Early on Friday, we ran a post in which we basically continued to pound the table on the extent to which (some) popular pundits and (a lot) of retail investors are suspending disbelief in an effort to avoid coming to terms with a rather inconvenient fact about markets.
See, people are no longer happy with the gains their portfolios have racked up since 2009. That’s not good enough. They want to pretend as though those gains are the product not of a deliberate attempt by central banks to inflate the value of financial assets by dumping $14 trillion in liquidity at the top of the quality ladder and thereby forcing everyone to either move down that ladder or else drown in NIRP-dom, but rather of some divine intervention that bestowed upon the masses an investing acumen they didn’t possess prior to the crisis.
That of course is absurd for any number of reasons, not the least of which is that, as we never tire of reminding you, this is the furthest thing from a conspiracy theory. Central banks said quite explicitly what they intended to do and then they simply went out and did it.
Additionally, the only sense in which it makes sense to call someone a “smart” investor in the context of indexing or closet indexing is if what you’re talking about is the self-evident conclusion that anyone whose investment horizon is longer than about 25 years is probably better off just buying the S&P and leaving it alone. But remember, that’s not so much “smart” as it is “not dumb.” That is, if the very first thing you learned when you first started to get interested in markets wasn’t that most people can’t beat an index over very long investment horizons, then either your teachers sucked or if you didn’t have any formal training, you started off reading the wrong books.
So please, spare me the bit about how the “smartest” investors are the ones who realize they can’t beat the market and therefore make the backbone of their portfolio an S&P index fund. Again, that’s not “smart” – that’s just “not stupid.” Calling that “smart” compared to idiots who blow their first $10,000 trying to day trade their way to glory (as opposed to giving their first $10,000 to Jack Bogle) is about like deciding early on in your adult life to not smoke crack and calling that a “smart” decision compared to someone who became a crack whore. Technically, it’s true – in that scenario you are “smarter” than a crack whore. But that’s not saying a whole lot.
But outside of the self-evident conclusion that allocating a good chunk of your long-term holdings to a low-cost S&P index fund is generally a good idea, there is exactly nothing “smart” about passive investing. In fact, the very idea behind passive investing is that it’s inherently “dumb” – especially when you’re plowing your money indiscriminately into a cap-weighted index. The idea that you can employ that “strategy” and generate triple-digit returns over three- or five- or even ten-year horizons is laughable. Or at least it should be laughable. But it’s not laughable today and the reason the joke is on the active crowd right now isn’t because the passive crowd is “smart” but rather because of central bank largesse.
Now, I say all of that to introduce two more very simple charts that should serve as a poignant reminder that pundits who tell you QE “ended” years ago are lying to you. These charts are nothing new to anyone who has a clue about what’s going on, but apparently we need to keep showing them because according to some of the pundits in our Twitter feed, this lie about QE being dead and gone is going to be pushed out to (literally) millions of people on a daily basis in perpetuity. So it’s incumbent upon us to call bullshit.
Here’s the reality:
QE is no more “dead” than you are a crack whore (apologies to all the crack whores out there for the disparaging remarks – as Donald Trump would put it, “and I’m sure, some are good people”).
In a further testament to the same dynamic, have a look at this chart:
See all that red? That’s negative yielding debt – some $8 trillion of it. If you can’t connect the dots between that and record high global equity prices, well then we don’t know what to tell you.
And finally, allow us to drive home what is perhaps the most ironic part of this whole charade. Your portfolio of ETFs may have tripled since 2009, but thanks to the fact that financial assets are disproportionately concentrated in the hands of people who were already rich, you and all of your E*Trading friends are paradoxically getting collectively poorer relative to the Hamptons dwellers:
Have a great night,