It’s Amazing We Haven’t Had Another Crash

It’s Amazing We Haven’t Had Another Crash

When you think about it, it's somewhat remarkable that equities are still perched near record highs. After all, the last several months haven't exactly been smooth sailing. Q1 witnessed what, by some measures, was the death of the four-decade bond bull, and the attendant mini-tantrum in rates marked the beginning of the end for the stratospheric rally in various manifestations of "froth." 2021 can also boast of a destabilizing short squeeze so dramatic it prompted hearings on Capitol Hill and
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11 thoughts on “It’s Amazing We Haven’t Had Another Crash

    1. I marvel at those who yap on the net about having to deal with our horrible fiat currency, the dollar, not backed by hard assets and isn’t that awful … And then those same people load up on stocks backed by absolutely nothing except the “greater fool theory.”

  1. The strength and resilience of the bull market is not surprising, considering that:
    – The US economy is a quarter into a powerful rebound/recovery surge that will probably last through year end (reasons: vaccination, stimulus, profits recovery, etc)
    – In a few months the Eurozone will accelerate into its own recovery (similar reasons as US), followed by major parts of the developing world (ditto plus commodities exposure).
    – There is a lot of cash yet to be invested (institutions, PE, SPACs, and whatever mattress keeps funneling big inflows into ETFs each month – frankly, the world is awash with cash that “needs” to be invested)
    – Financial conditions are very easy (an understatement, perhaps) and governments are spending bigly and are not about to stop soon.

    Yes, there is froth and ridiculous exhibitions of manias, memes, margin, everything that makes grizzled, cynical market observers want to dive into a foxhole. In the most egregiously overbought assets, there are corrections and outright meltdowns (SPACs, crypto, meme, lockdown winners). Rapid rotations from style to style as the hose of money inflow tries to find somewhere to go. The main US indicies look to be rounding over. It’s also May, as in “sell and go away”.

    But nothing in my second paragraph changes what was outlined in the first paragraph.

    When on the beach, what do you keep your eyes on: the body of the incoming wave, or the froth and splash on the crest of that wave? If you don’t want to be knocked off your feet, probably the body of the wave.

    I think that betting big against the market – other than super-short term bets, for those who are good at that – is pretty dangerous when the wave has just started to rush in.

    At some point, the wave will run out of energy and start receding. This rebound/recovery surge won’t last too far into next year, I wouldn’t think – not in the US, anyway.

    When hoarded inventories are getting dumped at deep discounts, the triple orders cancelled, the stimmies gone, the bills for unpaid rent and forborne mortgages come due, Home Depot starts comping -25% against the crazy “base effects” of 2021, then I will guess we won’t be talking about “froth” or “inflation” or “mania”. We’ll be assessing the “new normal” and how good, bad, or middling it looks.

    When does the market start discounting the post-rebound US new normal? I don’t know – late 2021 maybe? I doubt we’re seeing it yet, when there is so little clarity or consensus on what the post-rebound new normal is.

    If the Eurozone is 4-6 months behind the US, and the Covid-slammed areas of the EM behind that, does that mean their markets outperform from here? I don’t know – but certain ones have already started looking better than the US indicies.

    I don’t worry much about what the FAANMGs or lockdown winners do, or what memes or cryptos do – other than their potential for triggering a market “accident”, and their potential to bleed money back into other assets, of course.

    Here is a fun exercise. Build a reverse DCF model, that estimates implied terminal growth based on current valuation and consensus cashflows for the next few years. Point it at different sectors and industries. You’ll find lots of names with market-implied “long term growth” that is less than inflation, less than 1%, even negative. Then apply your preferred quality, dividend, whatever screens to weed out the companies that are, indeed, somewhat likely to flatline or worse in the coming decade. There are some. For example, can you really be confident that CVX won’t be a negative grower from 2025 onward? If not, then move on to the next name.

    You’ll find there is a lot to own, that yields 2-3X the 10 year UST even if long term growth is in fact as punky as market prices imply, and has double digit upside if long term growth turns out to be low-single-digits on a nominal basis. It’s kind of boring stuff, maybe. That’s okay.

    1. Well said,Thank you. Now would be a good time to take a deep breath, read the wave and pick your ride.
      Last June and this June are completely different worlds. Covid is still killing but we have much to be grateful for.

  2. To be honest, I’d like a deeper dive in the rotation aspects.

    Take the NDX 100. Not doing too badly, considering. Yet ARKK or even the NYFANG+ got their asses kicked. So who is going up, to make up for those losses in mega tech and unprofitable hyper growers? And that’s within tech/NDX100. Not even talking about SPX or broader market…

    1. The easiest way to look at this, I think, is to pull up a chart of relevant ETFs or indicies.

      For style, you can compare RLG-RUX, ELV-RUX, RDG-RUX, RMV-RUX, RUO-RUX and RUJ-RUX, these being the Russell growth and value indicies, starting with Large cap and ending with Small cap. Or, USMV VLUE QUAL MTUM, these being factor ETFs.

      For size, RUI-RUX, RMC-RUX and RUT-RUX, these being Russell Large, Mid and Small.

      Chart them relative to SP500 for easiest viewing.

      1. You can also download a list of the NDX100 or SP500 constiuents and their 1, 3, and 6 month price change. Add the starting market cap and you can see change in market cap by sector and thus kind of see money flows. For SP500,

        Last 1M: Biggest sector mkt cp gains: Finance 31BN, Energy 10BN, Healthcare 10BN, Industrials 8BN. Biggest sector mkt cap losers: Tech -19BN, Utilities -3BN, Consumer Srvcs -2BN.

        I guess you could normalize this against the overall mkt cp increase in SP500 too.


    An article last month goes into a theory that index funds and passive investing are creating a dangerous market where nothing matters because mega funds don’t react to anything, ever.

    John Coates argues that “in the near future, just 12 management professionals-meaning a dozen people, not a dozen management committees or firms, mind you-will likely have practical power over the majority of US public companies.”

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