Juggling Dynamite

In every market cycle, once everyone who can or will buy has bought, only sellers remain.

Today, households have a record 48% of their financial assets allocated to equities, the same level as the tech top in March 2000 and above the cycle peaks in early 2008 and 2022 (shown below, courtesy of The Daily Shot). We are running low on greater fools.
Wall Street strategists work for companies that sell securities and fee-generating investment products to the public. Unsurprisingly, then, they are not in the business of suggesting that people hold cash equivalents. As shown below, strategist recommendations have become increasingly fee-maximizing since 2006, with average cash allocations falling to 2% in the third quarter of 2024. What dry powder??

Next are asset managers trained to buy every dip with any cash. Once all capital under management is in stocks, some borrow to magnify exposure further. As shown below (courtesy of Game of Trades), in 2024, at the highest equity valuations since 2021, 2000, and 1929 before that, fund managers borrowed to increase equity allocations above 100%.

Think fund managers are managing downside risk to unitholder savings? Quite the opposite! What risk management? Once unit holders start requesting redemptions, managers have no choice but to borrow more or sell holdings to raise cash. As asset prices start to fall, this ensures a negative loop unfolds where selling forces more selling.

And since ten companies make up a record 30% of large-cap indexes like the S&P 500, index-following equity allocations are similarly concentrated in the same mostly tech-centric growth stocks.

The Russell 1000 Value Index is composed of large and mid-capitalization U.S. equities trading at relatively cheaper valuations than their peers. As shown below, growth names in the Russell 1000 recently triple topped at 1.45x the market price of so-called “value” names.  While this suggests growth stocks are overvalued, the metric is relative. Value stocks are cheaper than growth, but that does not mean that value is cheap.

My heart is heavy today because of Daniel Kahneman’s death. Dr. Kahneman was a wisdom mentor for me and many others, and his teachings on money management and investing will always illuminate.

Michael Lewis’s 2017 book The Undoing Project discusses Kahneman’s work on human behaviour, the prevalence of mental errors in overconfidence, and the critical importance of Emotional Intelligence in effective decision-making. The book is about Kahneman’s life work and partnership with Amos Tversky. Kahneman’s excellent 2011 book Thinking Fast and Slow remains timeless.

His 2021 appearance on The Armchair Expert Podcast was far-reaching and one of his last public discussions. Here is a direct audio link.

Daniel Kahneman is a psychologist, winner of the Nobel Prize in Economics, and recipient of the Presidential Medal of Freedom. Daniel joins the Armchair Expert to discuss the complexity of human nature, studying judgment and decision-making, and his experiments involving loss aversion. Daniel explains that memories can play tricks on our minds when remembering experiences and how to avoid noise and bias in the corporate hiring process. Daniel recounts his childhood growing up in Nazi-occupied France and his encounter with an SS soldier, he breaks down decision hygiene, and how it relates to vaccines.

Economist, David Rosenberg reveals the potential for significant economic downturn and wealth erosion in 2024. With an uncanny blend of humor and insight, he exposes the misleading job reports, the phantom strength of the housing market, and the precarious position of the consumer credit bubble. This discussion stretches beyond the US, offering a grim look at Canada’s economic pitfalls and the global implications of these trends. If you’re looking for a wake-up call on the economic realities of 2024 and want to know how to safeguard your financial future in these turbulent times, this episode is a must-watch.

Here is a direct video link.