I’d like to solve the puzzle, Pat

If stocks keep going up, why isn’t anyone celebrating?

I attempt to solve the biggest puzzle in the investing world these days – the market sets record highs day after day but the public refuses to get excited about it.

How the hell are we supposed to have a proper bubble if everyone abstains from partying down? Can the market put in a top without there being a cycle-ending, full-on extravaganza? Is the lack of euphoria the only thing keeping this thing climbing?

I have a theory. I’ll lay it out below.


I don’t know about you, but I don’t want to live in a world where you can’t unload a $70 million mansion in Greenwich over the course of a weekend. But this is precisely the kind of world we now inhabit.

Michelle Celarier writing at Institutional Investor magazine:

The status of Greenwich real estate is a window into the current world of hedge funds, one filled with busted dreams, and no small amount of schadenfreude. Multibillion-dollar funds have shut down, $100 million paydays have all but disappeared, and the funds that do survive increasingly employ machines instead of humans…

Greenwich encompasses 62 square miles and has a population of slightly more than 60,000. Today more than 1200 of the town’s homes are on the market, according to Sotheby’s. More than 250 of those are priced above $5 million and 57 above $10 million.

On a regular basis we’re hearing one of two types of announcements from the largest funds in the industry:

a) We are closing down/ partially liquidating/ fully liquidating

b) We are going in a new direction and hiring a whole truckload of quants to take over

They’re doing this in response to a few factors. The most notable one is that you’ve got to sell what people are buying and what people are buying these days is systematic / quant / data-driven / algorithmic. Too many of the swashbucklers have been blown up or have been trailing benchmarks for so long that their pre-Reg FD heyday numbers from the 90’s are no longer keeping track records impressive.

Here’s another new story today about the quant takeover, this one from Bloomberg. There are hundreds and hundreds of these piling up in the financial media:

The only hedge funds not shutting down these days are the computer-driven ones. And computers don’t throw Hamptons bacchanals or invite Wyclef Jean to perform in their office mens room, just because they can. Computers don’t rent out the ice rink at Rockefeller Center for a summer shindig and hand out crates of lobsters as their guests walk in.

More to the point, the types of people who are increasingly being hired by the large funds aren’t flamboyant in the traditional Wall Street way in the presence of rising stock prices. They’re technical people, building strategies that are devoid of emotion. The analysts driving the returns at a shop like WorldQuant are nameless, faceless and dispersed around the globe, cranking away at their terminals. This is both deliberate and a function of what kind of people they are.

They’re not “Look how big my f***ing boat is this summer” people. They’re “Look how fast I can run simultaneous regressions on a thousand data sets while testing for out of sample variants” people. Don’t hold your breath expecting to see them stuntin’ at Art Basel in a lime green Murcielago. It’s not going to happen.

It’s possible that the frat boys and lacrosse bros will find a way to get into the quant hustle and replicate how they used to act back when merger arb, long/short equity or event-driven were a big deal. But it hasn’t happened yet.

Even fictional Bobby Axelrod has cooled his jets on Showtime’s Billions. He opened season 2 with a sermon to his traders about how replaceable they all are in the modern era. By mid-season, he was skipping a massive party thrown to honor him in his own backyard.

If you’re looking for signs of excess and ebullience in the markets, you won’t find it in Connecticut or among the hedge fund corridors of Madison and Park Avenues.


In the mutual fund world it’s the same, but worse.

Actively managed mutual funds – the ones where managers used to make a lot money as stock prices rose – can’t raise a nickel in the aggregate. Every month it’s the same thing – assets leaving full-priced investment management firms and flowing in a torrent to BlackRock and Vanguard and their ilk in the low-cost world.

The brass at an active fund family wouldn’t be caught dead throwing an outsized celebration in this particular cycle given the flows and market share situation. The media has tried to adjust by profiling the button-pushers at the indexing and ETF firms, but…let’s just say these are not the kind of manager profiles that light up the cover of Forbes or Barron’s.

The 1980’s bull market had Peter Lynch and a whole constellation of rain-making stars at all the big fund families. The boldfaced names of the 1990’s boom (Munder, Janus, Abby Joseph Cohen, Joe Battapaglia, etc) have no analogs today. Try and name one contemporary equity fund manager who has any name recognition on or off The Street. How about one chief strategist? You can’t. The dour Bond Kings are still more well known and widely heeded – even the deposed Bond Kings hold more sway than any stock managers.


The year is 1994. There are no ETFs and index funds are borderline irrelevant. The US mutual fund industry manages to raise $119 billion in new money, it’s second largest total haul ever. Fortune sends reporter Joe Nocera to an Investment Company Institute conference the following June to capture the zeitgeist…

“You are about to go through an extraordinary period of growth,” the speaker is telling ICI members. He is a demographer, laden with charts indicating how much longer people are living, how worried they are about their retirement prospects, and, best of all, how much more money boomers will need when they retire. How timely. Because at this very moment in its rather spectacular history, the mutual fund industry’s proclaimed goal is to convince aging boomers of exactly that. “This generation is about to migrate to mutual fund country!” the speaker concludes. “Be pleased about it.” I can assure you: They are.

At the big cocktail party tonight they’re serving Peking duck–enough Peking duck to feed the 400 or so people who show up to drink and eat and schmooze. I’m not surprised. If some annual conventions are designed to grapple with difficult industrywide problems, and others are merely an excuse for a very long party, the ICI convention is, at heart, a chance for the mutual fund industry to remind itself how well it’s doing.

Can you imagine anything like that taking place now? Unthinkable. They don’t throw fistfuls of peking duck at people in Valley Forge, PA.


Okay, so there’s no joy among the hedge fund set or the mutual fund complex. What about the investment banks? Surely, they must be overwhelmed with animal spirits in today’s environment…

Not quite. The existential pall hanging over the money managers extends right up through the upper echelons of high finance. It’s hard to be excited about new highs in the stock market when there are open questions surrounding whether or not you’ll have a job next month. This may be the first bull market in history that featured layoffs on Wall Street.

A few years ago, Goldman Sachs Group Inc.’s leaders took a hard look at how the bank carries out initial public offerings. They mapped 127 steps in every deal, then set out to see how many could be done by computers instead of people.

The answer so far: about half.

Holy f***ing shit.

But surely we’re talking about basic steps being carried out by low-skilled employees in Jersey City, right?

Maybe – but consider that this is what the “bottom rung” looks like: “Associates working in equity capital markets at top Wall Street banks typically earned about $326,000 last year, according to a survey by recruiter Options Group.”

Against this backdrop, it’s easy to see why champagne corks aren’t ricocheting off the walls. If a $326,000 a year employee is replaceable by software, who isn’t? Can IBM’s Watson handle an M&A deal, other than the steakhouse lunch over which it’s being proposed?


Why can’t we get the euphoria that would normally accompany a multi-year bull market of the length and breadth of this one?

I’d like to solve the puzzle, Pat:

There has never been an asset bubble in which the industry that catered to that asset didn’t participate. Wall Street has never had an extended bull market during which everyone spent the entire time worrying.

Can you imagine a real estate boom where the brokers and mortgage people stood on the sidelines, forlorn and only taking part out of obligation? How about a gold boom where the miners told polls every week how bearish they were?

Unheard of.

Until now. Job insecurity will do that to people.

The stock market is now 35% passive and 65% terrified. The bond market is not far behind.

Just 10% of all trades taking place are being guided by fundamental research. Fundamental research is the wellspring of all profitability on The Street; Information asymmetry is our chief export to Main Street. We know stuff, therefore, pay us. Warren Buffett once quipped that Wall Street was the only place where millionaires took a Rolls Royce to get advice from guys who took the subway.

The Rolls Royces aren’t coming by as often as they used to.

Now what are the implications?

One thing worth considering is that the lack of enthusiasm is a primary reason why we’re still rallying, for why this thing is still chugging along.

And if the pros aren’t enjoying themselves – and they’re not – then it’s hard to imagine why we’d expect individual investors to feel any differently – despite the ballooning balances in their 401(k)s.

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