Wall Street to Main Street: Drop Dead
After 2008, in the central bank liquidity driven bull market, stock picking went out of fashion. As the market always went up due to stimulus aka money printing, the simple winning mantras were “don’t fight the Fed” and “buy the dip”.
My thesis is that this will change in the not too distant future: if I knew precisely when I would buy yachts with my spare change.
The divorce between stock market and real economy has been well documented. The stimulus driven boom gives us a stock market above its pre pandemic highs while we have Depression era levels of unemployment and a major health crisis that a) costs a lot of money and b) changes consumer behaviour.
Wall Street is sending a message to Main Street: Drop Dead. The stock market is saying we don’t need humans because robots do a better job. Hmm, can that be really true when 70% of the economy is driven by consumer spending? At some point, somebody has to buy something. The mantra popularised by Warren Buffet is:
“In the Short-Run, the Market Is a Voting Machine, But in the Long-Run, the Market Is a Weighing Machine”.
If your mantras are “don’t fight the Fed” and “buy the dip”, the best strategy is simply buying low cost index funds.
Those low cost index funds include both high flying digital growth stocks and pandemic casualty value stocks. If you want high flying digital stocks you may want to buy Tesla or Zoom or Shopify or mega tech such as Google, Apple or Facebook; but you don’t want today’s equivalent of AOL or Yahoo just when their growth was peaking, because that is a recipe for buy high and sell low.
This is not about value vs growth. Charlie Munger (Buffet’s partner) famously got Buffet to move away from pure cigar butt cheap value to “growth at the right price”. PE over 100 (some hyped growth stocks are over 1,000 PE) is clearly not “at the right price”.
In some cycles the buying opportunity is screamingly obvious. The Dot Com bubble led to some amazing buying opportunities for great tech businesses at depressed valuations around 2002/3.
In this cycle, the Softzilla thesis (software is eating the world) makes sense, just like it did in the Dot Com boom. However, paying PE 1,000 does not make sense.
Why is the stock market at record highs during what looks like a depression to most people? There are 3 explanations:
1. Don’t fight the Fed, free money is great, don’t worry be happy.
2. The market is just a giant casino or Ponzi scheme.
3. Fintech changes the game. You have to understand the technology that drives the market aka Fintech to understand the macroeconomic cycle; shameless plug, buy a subscription to Daily Fintech (weekly cost is less than a cup of coffee). My thesis is:
- Most of the volume is automated trading from passive indexing funds and Robo Advisers. So it takes very little volume to move the market.
- There is some speculative buying from retail investors lured in by free trading apps like Robinhood (and using stimulus checks). If you cannot go to a casino, betting on the market using a gameified trading app is the next best thing. As Robinhood makes it super easy to use sophisticated tools such as futures and options, this is dangerous.
- Big banks amplify the small retail investor bets, but often trade in a hedged way ie can mange the risk of a market crash. We recently had the revelations that SoftBank has been a big buyer. They are a Private Equity fund renowned for paying premium prices that happens to have Bank in its name and they want the public markets to be high because those valuation comparable drive private market valuations.
The other bank with even more firepower than SoftBank is the Federal Reserve Bank aka the Fed.
This week we had a sell off in some tech growth stocks. I do not expect this to continue. I expect a “Fed put” via more stimulus soon.
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