Each week we are treated to another pontification about why Americans are dumping or avoiding stocks. Most are written by non-market participants, often with the input from Ivory Tower institutional investors or a smattering of quotes from amateur traders. The journalists are trying to wrap a story around the undeniable data, endeavoring to explain the unthinkable. Andrew Ross Sorkin came up to bat this morning, his version actually gets closer to the truth than most of the others.
But still, the phenomenon goes unexplained and I grow increasingly frustrated. So today I put the topic to bed once and for all.
By way of bona fides, I’m a fifteen-year veteran of the markets, my career began at the peak of America’s love affair with stocks in the waning days of the last bull market that ended at the turn of the century. I’ve managed money for over one thousand clients over the last ten years, I speak with two dozen investors each week and I am in contact with hundreds of investment advisors across the country who do the same. I’ve read and linked to every single important article, blog post and research report about the stock market that’s been published in the last four years. I know what everybody’s opinion is on everything, I’ve seen the evolution of these opinions and I’ve chronicled all the pivotal moments when the consensus has shifted.
In short, I live with my face 6 inches away from the business end of a sentiment firehouse. What follows are the primary observations from my proximity to a decade’s worth of shattered hope and demolished expectations.
1. The Hot Stove Syndrome
Let’s begin with Mark Twain’s quote about risk aversion: “The cat, having sat upon a hot stove lid, will not sit upon a hot stove lid again. But he won’t sit upon a cold stove lid, either.” This generation of investors prefers to avoid the stove entirely – hot or cold – after an 80% decline in the Nasdaq to open the last decade and a 57% peak-to-trough S&P 500 massacre to close it. “Burn me once, shame on you. Burn me twice, shame on me. Burn me three times and you can kiss my ass before you ever see another dollar of my money.” Don’t take my word for it, make a few calls. This is the prevailing rationale for non-participation of Main Street’s upper middle class investor from coast to coast.
The perception that it’s all rigged might have something to do with the fact that every time investors are beckoned back in, usually toward the tail-end of a Fed-induced liquidity-binge rally, they are sucker punched. A mechanical arm with a boxing glove on the end shoots out of their computer screen and bashes them right in the crotch. Again and again and again. And yet the same motherfuckers appear in the finance category of the Forbes 400 year after year. Grinning like bastards, their eyes mocking you.
Wouldn’t you think it’s rigged, too?
2. The Grand Facade, So Soon Will Burn
They don’t let the deranged lunatics in the Disneyland character costumes walk around with their heads off. It would end your childhood right then and there if you ever saw it, worse than stumbling downstairs on Christmas Eve and realizing the guy in the Santa suit porking your mom on the dining room table is actually your father in a fake beard (that never happened to me, I swear). Unfortunately, the investor class has been forced to bear witness to one tawdry unveiling after another in this era. Nearly everyone – EVERYONE – has been revealed to have been full of shit and completely incompetent all along. The tide went out and we saw who was swimming naked, as Uncle Warren likes to say, and it turns out that we all were. A brief and far-from-complete list of the people and things that have lost all credibility since the the year 2000:
1. Brokerage firm analysts
2. Chief Global Strategists
3. Every Single Regulatory Body
4. Every once-great money manager
5. The entire profession of Economics
6. S&P, Moodys and the ratings agencies
7. Morningstar’s mutual fund rankings
8. The mainstream financial media in its entirety
9. Corporate Executives in the Aggregate
10. The entirety of the banking and financial sector
13. Our politicians’ grasp on the economy
14. The ability and sagacity of the Federal Reserve
15. The structural integrity of our stock exchanges
We believe in none of it! The cynicism follows us everywhere, pervading our every activity and business dealing. Approval ratings for all of the above are at all-time lows and dropping. And you want people to buy pieces of paper that might – MIGHT – be worth something in the future? “GFY” said the public. We’ve gotten the studio backlot tour, we’ve seen that the western gold rush town is two-dimensional and propped up with 2×4’s. And what has been seen cannot be unseen.
3. The Boomers and their Crumbling Institutions
Every 11 seconds 10,000 Baby Boomers turn 65. Okay, I made that stat up but it’s pretty close to reality. I want you to picture an enormous python with a giant goat-like lump ballooning out from one section of its serpentine body. That snake is our nation’s demography and the tumescent bulge is the Boomers passing through its digestive system. They are almost at the anus, soon to be passed completely through. Their generation has permanently altered the snake’s body by virtue of its sheer size and girth. And in the wake of its passing, the institutions the Boomers have used and abused – entitlements, pensions, unions, public schools, parks, infrastructure, etc – are literally groaning from the strain and crumbling from the neglect. These institutions must now shrink and the stock market and investment industry will not be immune. Volumes must decline, activity must dwindle and the indestructible titans of high finance that once towered over the foreground now must fade into the background.
4. “We’re Gonna Need Reinforcements”
Typically, as one generation of stock buyers moves on, another comes in to pick up the slack. That’s not happening yet with kids in their 20’s and early 30’s. And it’s no surprise why. Try to understand that this is the generation that, as children, watched while their Boomer parents blew up their retirement accounts in the dot com blow-off top. Seven years later, these same kids came home from college to find foreclosure notices tacked to their parents’ doors. To them speculation equals loss, pain and adjustments in standard of living. And just when it looked like the kids might get excited about their generation’s new engines of wealth creation, they were prison raped by the all star team of Morgan Stanley, Second Market, Mark Zuckerberg and his swineherd of Russian VCs. So they’re not coming. Every study shows they have no interest in playing. As the army of Boomer investors marches into the sunset, their banners tattered but still held proudly aloft, there is no one bringing up the rear. Their children prefer fantasy football to fantasy capitalism.
5. It’s Biblical
It’s been posited that one of the key reasons the economy and markets have stagnated is the lack of prosecutions stemming from the Credit Crash. Especially given the obvious and widespread presence of fraud, recklessness and criminal negligence. We are a nation built on the Judeo-Christian principles of our earliest settlers. The Scots-Irish and English pilgrims who so gallantly murdered their way into nationhood on these shores believed in hard work and consequences, in morality and retribution. The violence of the Old Testament combined with the score-settling of the New. This need for crime to find punishment is deeply ingrained in our culture and in our own psyches; the way the story is supposed to end is with the bad guy paying dearly for his wickedness. And yet Angelo Mozillo is most likely catnapping on a lounge chair in the sun as you read this. Fuld and O’Neal and Cayne and the rest, while they’ve certainly lost money, have probably not seen much of a change in their lifestyles upon their disgrace. These guys are fucking out and about, they strolled out of this economic hellscape twirling a cane. Untouchable! And their hordes of yes men, henchmen, Gals Friday and enablers, too.
The Feds went after two Bear Stearns hedge fund managers for lying and self-dealing at the dawn of the crisis and lost the case. Since then, everything’s been a settlement – where everyone gets to write checks from their corporate coffers and deny wrongdoing. This does nothing to appease the throngs of spectators watching from the cheap seats. This week in New York, a jury found a Citigroup drone not guilty of mortgage fraud but rather than send a signal to The Street that they were satisfied, this jury wrote a letter to the government begging them to prosecute bank CEOs. This was a first, and it happened five years later. What does that tell you about the public’s desire for closure and for the guilty to be punished? We don’t want it, we need it. We cannot move forward until there is a sense that loose ends have been addressed, until then we’re simply still in the crisis phase, we will not – as a society – accept that it’s over yet.
And now for the good news…
It had to be this way. The love affair with stocks had to come to a hideous and grinding denouement. 20 years of good vibrations requires almost as many of despondency and apathy for the flames of lust to be extinguished. This is how it always goes. This is what sets us up for the next bull market, the one that makes those of us who have stuck it out rich. We’re not there yet, but we are getting very close. Perhaps not on valuation, as central banks and governments still have too much invested to let it clear. But certainly on sentiment. Apathy is morphing into disgust, the longer this continues the better.
Because hatred and a public perception of endless futility brings about opportunity.