Irrational Is As Irrational Does
Summary
- It's typical of momentum-easy-riders to take credit for gains on the way up and then distance themselves from any responsibility for losses on the way down.
- Those buying and holding stocks today are betting the supply of lotto-ticket buyers will continue (indefinitely?), even as the global economy turns down, and a cash crunch spreads through highly indebted households, businesses, governments, and levered stock speculators around the world.
- Leverage, as always, cuts both ways. There are a whole lot of people holding assets at record highs today who will not be able to keep holding as prices mean revert.
Stocks bounced sharply yesterday after February's drubbing. If you were shaken by losses in February and elated yesterday, your portfolio is not 'defensive' or well-managed, and now would be another good opportunity to fix that.
It's typical of momentum-easy-riders to take credit for gains on the way up and then distance themselves from any responsibility for losses on the way down. Most broker-dealer/managers/advisors and do-it-yourselfers habitually join President Trump in this self-deluded practice. It's the equivalent of bragging about one's prowess for buying a scratch-and-win ticket, and then blaming others when you lose.
BMO Nesbitt equity promoter in chief investment strategist, Brian Belski, offered a classic example when asked about falling markets last week: "You can't rationalize an irrational market," he said. This, from a man who's spent his sell-side career rationalizing every irrational move up, and entered 2020 bullish-as-usual, even as the total market value of US stocks (Wilshire Total Market Index) hit record irrationality at 158% of US GDP in 2019, shown below since 1972 courtesy of Stephanie Pomboy).
Belski's 'irrational' drop January through February, managed to correct this reading back to 138%, just slightly below the all-time-tech wreck top of 143% in 2000.
Those buying and holding stocks today are betting the supply of lotto-ticket buyers will continue (indefinitely?), even as the global economy turns down, and a cash crunch spreads through highly indebted households, businesses, governments, and levered stock speculators around the world.
The chart below courtesy of dshort.com shows the record leverage (net debt and cash available in margin accounts in red since 1980) of present account owners with an overlay of the S&P 500 in blue.
I would add that that this total does not include the funds borrowed against homes or lines of credit to buy financial products this cycle, nor the leverage in ETFs and funds that use options and debt to magnify long exposure to markets.
Leverage, as always, cuts both ways. There are a whole lot of people holding assets at record highs today who will not be able to keep holding as prices mean revert. The need to raise cash forces selling and magnifies market drops just as levered buying has magnified gains in recent years. Passive 'buy and hold' investors and funds will be slashed along for the ride.
For more on this, see Margin Debt could worsen the coronavirus selloff. Speculators may have to cash out fast:
The mechanics of a margin call are basic. When stocks fall, brokers can be forced to call up clients and ask for more cash so debt to portfolio value ratios don't violate rules. That can, on occasion, lead to forced selling. Sometimes stocks are brokerage clients most readily available source of cash. That's a problem when market pain is widespread. Everyone runs for the exit at once.
We are here. Irrational is betting on never-ending expansions where central banks can solve toxic levels of leverage by adding even more. Individuals proactively managing our risk exposure for self-preservation, on the other hand, is entirely sane.
Disclosure: No positions
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
This article was written by
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Comments (11)
Following a pandemic, the natural rate of interest declines for decades thereafter, reaching
its nadir about 20 years later, with the natural rate about 2% lower had the pandemic not
taken place. At about four decades later, the natural rate returns to the level it would be
expected to have had the pandemic not taken place.
These results are staggering and speak of the disproportionate effects on the labor force
relative to land (and later capital) that pandemics had throughout centuries.
Good article Ma’am.
