this is not the first time that a low interest rate environment has led to a reach for yield. In the 1820s (yes, you read that right), interest rates on UK government bonds (consols) dropped significantly, and staid investors who used to be happy to live off of the coupons paid by those bonds were forced to take on more risk than they otherwise would have liked to.
In 1825, investors were so willing to suspend disbelief that a Scottish con man named Gregor MacGregor was able to sell over a billion dollars worth of bonds of a completely fictional Latin American country he called "Poyais." I would highly recommend reading the whole story, as it is a fascinating look into investor psychology as well as an entertaining tale in and of itself. This era was characterised by speculative manias and a flood of cheap credit.
Sound familiar? It seems like the more things change, the more they stay the same.
Thursday, June 25, 2020
irrational exuberance all over again?
Some have compared the recent retail investors’ enthusiasm to that of the dot-com bubble. “The key parallel between 2000 and today is that retail investors are seeing the stock market as a can’t miss opportunity,” said an unnamed source.
Whether this parallel holds or not, the data is pretty clear that the recent market rally is filled with some irrational exuberance. It may last a while, but if history is a guide, a happy ending is unlikely.
In his latest memo, Howard Marks (Trades, Portfolio) ended with the following words, which I find myself agreeing with:
“A bounce from the depressed levels of late March was warranted at some point, but it came surprisingly early and quickly went incredibly far. The S&P 500 closed last night at 3,113, down only 8% from an all-time high struck in trouble-free times. As such, it seems to me that the potential for further gains from things turning out better than expected or valuations continuing to expand doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting.
In other words, the fundamental outlook may be positive on balance, but with listed security prices where they are, the odds aren’t in investors’ favor.”
Whether this parallel holds or not, the data is pretty clear that the recent market rally is filled with some irrational exuberance. It may last a while, but if history is a guide, a happy ending is unlikely.
In his latest memo, Howard Marks (Trades, Portfolio) ended with the following words, which I find myself agreeing with:
“A bounce from the depressed levels of late March was warranted at some point, but it came surprisingly early and quickly went incredibly far. The S&P 500 closed last night at 3,113, down only 8% from an all-time high struck in trouble-free times. As such, it seems to me that the potential for further gains from things turning out better than expected or valuations continuing to expand doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting.
In other words, the fundamental outlook may be positive on balance, but with listed security prices where they are, the odds aren’t in investors’ favor.”
Wednesday, June 17, 2020
Dave Portnoy and Robinhood traders
Amateur investors have been piling in money into different stocks and
taking advantage of the market crash over recent weeks, but the
billionaire investor Leon Cooperman has rebuked these gains and believes
they will "end in tears."
Cooperman, who is the chairman and chief executive of Omega Advisors, told CNBC's "Half-Time Report" on Monday: "They are just doing stupid things, and in my opinion, this will end in tears."
The famed investor referred to the online trading platform Robinhood's surge in account openings, with more than 3 million new accounts created this year.
Robinhood has more than 13 million users, with an average user age of 31.
Cooperman said many new investors were replacing gambling and sports betting with trading, telling CNBC: "The gambling casinos are closed and the [Federal Reserve] is promising you free money for the next two years, so let them speculate."
He added: "Let them buy and trade. From my experience, this kind of stuff will end in tears."
Markets have largely rallied since touching lows on March 23, with many commentators highlighting that different day traders, also known as mom-and-pop traders, have contributed to this. Experts have been divided on whether to praise the surge in inexperienced investors or blame them for falsely inflating stock valuations.
A Monday note by Societe Generale said Robinhood traders displayed top-notch timing when they rushed to the market as it hit recent lows.
"For all the mocking of Robinhood investors, their timing back into the market looks impeccable, with a significant pick-up in holdings as equity markets bottomed in mid-March," Andrew Lapthorne of Societe Generale wrote.
But Peter Cecchini, the former global chief market strategist at Cantor Fitzgerald, said the actions of Dave Portnoy, the founder of Barstool Sports, a punter turned investor, were symptomatic of the dislocation between stock prices and economic reality.
"His attention-getting, wild style is emblematic of just how emotional and extreme equity markets are now," Cecchini said in a LinkedIn post on Friday. "It's both impulsive and compulsive. His behavior really just explains everything."
On Tuesday, Portnoy uploaded a video in which he said he "killed" the legendary investor Warren Buffett with his recent day-trading success.
Many amateur traders have been betting against the likes of Buffett, with the airline exchange-traded fund JETS seeing assets surge nearly 3,000% in three months, boosted by millennial day traders.
Day traders are piling into Hertz, JCPenney, and other bankrupt companies despite the overwhelming odds that shareholders will be wiped out during bankruptcy proceedings.
Before Hertz's bankruptcy filing on May 22, about 43,000 Robinhood accounts owned shares of Hertz. That number nearly doubled to 73,000 in the first week of June.
Cooperman, who is the chairman and chief executive of Omega Advisors, told CNBC's "Half-Time Report" on Monday: "They are just doing stupid things, and in my opinion, this will end in tears."
The famed investor referred to the online trading platform Robinhood's surge in account openings, with more than 3 million new accounts created this year.
Robinhood has more than 13 million users, with an average user age of 31.
Cooperman said many new investors were replacing gambling and sports betting with trading, telling CNBC: "The gambling casinos are closed and the [Federal Reserve] is promising you free money for the next two years, so let them speculate."
He added: "Let them buy and trade. From my experience, this kind of stuff will end in tears."
Markets have largely rallied since touching lows on March 23, with many commentators highlighting that different day traders, also known as mom-and-pop traders, have contributed to this. Experts have been divided on whether to praise the surge in inexperienced investors or blame them for falsely inflating stock valuations.
A Monday note by Societe Generale said Robinhood traders displayed top-notch timing when they rushed to the market as it hit recent lows.
"For all the mocking of Robinhood investors, their timing back into the market looks impeccable, with a significant pick-up in holdings as equity markets bottomed in mid-March," Andrew Lapthorne of Societe Generale wrote.
But Peter Cecchini, the former global chief market strategist at Cantor Fitzgerald, said the actions of Dave Portnoy, the founder of Barstool Sports, a punter turned investor, were symptomatic of the dislocation between stock prices and economic reality.
"His attention-getting, wild style is emblematic of just how emotional and extreme equity markets are now," Cecchini said in a LinkedIn post on Friday. "It's both impulsive and compulsive. His behavior really just explains everything."
On Tuesday, Portnoy uploaded a video in which he said he "killed" the legendary investor Warren Buffett with his recent day-trading success.
Many amateur traders have been betting against the likes of Buffett, with the airline exchange-traded fund JETS seeing assets surge nearly 3,000% in three months, boosted by millennial day traders.
Day traders are piling into Hertz, JCPenney, and other bankrupt companies despite the overwhelming odds that shareholders will be wiped out during bankruptcy proceedings.
Before Hertz's bankruptcy filing on May 22, about 43,000 Robinhood accounts owned shares of Hertz. That number nearly doubled to 73,000 in the first week of June.
Minerd is bearish too
The Federal Reserve is buying junk bonds and corporate debt ETFs as part of its campaign to revive the American economy. Next on its shopping list: US stocks, as Scott Minerd, global chief investment officer at Guggenheim Partners, told CNN Business.
The S&P 500 has skyrocketed 40% since March 23, when the Fed announced its unprecedented experiment with junk bonds. That surge, coming in the face of the collapse of the real economy, drove up market valuations to dotcom-bubble levels.
It's a troubling precedent that the Federal Reserve is going to sit there and continue to fund these zombie companies that don't deserve to exist."
But Minerd thinks a reckoning is coming, and soon. He expects the S&P 500 will retest its March 23 low of 2,237.40 over the next month, potentially crumbling to as low as 1,600. That would mark a 49% collapse from where the index traded Tuesday during a strong rally.
"There's a point where the Federal Reserve is going to have to pull out a bazooka," Minerd said in an interview. "And I think the option of buying stocks on the part of the Fed is on the table."
Should a stock market collapse happen, it would erode confidence among consumers, small businesses and CEOs alike. And it would make it harder for companies to borrow the money they need to survive because of the strong link between stock prices and corporate credit spreads.
"The Fed has basically told us they don't have a stomach for this," said Minerd. He warned his clients back in February -- when US stocks were rising to ever greater heights -- that there were "red flags" in financial markets.
"This will eventually end badly. I have never in my career seen anything as crazy as what's going on right now," he wrote on February 13.
This isn't the first time Minerd has warned of a brewing storm. In August 2007, he said the credit squeeze at the time could morph into a recession. Stocks hit record highs that fall, before beginning an historic collapse as the Great Recession began.
The S&P 500 has skyrocketed 40% since March 23, when the Fed announced its unprecedented experiment with junk bonds. That surge, coming in the face of the collapse of the real economy, drove up market valuations to dotcom-bubble levels.
It's a troubling precedent that the Federal Reserve is going to sit there and continue to fund these zombie companies that don't deserve to exist."
But Minerd thinks a reckoning is coming, and soon. He expects the S&P 500 will retest its March 23 low of 2,237.40 over the next month, potentially crumbling to as low as 1,600. That would mark a 49% collapse from where the index traded Tuesday during a strong rally.
"There's a point where the Federal Reserve is going to have to pull out a bazooka," Minerd said in an interview. "And I think the option of buying stocks on the part of the Fed is on the table."
Should a stock market collapse happen, it would erode confidence among consumers, small businesses and CEOs alike. And it would make it harder for companies to borrow the money they need to survive because of the strong link between stock prices and corporate credit spreads.
"The Fed has basically told us they don't have a stomach for this," said Minerd. He warned his clients back in February -- when US stocks were rising to ever greater heights -- that there were "red flags" in financial markets.
"This will eventually end badly. I have never in my career seen anything as crazy as what's going on right now," he wrote on February 13.
This isn't the first time Minerd has warned of a brewing storm. In August 2007, he said the credit squeeze at the time could morph into a recession. Stocks hit record highs that fall, before beginning an historic collapse as the Great Recession began.
Grantham is bearish
Jeremy Grantham, the longtime investor who called the financial crisis, told CNBC’s “Closing Bell” that this U.S. stock market rebound amid the coronavirus may be the fourth major market bubble he’s seen in his lifetime. He advises investors to take their U.S. exposure to zero. “The U.S. is simply now playing with fire. You might make a lot of money in a really short time but recognize we are skating on very thin ice,” said Grantham.
***
Investor Jeremy Grantham is growing more and more sure that the U.S. stock market’s rebound amid the coronavirus pandemic is forming a bubble that is ignoring reality and will end up hurting many people.
“My confidence is rising quite rapidly that this is the fourth ‘Real McCoys’ bubble of my investment career,” Grantham, co-founder of GMO, told CNBC’s Wilfred Frost on Wednesday in an interview which aired on “Closing Bell.” “The great bubbles can go on for a long time and inflict a lot of pain.”
The previous three bubbles Grantham referred to were Japan in 1989, the tech bubble in 2000 and the housing crisis of 2008.
***
Investor Jeremy Grantham is growing more and more sure that the U.S. stock market’s rebound amid the coronavirus pandemic is forming a bubble that is ignoring reality and will end up hurting many people.
“My confidence is rising quite rapidly that this is the fourth ‘Real McCoys’ bubble of my investment career,” Grantham, co-founder of GMO, told CNBC’s Wilfred Frost on Wednesday in an interview which aired on “Closing Bell.” “The great bubbles can go on for a long time and inflict a lot of pain.”
The previous three bubbles Grantham referred to were Japan in 1989, the tech bubble in 2000 and the housing crisis of 2008.