The dangers of blind bull market complacency
It’s important not to confuse the ‘what’ of investing with the ‘why’ you invest
Every market cycle has had its skeptics, and the current environment is no exception. The most under-loved and under-believed market rally in history has arisen like a phoenix from the ashes since the financial crash in 2008 and market lows of 2009.
I’m often viewed as a thoughtful skeptic, due largely for our efforts to hedge the money of investors who entrust us with their financial security. Being a steward means not following the crowd as they sing the familiar chorus that this bull market will last and last. History tells us otherwise but in the current environment and the current bull market there is little in history that can teach us.
No one has seen a market in which the Fed or other central banks have played such an active role in providing cheap, zero-interest money aplenty. We have an equity market that feels, and seems to be, divorced from an only moderately growing economy.
In a recent “Thoughts from the Frontline” column, economic commentator John Mauldin summed it up: “The intense drive for yield is driving down interest rates and volatility, pushing up assets of all kinds, and setting us up for the same song, second verse of the 2008 crisis.”
In simpler terms, this means that a nearly 200 percent appreciation in the equity market since March 2009 might be normal but, more importantly, may not be sustainable.
Global research analyst Dylan Grice has articulated this point even more directly: “The markets may be awash in money but economies large and small are vulnerable because there is a scarcity of capital. … Like the Zuni tribes struggling to deal with the difference between yellow and orange without sufficient linguistic precision, we face the same problem in our financial system … and as central banks are conjuring up ever more liquidity, more thoughtful observers scratch their heads over the lack of collateral in the system. The problem may be solvency, not liquidity. Capital comes from savings, and the policy of cheap credit has encouraged leverage not saving. Scarce capital is growing ever scarcer.”
A ‘la la’ state
Capital is scarce because corporations continue to retain vast reserves of cash, which is the same as Depression-era folks who kept their savings tucked under their mattress or buried in the back yard. What makes the current environment even more challenging is that the Fed is doing all it can on the monetary front (in the form of buying up public debt) as a lifeboat substitute for real political policy and leadership. Every nation needs to manage monetary and fiscal policy after all, and some do it far better than others. The central bankers, however, can’t mandate capital creation. What the Fed has done is create a myth of control – and the public seems to enjoy the myth that “adults are in charge.”
One does not have to stray far from the macroeconomic level to see we have possibly entered a “la la” state, which Grice has aptly labeled “bull market complacency.” We notice it most when phone calls to those who entrust us with their financial future go unreturned, or when those who were most risk averse in 2008-09 are now willing “to swing for the fences.”
What does a financial steward and fiduciary do at times like these? We ignore the noise and focus on the signal.
Anyone who thinks that CNBC or Fox is the orb of sage advice ignores that when market media was a novelty more than a decade ago, we would watch the tube or screen to understand the advertising model of allowing a retail investor to think they were playing with the “big dogs.” If one walks into a surgeon’s office and the surgeon is grabbing advice from the “Surgery Channel,” might they look elsewhere?
It’s important not to confuse the “what” of investing (the drug of choice for speculators) with the “why” you invest. With an aging demographic, it is increasingly important that clients know what they want their capital to do, when and with whom.
Many do listen and understand what matters. But the attempt by others to erase or ignore the past and believe that markets and economies aren’t cyclical won’t be successful. In other words, a sense of denial can’t make up for poor planning.
The illusion of central bank omnipotence to “save the day” won’t be worth much in the end, either. As another astute market observer states; “one of the chief ironies is that a bull market can last longer than any of us can reasonably expect – and then end more abruptly than even the most cautious bulls suspect.”
Planning for ups and downs in the markets is both prudent, and, more importantly, sane.
Tom Sedoric, managing director-investments of the Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 603-430-8000 or thesedoricgroup.com.