A Mean Reversion

Why most people are wrong, most of the time, about most everything...

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

That's life
(That's life)
That's what all the people say
You're riding high in April, shot down in May
But I know I'm gonna change that tune
When I'm back on top, back on top in June

~ Frank Sinatra, “That’s Life”

Ouch! Our small holdings of Russian stocks are down almost 60% so far this year.

But you’re probably wondering: what are we doing investing in Russian stocks in the first place?

Ah, dear reader… let us explain.

As we’ve seen, the markets move in great, generational sweeps from high to low and back to high again. The general rule (and we’re not divulging any trade secrets here) is to buy low, and sell high. Many people have tried it the other way around, but the results have been disappointing.

We bought Russian stocks as part of a special program – mostly for fun – in which we invest in the worst-performing markets, counting on ‘reversion to the mean’ and ‘contrarianism’ to turn them around. After all, a single company can go down and never get up again. So can an entire industry. But not a whole country.

Often beset by worries, nevertheless, they tend to survive.  

Horsesh*t Predictions

In 1900, there was a major industry involved in cleaning the horse manure from city streets. New York, for example, had an estimated 50,000 horses, producing 15 to 35 pounds of manure, each, per day. That was 2.5 million pounds per day. The street cleaners were unable to keep up with it. One ‘expert’ forecast that London’s streets would soon be buried under 9 feet of manure.

That was the great climate disaster of 1900… and it was, well, horsesh*t.

So too were the many crises and delusions to come along later. Child labor in the factories was a bugaboo in the early 1900s. Then came a war ‘to end war.’ A “permanent plateau” in the stock market was the forecast of the greatest economic expert of the era, Irving Fisher, in 1929. Bolshevism was seen as a threat to mankind in the 1930s, 1940s… followed by communism in the 1950s. In the 1960s, leading economists were still predicting that the centrally planned Soviet Economy would overtake the US. In the ‘70s, climatologists were concerned about ‘global cooling.’ In the ‘80s, Japan’s model of government-led capitalism seemed unstoppable. Then came the dot.com bubble… in which it was predicted that growth rates would now speed up because the new Internet made the world’s knowledge available to everyone. Why live in darkness, when the light switch was now just a click away?

Then we discovered ‘terrorists’ in our midst… followed by Ben Bernanke’s hallucination: “We may not have an economy on Monday,” said he, in 2008. More recently, Covid was advertised as though it was the Great Plague… and now, the Russians are threatening our western civilization.

But since the advent of the 21st century, US GDP growth rates have been cut in half. War is still in the news. Experts believe the world is heating up. Japan seems to have fallen into a permanent, on-again, off-again, slump. Bolshevism has disappeared almost everywhere, except perhaps on US university campuses. Terrorists, too, have practically disappeared from the headlines. The economy is still in business. Covid has left more people on Planet Earth than it found. And child labor? In the 50 states, we can scarcely find a factory for anyone to labor in.

From these facts, laid down before us like stepping stones across a woodland stream, we could probably take a leap to many different insights. But rather than risk a slip, we will merely conclude that ‘things change.’ ‘Tout casse, tout passe,’ as the French say. Everything keeps moving… the tides ebb and flow, as the ancient rhythms of life continue. You’re riding high in April; shot down in May. That’s life.

Most of the People, Most of the Time

Russian stocks were shot down long ago. But they didn’t die. Rarely does a whole country go out of business. Instead, it goes up and down.    

When we bought them, Russian stocks were among the most unloved equities on the planet. And yet, they were real companies, operating in a real country… with very sophisticated engineers… a large domestic market and all of Europe just a pipeline away. And now, they are even cheaper.

But wait. Russia is a pariah. Russians are ‘bad guys.’ The world has turned against them. And Russian assets are stranded, doomed. Yesterday, the Russian stock market was closed. In New York, the losses mounted up so high, trading in Russian shares was halted. But a few Russian stocks and ETFs still traded in London… and it was a bloodbath. The two leading Russian stock ETFs dropped 25% each. Russian bonds, too, have collapsed; they are now selling for about 33 cents on the dollar. The Russian ruble is losing value on world markets; in Russia, the physical currency is hard to get, with long lines of people trying to make withdrawals. And Sberbank, whacked by sanctions and thought to be near bankruptcy, lost 75% of its value. 

Did investors overreact? Did politicians?

In private life, most people get along tolerably well. They pass through intersections without damage. If they earn sixpence, they spend sixpence, not more. They grumble, but render unto Caesar that which he asks.

But in public life, most people are wrong, most of the time, about most everything.  Humans take their cues from others, especially their leaders. They go to restaurants that are popular… read the books that others are reading… and wear the clothes they’ve seen on their friends and influencers. They tend to bunch up, unite behind jackass leaders, trample each other in a stampede, and pay too much for their favorite investments.  

But there’s always more to the story; eventually, it comes out… 

In the short run, says Warren Buffett, the stock market is a ‘voting machine.’ The mob votes for stocks like it votes for politicians – electing loudmouth buffoons and slick frauds. The contrarian takes the other side of the trade. He votes for the underdog, and waits for June.

Regards,

Bill Bonner