Two Roads Diverge...
Investors feel their way through some unfamiliar terrain
Bill Bonner, reckoning today from Baltimore, Maryland...
When we left off yesterday, investors had come to a place where two paths diverged.
On one, the most traveled, stocks always rebound from a downturn and go on to new highs. That is what they did after every selloff since 1987. It was the year that Alan Greenspan created the famous “Greenspan Put,” almost guaranteeing a Fed rescue.
Since then – 2003, 2009, 2016, 2020 – each time stocks corrected…the Fed lowered interest rates, and soon equity prices were rising again.
The ground on this path is well-trod; and it is chock-a-block with buy-the-dippers, who are counting on the road to lead them to where it always has in the past – higher stock profits.
The Road Less Traveled
But multiple excursions so far this year have been disappointing. Each time, after a brief run-up, stocks soon fell again, leaving buyers with even bigger losses. Undaunted, beginning in October, investors set off once more. As of Friday, it looked as though this time they might get where they wanted to go; stocks were up 17% since October.
But yesterday, the path looked, once again, rocky and unpromising. MarketWatch:
U.S. stocks are on track for their worst daily pullback in nearly a month on Monday as the S&P 500 traded below 4,000. Equity prices have been rattled by stronger-than-expected economic data, which market strategists say could inspire the Federal Reserve to hike interest-rates more aggressively. The S&P 500 fell 82 points, or 2%, to 3,988. The Dow Jones Industrial Average fell 540 points, or 1.6%, to 33,889. The Nasdaq Composite fell 254 points, or 2.2%, to 11,206. All three indexes were on track for their worst day since at least Nov. 9, according to FactSet data.
By the final bell, the damage was less severe. But many analysts still thought the rally was over. “Time to take profits,” says Morgan Stanley’s Michael Wilson.
But it's too soon to know whether this marks the end of the rally. Just in case, though, let’s take a more careful look at the alternative. Most investors are not even aware it is there. To them, there is only one way…the only path they have known. ‘Stocks always go up in the long-run,’ they say. ‘Just get on the path and stay there.’
But pull away the vines and brambles, and there it is, another trail, just as it was 40 years ago, when it was abandoned.
A Road to Nowhere
Consulting some old maps, we find the path once conducted a fair amount of two-way traffic. Investors took it coming and going…as stocks rose and then fell. And unlike the more traveled trail, which only leads up and up, investors never knew where they would end up. Often, misled by inflation, they didn’t know where they were even after they got there.
In the 16 years between 1966 and 1982, for example, it was uphill and down. At the end of the path, investors looked around and saw a familiar landscape. They judged that they had just gone round-trip to nowhere, ending up almost exactly where they began. But they were mistaken. The scene had been badly distorted by inflation. After adjustment, they had lost 70% to 80% of their money.
That is the thing about this other path; it is full of unexpected twists and turns, hidden switchbacks, and confusing by-ways. Not only is there no guarantee investors will make money along the way, there are plenty of traps and temptations to help them lose it.
Back in 1982, for example, it was obvious to everyone that the Fed was going to halt inflation and that bonds were going to rise (as interest rates fell). But investors had gotten used to the other path – where bond yields had been rising since the 1940s. They couldn’t believe that such a fundamental change of direction had actually taken place. Two years after the trend was already in motion, 10-year US Treasury bonds, still regarded as “certificates of guaranteed confiscation,” were trading with a yield of 14% (it later went to 0.6%).
Turning Japanese
And in Japan, investors have been on this path since the Japanese Miracle blew up in 1990. The government has done everything it could to help force them off, including running up the most debt of any nation in the world. But nothing worked. The Nikkei index was over 38,000 in December of 1989. Now, it’s a generation later and you can buy it for 27,000 – nearly a third off.
Which path would you prefer?
It doesn’t matter. You don’t get to choose. And it doesn’t matter whether stocks go up or down from here; the easy gains are gone. Investors are embarking on a different path now, through tougher terrain with different and unpredictable twists and turns.
So, put on your hiking boots and bring along some bear repellent. You may need it.
Stay tuned...
Regards,
Bill Bonner
This is one of the best descriptions I’ve read that pinpoints where we are. I keep reading other analyses that say buy the dip, or we are in for a rocky road until the Fed moderates. That is optimism that hasn’t been surgically removed by Mr. Market. Once everyone is saying, “all hope is lost, sell sell sell!” Only then is it the time to possibly buy. I just noticed that the Case Schiller home price index is rolling over with last summer’s data. It is a very laggy piece of data. Zillow has shown my house dropping from an insane price since summer. Nothing has value until someone assigns a price to it. I always thought my house was overpriced since I purchased in 2004. It almost doubled by last summer. As this everything bubble implodes, I wouldn’t be surprised if if drops below the original value I paid.
From Bill: “Two years after the trend was already in motion, 10-year US Treasury bonds, still regarded as “certificates of guaranteed confiscation,” were trading with a yield of 14% (it later went to 0.6%).”
How I remember those days! A newly minted broker in Baltimore, I was urged by a senior colleague to call everyone I knew and offer them the long bond, then yielding about 15%. Not a single taker! The typical response was “Get back to me when it goes a few percent higher.” After all, the hometown company T. Rowe Price was then crediting 16% in its money-market fund. Little did it avail me to remind my sales prospects that the long bond is not callable. I did manage to get my best local friend to buy some shorter-dated zero-coupon bonds (seven to ten years out) for his pension fund. The discount was so substantial he didn’t need to commit more than a small percentage of the pension account to make a killing. Over the years, I needed to remind him, more than once, of that early “brilliant idea” of mine when some other products I later installed for his account eventually defined mediocre down.