Uninvestable Markets

Yesterday I explained to my eldest son – studying economics and accounting in high schools, and currently reading Yannis Varoufakis’ brilliant book “Speaking to My Daughter” – why markets are fast becoming uninvestable.

I explained that since the Global Financial Crisis the world’s central banks have experimented with monetary policy to such a degree that markets are totally gamed. Now in response to the global COVID-19 pandemic they have doubled down and even trebled down.

President Trump is not the only elected politician who cheers higher asset prices. In Australia PM Howard made it clear that he preferred ever higher house prices, and our obliging past central banker Glenn Stevens once quipped that first home buyers’ concerns over high house prices usually reverse once they have bought. 

As I explained in my submission to the Royal Commission into banking, that has left our economy vulnerable to the point where it seemed that economic management was synonymous with housing bubble management.

In other words, all central bankers know what pleases their Political masters, and, belonging to the club of Elites, which includes others in Business who they usually join in one form or another after their official appointment ends, they do not often disappoint.

The prices that one must pay to invest bear no resemblance to realities of the underlying economy and are only superficially relative to each other, with many companies trading at high prices even though they would be out of business but for the central bank “free money” shenanigans.

One of Warren Buffett’s favourite sayings coming from his mentor, Ben Graham, goes that in the short term the stock market is a voting machine but in the long run it is a weighing machine. Buffett has not been doing a great deal of investing in recent years, and had been notably quiet this year, not even repurchasing Berkshire Hathaway stock at lower prices in March. This suggests that the voting machine that has come to dominate this decade remains dominant.

Investors are under the belief that the central bankers are omnipotent and can save the situation no matter what, so this creates what is called “moral hazard” where there is a belief that there is no reasonable argument to not invest because it is impossible to lose.

The problem for this way of thinking is that central bankers are not omnipotent, and their shenanigans will work up until the point that they don’t at which point the market will crash like it did in 1929. And when that happens it does not just go down 30% or 50%. It goes down perhaps 90%, and from there it does not bounce back but grinds back over decades!

There comes a point where the more central bankers do the more a prudent investor fears them doing even more.

I have personally reached that point and my only positions in equities, besides a few very low value speculative positions, are with my preferred fund managers whom I wish to continue to support and in ETFs that will move inversely with the US and Australian stock market indices. 

Note that I drafted the above before investing luminaries shared their concerns last week, including Stan Druckenmiller who said that the risk-reward in the market is the worst it has been in his (long and distinguished) career, and David Tepper who said that the market is the most overvalued ever with the exception of the 1999 bubble with parallels to now since both had a high involvement of technology stocks.

To be clear, I am not saying that I believe that stock market indices are likely to fall 90% from current prices. I am saying that the way that the stock market and central bankers are behaving, markets are about as likely to melt up from here as they are to fall to the March 23 lows or lower. However, if markets do melt up, then I would become more fearful of the consequences for our economies, nations and geopolitics.

Nobody making an active decision to allocate capital to broad markets at these prices is an investor in my opinion – they are speculators – and as such they are backing themselves to get out before the stampede. That is a very dangerous strategy and is not conducive to building and maintaining financial security.

After 1929 “playing” in the stock market was long considered a mug’s game equivalent to gambling. Unfortunately the actions of global central bankers are making it that way again, and the psychological and reputational damage could last as long as that previous episode lasted. I, for one, am not interested in allocating my family’s capital to businesses until I have confidence that the long term weighing machine is restored in primacy above political influence.

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© Copyright Brett Edgerton 2020

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