial markets and the underlying economic reality. The stock market bottomed on March 24th last year and was up around 40% through May while in real life, lockdowns were becoming more draconian and more and more businesses were getting shuttered.
We wonder if there will be any symmetry to this coming out the other side - businesses are hiring, travel is coming back, countries are reopening borders, economic activity is picking up...but this has already been effectively "priced in" by the markets. Is there much upside to be captured in stocks from economic growth when that growth merely confirms the underlying assumptions justifying such market levels in the first place? We shall see.
What a week! Down with the shorts! David vs Goliath! Occupy Wall Street! Stonks!
The current tagline of r/wallstreetbets is "Like 4Chan found a bloomberg terminal", though for most of Thursday and Friday it actually read "Like 4Chan found a bloomberg terminal illness". Which is both clever and the most accurate description possible.
We imagine a lot of people were exposed for the first time last week to some fairly nuanced and advanced financial concepts that got completely mangled in the media because who has time for nuance these days, right? Well, we do! So let's unpack what's going on a bit.
You know what a lot of the best surfing spots in the world have in common? A dangerously shallow reef. The reef at Maverick is about 20 feet deep at the break. Pipeline's reef is less than 10 feet from the surface. The reef at Teahupo'o is less than 6 feet deep.
Give a wave a lot of open ocean to conserve energy, then stick a shallow reef with a steep drop-off down to the continental shelf in front of it. The drag caused by the bottom of the wave interacting with the seafloor drives all that wave energy up into a crest and over into a hollow barrel. (Knew that oceanography degree would be good for something!).
How is this relevant to investing, you may ask? Well, despite a false start a couple months ago, the Blue Wave finally materialized this month, and it looks like it's carrying an entire 4-year ocean's worth of fiscal stimulus.
Well. The scariest night of the year is almost upon us (take your pick of October 31st or November 3rd), and it definitely feels more trick than treat in the markets this week, doesn't it? Monday was off a couple percent, no bounce on Tuesday, and then down another 3.5% Wednesday. A little bounce yesterday, but all given back again so far today. Frustratingly, Wednesday's selloff was another one of those days where literally everything sold off. Stocks, bonds, gold..everything. To put that into perspective: stocks, bonds, and gold all down on the same day has happened twice. Ever. And both those times were back in March of this year.
Which kind of makes sense...the catalyst for the selloff is a little murky, though it seems like Europe (at least Italy, Spain, France, Germany, UK, Belgium, Czech Republic, and Poland) reinstating various lockdown measures is largely to blame. Domestically, optimism around a fresh stimulus deal seems misplaced (though does that actually surprise anyone a week before the election?), and the election races seem to be tightening.
A few weeks ago, the default positioning on elections felt like expectations of a "Blue Wave" result next week, and markets had been rising ahead of an expected proverbial opening of the government spending floodgates. Now, it feels like there is a reconsideration of that outcome. Markets hate uncertainty. The worst possible outcome (for markets) is a contested election that has to spend months working its way through the courts. Tighter polls make that outcome marginally more likely, so perhaps what we're seeing in this selloff a broad deleveraging of risk assets. Or maybe it's the opposite of what we saw back in Q2 and is a bit of a negative gamma squeeze.
In the spirit of Halloween, we'll take this newsletter in less of the obvious Bruce Banner/Incredible Hulk direction and more of a The Gamma People/Creature with the Atom Brain direction as we dive into what exactly gamma is and how it moves markets.
The upshot of last month's webinar, for those of you that missed it, was that the Fed is turning the stock market into a house of cards, but you might as well make yourself comfortable in it. Recently, we've been having a number of conversations that suggest we need to elucidate that point a little further than can be accomplished in a 40-minute Zoom. So here we go:
What is investing?
Are you "investing in companies" when you buy into the stock market?
99% of the time you are not investing in a company. The only ways you can actually invest in a company are: public stock offerings (usually IPOs); public debt offerings; private equity or debt deals. Last year, there were a low-200's number of IPOs that raised around $62B total. Through the first half of 2020, there have been 64 IPOs that raised $22.3B. The total value of the US stock market is right around $30T with a "T". So in any given year, about 0.2% of the stock market is actual "I want to invest in your company" money.
You've seen a record $1.2T in new bond issuance (more on this in a bit) year-to-date in a $40T bond market. Private markets are up to about $6.5T total and have added $370B or so a year (including performance). So recently, in any given year, you could reasonably expect about $1.6T in real "give this company my money" investment. In a combined stock/bond/private marketplace in the US of $77T or so. That's 2%.
Okay, sorry, we were wrong: 98% of the time you are not investing in a company (though really, most of that 2% is limited to a very select few, so in our defense it is likely closer to 99%).
So what are you investing in? When you buy your shares of Apple or Tesla or Aurora Cannabis, you aren't giving your money to the company for them to do amazing world-changing things with. You're not giving your money to the company at all. That's why the stock market is a "secondary" market - you're giving it to the person you bought the shares from.
This month we're going to talk about a somewhat taboo subject in investing: gold. There are those who still hold that gold is nothing more than a "barbarous relic", a literal lump of rock that, while shiny, produces nothing, yields nothing, pays nothing, and is essentially a way that financial companies have found to charge you for keeping money under your mattress.
On the other side are those convinced that gold is a necessary store of value in a world where paper money is backed by nothing more than the (perhaps rapidly eroding) "full faith and credit" of the issuing government. Our money used to be backed by gold and silver. Now it's backed by nothing. And in point of fact, there aren't even enough paper dollars to cover the amount of money in the US economy.
Gold bugs tend to get a bit of a bad rap and are lumped in with doomsdayers and naysayers of various ilks. But with gold at all-time highs over $2,000 an ounce, let's try and take a rational look at why and how one might invest in gold.
Because we're also doing a live market update this month, this note is (hopefully) going to be on the shorter side...but no guarantees.
We've written about inflation before. It was a couple years ago now, and the thesis was basically that wage inflation would pick up, signaling minimal slack in the economy and the need for tighter monetary conditions going forward that had the potential to prick the stock bubble. Spoiler alert: that didn't so happen so much. Real wage inflation did pick up and actually spent most of 2018 and 2019 above 3% before sliding back to the mid-2%'s as the calendar turned into 2020.
What ended up popping the equity bubble was not wage inflation but rather a little spike protein on the surface of the SARS-CoV-2 virus. Of course, that equity bubble was subsequently reinflated faster than you could say "Thank you sir, may I have another", but there's still an interesting question of inflation on the table.
Namely: are we headed into disinflation/deflation, or are we headed in the other direction into (perhaps significantly) higher inflation? It's an important question, because the kind of investments that tend to do well during inflationary regimes are categorically not the kind of investments that tend to do well during deflationary regimes.
Robin Hood: Men in Tights - a great movie from the early 90's (which, not to make anyone feel old but was 30 years ago) starring Westley from The Princess Bride, Dave Chappelle, and Patrick Stewart.
Brilliant! Anyway, it's a Mel Brooks movie, so it's a hilarious parody of the Robin Hood story, in a similar vein to Young Frankenstein. And this is relevant to this month's note because there is another hilarious Robinhood parody playing out right now: Robinhood, the online brokerage platform, and the parody is the stock market, and by hilarious we mean sad.
With nothing to do except stay at home under shelter-in-place orders, people apparently turned to day trading in a big way. It seems like the combination of time, boredom, stimulus checks, and no sports to bet on have people piling into the market (see: anything from Dave "Davey Day Trader" Portnoy, founder of Barstool Sports-turned day trading stock market guru who picks stocks out of a Scrabble bag and whose first maxim of investing is: "Stocks never go down"). E*Trade, TD Ameritrade, and Charles Schwab all saw record new accounts in the first quarter of the year. All 22 trading days in March were among Schwab's 30 most active days ever.
Mel Brooks has already made one parody movie entitled Robin Hood: Men in Tights. The year was 1993, and you had Westley from The Princess Bride, Dave Chappelle, and Patrick Stewart all on screen at the same time. Brilliant.
And now, nearly thirty years later, we have a real-life Mel Brooks-ian parody playing out in the stock market. May I present - Robinhood: Men in Tights (the reprise).
"Capitalism is the worst economic system ever invented...except for all the other ones."
- Winston Churchill (paraphrased) et al.
One of the main effects of this virus - and our response to it - has been to shine a light directly on all the broken parts of our societal system. A really harsh, fluorescent light. In some cases even a seizure-inducing strobe light. Whether your particular flavor of failure du jour is institutional, political, economic, macro, or micro, there is something there for everyone.
Remember all the outrage over "faithless electors" a few years ago? That was people waking up to the fact that their vote doesn't matter. In point of fact, you don't actually vote for President at all. You are really voting for which party you want to appoint a donor fundraiser elector to vote for you. This is like that, but with everything. In the interest of page limits, we'll stick to our broken economic system for now: Covid killed capitalism.
Well. We knew we didn't have any kind of monopoly on rogue waves, but this one...wow. Iceberg ahead, captain.
In early March, when stocks were down 15%, we wrote that if you were asking yourself "should I be selling stocks", our answer was "yes". Apparently, nobody listened.
Shelter-in-place orders turned people to day trading in a big way. E*Trade, TD Ameritrade, and Charles Schwab all saw record new accounts in the first quarter of the year, with Schwab alone reporting 300,000 just in March. All 22 trading days in March were among Schwab's 30 most active days ever. For the new hundreds of thousands of you that will soon be asking "should I sell my stocks", we will reiterate: yes.
Part 2. There is so much to unpack economically here, it might take us the rest of the year. So we’ll just start for the time being with a real-time post-mortem of the stock market and economy. A peri-mortem, perhaps.
Things in the land of fiat money and made up valuations are...bad. Like, Stewie destroying Mr. Rogers’s Land of Make Believe bad.
The S&P 500 had a closing high on February 19 of 3,386. As we write this on March 19, exactly one short month later, the S&P 500 is sitting at 2,323 about 15 minutes into the trading day. That is a loss of 31% in a month, which is the fastest drop into a bear market from an all-time high on record (the red line).
As I’m writing this (first week in March), the market is in the middle of some obscene volatility thanks to the coronavirus that has started taking over the world like the second coming of Genghis Khan. The crystal ball is decidedly murky on this one, so no telling what things will be like when you’re reading this in April, but here’s hoping the zombie apocalypse chapter story you’ve read in these very pages hasn’t been a massive case of cosmic foreshadowing!
Something I’ve heard a lot in the last week from clients is: “should we be selling stocks?” Perhaps you’ve had the same thought yourself. Fortunately, there’s a straightforward answer to that question: yes, you should sell.
But, but....what about long-term investing and buying the dip and “the market will recover” and everything else people say? Irrelevant! Let me explain:
We had originally intended to keep unpacking December’s This One’s For Us newsletter and get into the superstitions and black magic of technical analysis...but things have taken a rather interesting turn in the last week, so let’s address the elephant - er, the bioengineered microscopic pathogen - that’s (probably) in the room. It’s not yet April, so we’ll try really hard to stick to facts...or at least what has been publicly admitted to.
Here’s what a pandemic looks like:
It’s beach renourishment time again! The dredges and pipes and bulldozers are all hard at work this offseason fighting with mother nature to try and keep those free-spirited sand grains in one place. Or at least temporarily reset them, I suppose. The more cynical among us might argue that it’s a bit of a losing battle...but man does that new beach look good.
From time to time, it’s a good idea to give your portfolio a little renourishment as well. We’re not talking about selling everything and starting over - after all, you don’t scrape the beach away down to bedrock and then rebuild it. You just need to move some things around a little bit.
There are all kinds of pithy sayings out there about how to renourish your portfolio: “cut your losers and let your winners run”, “if you liked it before, you should like it even more now that it’s cheaper”, etc. Gag. All you really need to do is a simple rebalance.
About the Blog:
Here lives our collection of newsletters, articles, and some occasional guest posts by outside authors (where indicated) who have quoted us. If you're interested, feel free to browse through the archives here.