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.
Happy Holidays, dear readers! Believe it or not, the vast majority of the newsletters we write are not, in fact, for our own entertainment. A couple of them definitely are - notably the April Tin Foil Hat series and the October Halloween series - but apart from those semiannual gems, most of the time we are trying to educate, inform, amuse, explain, entertain, and/or deobfuscate.
This one, however, will likely turn out to be none of that. If you’ve been paying attention to those trade confirmations that hit your inbox at the stroke of midnight, you’ll have noticed that we’ve been busy headed into year-end. The following is a glimpse into what we’re thinking, and why. Fair warning, it may feel a bit like climbing up an Escher staircase. But like we said, this one’s for us.
Hindsight is 20/20, as they say. Unfortunately, since my benevolent overlords editors here at Beachcomber have these things called “deadlines”, there is absolutely zero hindsight available for this first Rogue Waves of 2020, as it is, in fact, still 2019 as I write this. Which must mean it’s Magic 8-Ball time!
What’s that? You think we meant to say “crystal ball”? Ah, yes, that is to be expected given all the punny ways you can put “vision” and “2020” together for economic forecasting. But from time to time we like to refrain from beating a dead horse. And also, economic forecasts are useless.
To pick up where we left off last month: Diversification, huh, what is it good for? Well, most people would say a lot, that diversification is the foundational bedrock of an investment portfolio. But also - and this next point might be somewhat controversial - nothing.
If you want to make money in the stock market - like, turn $1,000 into $100,000 money - you won’t do that with diversification. Well, you will, but it’ll take 50 years. The quickest way to make money is by making a very small number of very large, concentrated bets...and then hopefully the bets pay off. Think of any famous investor you’ve heard of, and they’ve probably made their money that way.
The problem is, it’s a huge gamble. For every one investor you just named, there are hundreds that nobody has ever heard of, because they lost. And then there’s the ones that made it to the big leagues and subsequently crashed into bankruptcy: Long-Term Capital Management, Amaranth Advisors, Marin Capital, Tiger Management, MF Global...the list goes on. So sure, you can do all kinds of research/activism/questionably-legal market manipulating activities to try and make the gamble less of a gamble (*cough*hedge funds*cough*), but any investment with that kind of payoff comes with all sorts of risk.
That risk is exactly why the SEC, in their paternalistic omniscience, have limited most of the best investment opportunities out there to “accredited investors”. For the vast majority of “non-accredited investors”, that level of risk is unacceptable. If your investments are in the form of a 401(k), or maybe you have a brokerage account but know you will be needing to use those funds in retirement, the possibility of losing all your money should never be on the table to begin with. Yes, turning $1,000 into $100,000 a couple times over would be nice, but we’ll choose instead to take the worst possible outcomes off the table and make money the old-fashioned way: savings and time. And so we turn to diversification. Diversifying will not make you money, but it will certainly mitigate potential losses.
Back in the USA! And for our first meal in Atlanta after two months, we had...Chinese. Which was delicious, but our fortune cookie said - no joke - “Don’t invest in the stock market. Invest in family instead.” Well played, China. Apparently we have progressed to the psyops portion of the trade war.
But let’s leave China to the side for the time being (until we get into what it means to have the world’s reserve currency) and stick with Europe for another month. Europe is a hot mess.
Let’s start with Brexit. Boris Johnson is brilliant. Well, perhaps not. I mean, he kind of looks like he never outgrew his second year of boarding school where experimentation with sloppy hair and dress was all the rage, which admittedly taints our opinion. But he and/or his advisors (rumor has it Dominic Cummings is largely the brains behind the Brexit tactics) have played this beautifully.
If last month was Roger Moore as 007, then we’re closing out this summer series with Michael Bay. That’s right - it’s time for stock valuation, replete with explosions, special effects, and very confusing cuts in the action sequences.
Stocks, also referred to as “equity”, are shares of ownership in a company. These used to be issued as actual stock certificates (really decorative pieces of paper), but now it’s just digital 1’s and 0’s. Kind of like the cash in your bank account. When you buy a stock, you expect to make money in two ways. One is by collecting a dividend (which right now averages just under 2% for the S&P 500). The other is by the stock price going up.
Unlike bonds, there is no intrinsic starting point for stock valuation. There is neither a maturity date nor a future value, which makes them more or less impossible to actually value. Not kidding - there are textbooks upon textbooks upon college courses upon certifications all trying to impart some standardization to stock valuation. But that uncertainty is also where the fireworks come in, and why stocks swing they way they do.
Too Soon to Start Investing? Financial Experts Weigh In.
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