In the financial world of banks and funds, stupid follows stupid, which then follows stupid.
It would be funny if trillions of dollars of real people’s paychecks and savings were not the instruments of capital dumbness. I have saved a chunk of money over several decades and put a piece of it into the stocks of successful companies like Microsoft, Apple, and Costco, which are all thriving right now in the real world. But the hedge funds, banks, and pension funds that dictate the stocks’ value have been selling them by the billions every day, driving down their value even though these firms prosper and show every sign of continuing to do so.
The best answer I can give as a long-term observer is that they are SHEEP.
They read the same publications, employ economists who went to the same Ivy League schools, they attend the same kinds of meetings, and get paid handsomely to mouth the same erudite comments to bosses who answer to other bosses who might all be fired if they were contrarians.
Being different in a big institution is exceedingly dangerous. It can get you fired if you are wrong in the short term and fairly loud about it. If you are wrong like everybody else is wrong, your job is safe, even if that view turns out to be really really stupid.
What we see now is the Federal Reserve raising interest rates to combat the inflation that it promoted by keeping interest rates at absurdly low levels for several years. That promoted a home buying frenzy, which drove up prices at a crazy pace. The Wall Street herd then pushed up stock prices with the hedge funds borrowing at 3%. Then they would go short or long with options. Nice game if you pick up 20% of the profits. Just follow the leader.
Unfortunately, the black swan event appeared in the pond followed by baby black swans.
The Russians attacked Ukraine, Volodymyr Zelinskyy did not run, the Europeans reluctantly stopped buying as much Russian oil and gas, and prices jumped like LeBron.
Then the ports, especially Long Beach, backed up with a work slowdown. The Chinese got hit by COVID and panicked like a California governor but worse. Then they suffered a drought that screwed up their hydroelectric power.
And, in the US, COVID depleted the workforce. Wages, especially for poor people who could work, rose to where they should have been. Unemployment fell to 3.5% and stayed there.
In my opinion, most of these unusual events will reach an equilibrium unless the federal government panics and absolutely floods the economy with dollars. It could take a year or a little longer to happen, but the Federal Reserve could not wait. Mortgages have now hit 6%, which has calmed the home market. Commodities have plummeted in price.
And the SHEEP on Wall Street have decided they must sell stocks now because a recession is here or coming.
If the Federal Reserve were to stop raising interest rates now, the Russians and Ukrainians decide on a winter truce, oil prices come down to three dollars for gasoline, and natural gas falls by half–all events which are quite possible–we will have no recession. The SHEEP would then pivot, and everyone would try to save face on Wall Street.
A perfect example of the SHEEP not understanding what is going on in the real world happened yesterday. Capital goods purchases rose 1.3% in August despite commercial aircraft purchases falling significantly. The SHEEP had expected a decline. The stock market fell because in the SHEEP’S world, good news in the real world is bad news, as it causes the Federal Reserve to raise interest rates aggressively.
In the short run, they probably are correct, but eventually that rare contrarian will shout to the world that this inflation is a temporary happening and we could easily be at 3%- 4% price increases without pushing short-term rates to 8%.
What should real people do? Stockpile flour and sugar? Move into a tiny apartment and rent out their house? Cancel Netflix? That is up to you.
Personally I am betting against the SHEEP and buying a little Costco stock. And the Cubs will win the pennant next year. Bet on it.
Are you seeing a recession right now?
Where are you putting your savings?
“The economy will boom”. “The economy will crash”. Both statements are most likely true, but the trick is picking the timing for each scenario. Was Michael Burry wrong in his projection of a real-estate crash? In the short term, he was off as RE values accelerated, but he was eventually proven to be correct. Who has the stomach to take a beating in an investment when your timing is wrong?
Also, it is good to remember the classic economic statements..
“This time is different.”
“Don’t fight the Fed.”
“The market can stay irrational longer than you can stay solvent.”
“There’s never been a better time to buy.”
“Cash is king.”
“Cash is trash.”
Right now I am hunkering down in Orlando waiting for Hurricane Ian to plow through the area.
Go ‘long’ Owens-Corning roofing shingles.
Go ‘short’ insurance companies.
Were you long Biogen? Let us older machining folk pray they actually cracked the code on Alzheimers. The “smart people” mostly doubted them.
Regarding Biogen, I was holding both Biogen and Celgene at the same time years ago. I was ‘stopped out’ on both by $.50 each after a reasonable gain. Stupid me…I never bought back in. This goes back to my original comment about timing (and conviction).
Yes, a breakthrough on Alzheimer’s would be a godsend.
Your perspective is always appreciated.
How bad is the weather where you are?
Getting back to you a bit late, Lloyd. I am typing this at 6AM on Thursday. According to my rain gauge, we had 6″ or rain thru 9PM on Wednesday. Checking my rain gauge early this morning, it was overflowing after it reached the top at 8″. Still raining hard in bands with big gusts coming thru from the north. We are now under tropical storm watch, degraded from hurricane watch. No trees are down from my view. We live on a golf course and it is completely flooded on the fairway behind the house.
We maintained electricity thru the night. That’s key. Our community had an extensive 7 year plan to underground most of the power lines. I think that helped a lot. I heard on the radio that 150,000 households are without power in Orange & Seminole Counties….the Orlando region.
Rain is expected for most the day today. Inland flooding should be a problem
Wanted to clarify that I emptied the rain gauge last night…so a total of 14″ plus in less than 24 hours and it is still raining.
I am just a lowly self employed machinist welder, Our company does a lot of diffrent things, I could never understand why the fed raise the interest rates when most all of us are busy with work and have to borrow short term moneys for materials.
Thanks for telling the big picture !!
I feel like the biggest panic is in the companies in tech. Faceb- err, I mean, Meta, is squandering billions, wandering around aimlessly trying to figure out what a Metaverse actually is, Amazon is starting to unionize, as is the games industry, Twitter is having a fued with Elon over a takeover deal, crypto/nft/web3.0 scams are collapsing,and on top of that, the cheap credit stream companies NEED in that sector is drying up.
Will their problems affect us whose existence is smoke and steel? Maybe. Probably a little bit, given how much society has overvalued them over the past 15-20 years. But not nearly as bad as it could be.