The Shit-Show
Yesterday the New York Times published an article that the Bond Market is screaming one of its worst signals by going into the rare and portentous inverted position. That means long rates are lower than short rates. That means people are getting bearish about the economy and liquidity is starting to dry up.
In forty-five years on Wall Street I learned many lessons, but none starker than to pay attention to pending illiquidity. I am reminded of the movie Leaving Las Vegas (not to be confused with Hunter Thompson’s Fear and Loathing in Las Vegas). Seeing one’s coming demise and rushing headlong into it is a very human response to bad times. Nicholas Cage doesn’t just get drunk in the high-risk town, he embraces drunkenness out of desperation. If only we all had an Elisabeth Shue available to catch us when we do that.
The thing is, the world of investments is Las Vegas. No question about it. It is no joke that Anthony Scaramucci holds his annual SALT Conference in Las Vegas. That’s the conference where he gathers all the bright lights of the private equity and hedge fund community and they share great thoughts. It is the successor gathering to the Predator’s Ball started in the 1980’s by Michael Milken and Drexel in the heyday of Junk Bonds. In between those two gatherings were years of High Yield Conferences, usually held in Phoenix, but with a Las Vegas flair and edge to it.
The operating mode of Wall Street, Las Vegas and the investment world in general is one of juxtaposing fear and greed. The Fear/Greed cycle is very well known and understood by Wall Street people. It is one of the easiest lessons to understand and yet one of the hardest lessons to take heed of and use to avoid disaster. The reason it is so challenging is that Greed turns to Fear in the blink of an eye and Fear reverts to Greed in a similar nanosecond. Everything in the world is liquid until the moment it is not. For those who watched the sub-prime crisis unfold from a front seat in 2007 (guilty as charged), this reality of liquidity is startling. And here’s the most pernicious aspect, the greatest fortunes are made when one makes a timely call on the reversal of the cycle.
The Joe Kennedy story is prescient. He was supposedly getting his shoes shined on Wall Street in 1929 when the shoe shine boy talked to him about his investments. Kennedy took that properly as a signal that the market was over-heated, and it led to him putting on a massive short against the market. Jumping out of a speeding train takes some serious guts. The other day, a friend who is gathering investors in a ride-sharing service/app told me that an Uber driver overheard his discussion and asked him if he could invest $150,000 in the investment. I told my friend that was a Joe Kennedy signal. He did not know the story and I could tell that the lesson was immediately lost on him as another quirky story being told by an avowed storyteller.
In December, I got some twitchy feelings about the market and I called my private banker and told him to lighten up my investment allocation. He said to me that he could not remember me doing that in fifteen years of working for me. He is correct. I scoff at market-timers. It’s a mugs game to think you can out-time the market. Great fortunes are frittered away by people who play the market and get clipped on each turn. I don’t do that. But I did that. For a while it served me well with the market retrenching, but as the new year unfolded, the market has recovered. My defensive strategy had gone from helping me to mildly hurting me. I was tempted recently to take off my limitations and let the market run. I am pleased to report that I didn’t do that and did not fall prey to getting myself whipsawed like I always advise people against. I had de-risked my investments and I stayed with that de-risked strategy. Yesterday’s article reminded me of all my lessons.
Do not try to time the market. If you are nervous, then de-risk and stay de-risked. If you get a lot less nervous, you’re on your own. Always remember that Fear and Greed are governing dynamics and always try not to give into your fears too much and never, never give in to greed feelings. Investing is about capital preservation first and foremost. If you are a player and want to aim for capital appreciation rather than preservation, then recognize you are less an investor than a player. Have fun, good luck, but don’t cry when your have less and less to invest.
The Shit-Show is coming. We have been in a bull market (I refuse to adhere to formal definitions of numbers of quarters etc., since times are always changing) since 2010. That is some kind of record for recoveries and bull markets. For every bear that says the end is near, remember that there are equal numbers of bulls saying that trees can grow to the sky. All I know for sure is that a decade of good times is a long time and that what goes up always comes down. Now equity markets are positive carry forward markets and do, indeed, trend up over time, but they do so with high degrees of cyclicality and those cycles are where money is made and lost.
When I was on the trading desk for two years thirty-five years ago, I learned that I am not a trader. Once I had seen one market cycle, my interest waned in trying to figure that out over and over. Others were fascinated by it and could and have done it forever. I prefer to build businesses. But to build businesses you need to finance businesses. That means I need to keep my eye on the state of liquidity. I need to keep my eye on the Fear/Greed cycle. I need to be wary of the Shit-Show, which is like the tide. You can’t stop it and it will drown you if you are unprepared for it. If you know it’s coming and acknowledge its power and plan for it, it is quite manageable.
Allow me to repeat myself. The Shit-Show is coming. I am ready. I have checked my greed at the door. I have buttressed my fear (I have looked into the abyss one too many times to be afraid). I am ready…I think.
Dear Lone Ranger,
Alan Greenspan is a favorite person of mine due to his diversity of thinking. As you probably know, early on in life he had a decision to make as to whether to become a professional musician or go into the economic/business field. He chose the latter and rose to one of the most influential posts in government, Chairman of the FED. He remained through three administrations and through some very interesting times, though I don’t recall ever seeing him flummoxed. You were/are of course much more familiar with the field he had so much influence over and certainly know better than I as to his failures (which he readily admits to) and his successes (which he often said he was too often given credit undeservedly).
I like many of his quotes and am just throwing a few out here. None are meant to be argumentative, just interesting to me, if not to anyone else.
“Finance is wholly different from the rest (of?) the economy.”
“History has not dealt kindly with the aftermath of protracted periods of low risk premiums.”
“I’ve always considered myself as more of a mathematician than a psychologist.”
“Markets do very weird things because it reacts to how people behave, and sometimes people act a little screwy.”
“It is very difficult to predict when a bond crisis could happen.”
“We really can’t forecast all that well, and yet we pretend that we can, but we really can’t.”
“I guess I should warn you, if I turn out to be particularly clear, then you’ve probably misunderstood what Ive said.”
In some ways I guess he reminds me of Ed Koch who, as I recall, took credit for the bad as well as the good.
These just came to mind and I hope I haven’t waisted your time.
Sincerely, Do I Comment Too Much?
Thanks