Juggling Dynamite

As John Hussman patiently explains (again) in this month’s missive Detached Parabolas and Open Trap Doors, the impulse to exchange cash for any other security, regardless of price, has bid up markets to positively mindless levels.

This first chart of the total U.S. equity market capitalization level (price x shares as a percentage of GDP since 1945) attests that there has never been a time when stocks were as exuberantly valued as the present.  The last two (lesser) peaks in 1966 and 2000 ushered in loss cycles greater than 50% where stock prices collapsed and spent more than 15 years trying to grow back losses.

As always, the price paid will matter this cycle as well.  From present levels, the average nominal total return for a conventional passive portfolio invested 60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills, is now poised to be -2.15% annually for the next 12 years plus, before any fees (as shown below).  The higher the weight of so-called “growth” equities in a portfolio the more negative return prospects are from here.

Whether it be established companies selling at more than 35 times their forecast earnings (top blue line in Chart 1 left), parabolic home prices selling 6 to 20 times the buyers’ household income, retail traders going for broke with levered betting or the 80% of initial public offerings globally that are being sold to the public at record pricing (red dotted line top left) and negative-earnings (lower blue line on left), mania is everywhere.

Not only have present owners borrowed against their homes and credit cards to fund their spending and speculative capital bets, but they have also borrowed against the securities themselves with even more margin debt than before the 2000 and 2007 collapses as shown left in Jesse Felder’s chart of margin debt to GDP since 1959.

Then there are the should-be-illegal ‘SPACs’ Special Purpose Acquisition Companies that have been allowed to take in public funds for unspeficied purposes on the idea they will buy something (anything) within two years or be liquidated.  This end-run allows celebrity promoters to hype up their offering in the media without normal IPO “quiet period” restrictions.  While these vehicles pay their sponsors lucurative fees from inception, the vast majority have delivered negative returns for outside “investors” as shown below, see SPACs:  Not so SPACtecular.
Whatever people think they are doing here, it’s the antithesis of ‘investing’.  And the implosion to inevitably follow will not be contained to just on-line gamblers and SPAC capital.  Regular folks, pensions and key institutions that are today holding ‘growth’ assets in this mayhem are unwittingly riding shotgun with the madness of crowds.  We don’t have to be helpless passengers.  Bonkers is as bonkers does.  Cash is only trash when it is thrown away thoughtlessly.

Don’t kid yourself:  mindful, financial discipline and capital preservation strategies will remain the highest yielding assets over time– today more than ever in our lifetime.

Better Markets is a public interest 501(c)(3) non-profit based in Washington, DC that advocates for greater transparency, accountability, and oversight in the domestic and global capital and commodity markets.

They make it their mission to clearly articulate for the public and legislators the conflicts of interest and trust abusing activities today rampant in a largely lawless financial industry.

Steal-from-the-poor-to give-to-the-rich-addiction-inducing-trading-app Robinhood was paid more than $450 million in 2020 alone for selling its clients’ orders to trading venues, known as “payment for order flow” or PFOF, aka “maker-taker” fees and rebates.

But Robinhood is far from alone; trust-abusing self-enrichment is the dominant financial model today.

Better Markets succinctly lays out the should-be-banned architecture behind some of the latest stories in Reddit, Robinhood, GameStop & Rigged Markets:  The Key Issues for Investigation; all screaming for a much-needed return to Glass-Steagall divisions in this sector.  Here’s their conclusion:

There is little doubt that today’s financial market are littered with multiple layers of legalized bribery, including PFOF and market manipulation that enriches the financial industry’s biggest firms and intermediaries at the expense of investors, price discovery, capital formation, and the orderly functioning of markets. There is no reason for the markets today to be so fragmented other than to serve as a wealth extraction mechanism that moves money from buy-side pockets to sell-side firms, intermediaries and their affiliates.

So, the conclusions thus far based on what little is currently known are twofold. To be sure, first, there should be a thorough investigation into the market mayhem precipitated by the so-called Reddit rebellion ignited in the subreddit community of WallStreetBets and apparently implemented by Robinhood’s retail army. However, second, that must not be allowed to obscure the need for a much broader and deeper investigation into the fragmented predatory financial ecosystem that enables such mayhem. For example, the biggest Wall Street banks and their subsidiaries and affiliates enable, fund and facilitate many of those trading practices because those banks are also (1) the prime brokers for most of the hedge funds, (2) the biggest derivatives dealers, (3) major market makers, and (4) significant lenders in various capacities including as securities lenders, while also playing numerous other roles in the financial system and, undoubtedly, in the transactions and activities at issue here.

Thus, while the direct and obvious participants in the market chaos like Robinhood, Reddit, Citadel, and the short-sellers must be intensely scrutinized, the many other financial firms, including the marquee Wall Street banks, driving, enabling, funding and incentivizing these activities –and enriching themselves from them –must also be thoroughly reviewed.

Also, see Anyone can manipulate the market. Here’s how to fix that, for reform suggestions on how to restore some semblance of free markets.

The more people COVID-19 infects, the more opportunity the virus has to evolve into new strains.  Variants originally found in the U.K. and South Africa have quickly become the dominant types in the countries where they were first detected.

As of late January, the UK variant had surfaced in 70 countries and territories including Canada and the U.S, and is on track to be the dominant North American strain by mid-March. See: COVID-19 variant in Barrie outbreak upends conventional wisdom of spread.

By late January, the South African variant had surfaced in 30 countries including Canada and America, and the Brazilian was detected in America.  See How Coronavirus Mutations Are Taking Over.

Preliminary estimates suggest the variant from the U.K. is 50%–70% more transmissible than earlier versions of the virus and early data suggests it could also be deadlier.

Scientists have also noted that the South African variant could be better at evading antibodies produced in response to natural infection and vaccination.  See New clinical trials raise fears the coronavirus is learning how to resist vaccines:

New data showing that two COVID-19 vaccines are far less effective in South Africa than in other places they were tested have heightened fears that the coronavirus is quickly finding ways to elude the world’s most powerful tools to contain it.

The U.S. company Novavax reported this week that although its vaccine was nearly 90% effective in clinical trials conducted in Britain, the figure fell to 49% in South Africa — and that nearly all the infections the company analyzed in South Africa involved the B.1.351 variant that emerged there late last year and has spread to the United States and at least 30 other countries.

…Researchers once believed it would take several more months, or even years, for the virus to develop resistance to vaccines. They said the speedy evolution is largely a result of the virus’ unchecked spread.

While vaccination programs are underway worldwide, effective distancing measures remain critical in containing COVID-19’s spread.  Read:  The Virus changed.  Now we must ‘Get to Zero’, or face catastrophe.