This was posted by a user who seems to have been deleted, so I am reposting for archival posterity purposes.
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I haven't posted in a while due to personal circumstances but I've been reading along regularly in the daily posts and sharing in all your tales of joy and suffering.
I want to put forward a random epic rant about some stuff that's in my mind currently. This isn't really structured, just, what comes to mind as I think about the market today, thoughts circulating around the last month or two. Maybe someone will find it interesting.
Time & Experience
Keep in mind, I'm a much older investor than most of you, that doesn't make me a better investor (in fact, the last 18 months, and the period from 2015-2020 have been a shit time to be a bear!), but it means I've lived through stuff that is just old tales in the history books for you.
Part of that is about understanding the experience of loss, part of it is expanding your idea of what's possible. I mean, if I built a time machine, went back and told you in November, “Netflix will fall from $700 to $250 within months, and yet, no one will be rushing to buy it, in fact it will then keep dropping some more the next day”, you would have laughed at me a lot and pointed out how Squid Game was currently the most popular show in the world and netflix was an amazing growth stock with limitless potential. That was just six months ago, when people lived in that version of reality. Inflation was high then, but it was 'transitional', rates were 0%, there was no need for rate rises, the housing market was continuing up at blistering pace. Mortgage rates in the USA were 2.5% for a 30 year loan. Europe was at peace. Picking up the paper, no one was discussing where a nuke might land. Delta was a pain in the butt but we seemed to be getting finally through the worst of covid, at the start of november, omicron was barely on the radar, omicron B2, XE, 98, ME, 2000, or Omicron 11 Professional Edition didn't even exist. That was just six months ago!
If that much can change in the last six months, imagine what it will look like six months in the future, just try to imagine! It's like the blind spot in your field of vision. Your instincts will say 'pretty much the same as today, perhaps a linear extension of the trends we see today'. But actually we could be really very far from that. There could be a major earthquake somewhere, war could get a LOT worse, new disease can show up, rates might have to rise above inflation to control it, inflation could keep rising rapidly, there could be a currency crisis, a crypto wipeout, a new technology might be discovered (like MRNA vaccines) that suddenly and rapidly changes the game for humanity. The 'mood' of the world might change, grow more gloomy, the markets may crash through the floor to a degree that seems as impossible to you today, just as impossible as Netflix $220, or tens of thousands of US military volunteers travelling to fight for the future of Ukrainian democracy against the real threat of Russian nukes would have seemed to you in November 2021. Nonetheless, things happen, totally regardless of what we each believe is the range of possible futures. Our personal models of the future fail again and again, yet we each retain absolute confidence in them somehow and always think 'the next 6 months will be mostly just like today, except maybe some musician will get married or die or something'. If you want to make God laugh, tell him about your plans, or about your views on the future.
A lot of people don't even know themselves yet
You can train soldiers for years but they won't know till they're in combat what combat actually feels like, or how they'll react to it. Similarly, you could read this forum all day, read buffett's letters, read AMD's earnings report, read books, watch youtubes or tiktoks or whatever, trade all you like in a happy, upwards, safe market. But there's literally nothing that will prepare you for the cold hard ninja-nut-punch when you realise 80% of your money is just… gone. It isn't coming back. It's too late. You've fucked it up. You can't unfuck it. A decade or two of grind in a shit job you hate is the only way back. I speak from experience. I've been there. It permanently changed how I invest and made me a hyper-cautious scaredy-bear for life. Making money in a euphoric bubble vs losing money in a brutal crash, is like the difference between having fun in the bedroom with someone, vs having a baby burst out so forcefully and painfully that the entire lower body instantly rips open all the way round from front to back. Experience gained from one is not a teacher for the other.
Like the moment your doctor tells you that you have cancer. I've been there. Like the moment a one-night-stand texts you she's pregnant and not getting an abortion, (thankfully avoided this one). You can't know who you are, till you're actually standing there experiencing it. Living in a new type of experience. No amount of bookwork or pre-thought or imagination will show you who'll you be in that moment. That feeling of 'hmmm… shit.' you feel looking at the market dumping today or netflix losing 36% and then losing so more %s after that…. this is not the end, it is only barely the beginning of the experience you're going to have one day, and probably very soon. It is the pre-appetiser nibble, not even the appetiser, certainly not the main course. I'm afraid to say, new investors, that you are only seeing the oh-shit seagull balanced on the tip of the oh-shit iceberg through your telescope. By 'new investors' I mean anyone who joined the market in the last 22 years.
22 years??? wtf?
Yes. 22 years. That's when the last proper secular bear market began. 2018 and 2020 were corrections. Technically, 2020 qualified as a bear by depth of crash, but it was not a real bear market. 2008 was a proper decent bear market, but not the start of a secular bear, just a piece of an existing one. A secular bear is when you put your money in and don't see those levels again for over a decade. A secular bear is a total nightmare for anyone who's not a value investor (because value investors don't really care much about the market's opinion anyway). 2000 qualifies, because it took til 2015 for most QQQ / SP500 investors to get back what they put in. Corrections and crashes are about sudden, painful losses, but you can easily just take a nap and wait them out unless you trade options (very common now, not common in the past). We used to see 10% corrections almost every year, sometimes several, but all the easy money and mania and euphoria has made all dips shallow in the last 6 years excluding Dec 2018 and Mar 2020.
Bear markets are about brutal losses, they drive margin-users out of the market and give everyone else a big fright / buying opportunity for a year or two.
But secular bears? Holy fuck. Secular bears are just a different game. Secular bears, you wait a month, you wait a year, you wait 3 years, you wait 5 years. Jesus christ I'm still down 50%!. You wait 10 years, oh my god I'm still down. You wait 15-20 years, oh jesus, finally! finally! I can sell and get my money back! Secular bears are when you write a letter to yourself reminding future you of why Chewy, Rivian or GME truly is an amazing company and definitely not to sell it, then 8 years later, you find the letter in a box in the attic (having long since lost interest in investing), you read it, laugh a little, cry a lot, and then you either burn the letter or frame it.
If your child is born the very first day of the start of a secular bear market, your first grandchild may be getting born by the time you get your money back out from the market. Look at the 1930->1950s secular bear for example. Secular bears make society stop talking about stock investing completely, it becomes taboo at first, then just, not interesting. No one cares. We are very far away from that stage of the market!
But from a CAPE 40 (January), that's what you'd expect to see in the next 10 years, from all the historical data, you should expect a secular bear to be beginning. Rates rising, QT, inflation, supply/demand crisis, labour costs rising, epic bubbles in housing, bonds, crypto, stocks, growth going ex-growth, hype losing it's hype – sorry folks, but we are going straight towards a secular bear whether you want it or not. It's just how it is. Ask yourself, how many people do you know that are actually prepared emotionally and financially for multiple years of grinding losses, like 2000 or 2008? For decades of stagnation? Like 2000-2015 and 1930-1950s?
Look up the DJIA from 1934-1950. Look it up from 1966 to 1982. Look it up from 2000 to 2016. This 'secular bear' thing is not an imaginary concept. It comes around every few decades, and it ruins the lives of all the investors who hate history books.
Your great-grandparents lived through several secular bears, your grandparents too, your parents too. It's just part of the human experience. Now, it is probably going to be your turn to experience your first secular bear. Whatever happens next, it will not be like the fun and games of the last 24 months, I assure you.
The euphoria is clearly starting to fade.
We're now several months since a new all-time high in the indices was last reached. The emotions that replace euphoria aren't 'hope' or 'resoluteness', they're 'boredom', 'frustration', 'despair'. The emotions that follow after those ones are 'caution', 'panic', 'fear'.
Long-term market price comes from company value, but short-term it comes from waves of people changing from buyers to holders, holders to sellers or vice versa. An imbalance between people wanting to buy or sell is the force that creates bubbles and crashes. And we're seeing a change of balance taking place currently, though it comes in waves, as people flip-flop back to greed one week, fear the next. But long-term, the euphoria is clearly draining away. The thing about euphoria is that when you lose it, it doesn't quickly come back. The thing about fear is, when you get it, it doesn't quickly go away.
We'll eventually pass through 'selling from caution', 'selling from boredom', 'selling from fear', and will then reach 'forced selling'. Where people just have to close positions because they were running on margin, or they put more into the stockmarket than was wise and have to meet some household expenses, or whatever. You'll recognise it because everything goes down. Even safe-haven stocks losing 5%. People get to the point they simply can't manage the emotional pain caused by seeing losses after losses. Unfortunately (for bulls), the more that bulls convert to bears (or are forcibly converted by their broker or wife/husband), the less fun it is to be a bull going forward for years to come. As a classical-value investor, I hate to say it, but short & long-term momentum is a real effect, and it's driven by human psychology.
The fall is still beginning
With hype stocks, memes, spacs etc, we may see a 2000 style market overvaluation. I have a 'pick the right meme stock!' book on my bookshelf from 2000, telling you the hot stocks to buy. It's quite amusing. We didn't call them meme stocks then, just 'internet stocks' or 'dotcoms'. And we didn't have Buttcorn, we had Flooz. But you get the idea.
With an overpriced housing market, we see 2008 style market overvaluation, 'flipping' etc.
With bonds priced all the way down to <1% rates on the 30y not long ago, we saw a new type of market overvaluation, which is now rapidly correcting.
All of which coincided with short rates & QE being the driving factors. Now both of these are in reverse. Let's suppose we get only one of those bubbles turning to a crash, and not all three running together.
2000-2002: We saw the nasdaq decline 78%. Currently, it's only declined 18%.
In other words, as of today, April 21st, we're just 1/8th of the way to replaying the last tech hype bubble drop.
18% drop from peak -> 82% left
18% drop from there -> .82 x .82 = 67% left
18% drop again -> 55% left
18% drop again -> 45% left
18% drop again -> 37% left
18% drop again -> 30% left
18% drop again -> 25% left
18% drop again -> 20% left
So, we would need to see another 7 similar dumps of 18% in the nasdaq like the one from November 2021 peak to today, in addition to the drops already happened, to replay the 2000-2002 tech/hype/meme crash. Stop and think about that for a moment if you're investing in these stocks. The 'bummer' feeling you have today is 1/8 of what you may have by the end. You will go through this again, and again, and still not even be halfway through the suffering.
Nah it won't happen
Now you will all have lots of reasons why 'that can't happen again, this time is different' etc. Copium is a real psychological effect, read up on 'the five stages of grief bargaining' etc. But load up the share price charts for your favourite memes and scroll back to 2015-2016.
Let's take netflix as an example. Netflix in 2012 was $7. In 2015, $47. 2016? $85. And that was without a market crash backdrop, and without competition, without 'the end of customer growth'. That was a company with a basic perfect future ahead, lots of customers to be discovered, that was how it was priced in a market not facing QT and rate rises, tax rises, rising labour costs, etc. None of which is true any more.
The idea of netflix dropping another, say, 33% from here shouldn't seem unreasonable. $150 netflix would put it on a PER equal to the long-term US average for ex-growth, non-monopoly companies around PER 15. Also sort of matches the 2000 dotcom price drop. Besides, a further 33% drop in netflix shouldn't seem THAT weird when we literally had a 36% drop happen out of nowhere literally 2 days ago.
Or how about AMD? The last few years it enjoyed a lack of performance competition from intel. Now, it's competing with Apple, with Amazon/Google data warehouse custom chips, it's competing with nvidia in graphics (who are winning), and intel is winning on both price and performance again in the x86 consumer market. The only place AMD are still hanging on is x86 server performance, and not for long. 3D chips have not been the outrageous victory hoped for this year either.
AMD is in a technologically inferior and substantially financially weaker position than Intel. We should expect their share PERs to be much closer together. Intel's PER is about 10-13 (depending on where earnings come in soon). Even viewing AMD as 'going ex hyper-growth, exiting the glory years, room to still grow share' you'd maybe put it on a 15-18 PER.
Let's take the highest analyst forward earnings estimate for 2022 and price that with a 15 PER, higher than intels. (https://www.nasdaq.com/market-activity/stocks/amd/earnings). That's 3.78 earnings x 15 per = 56.7$. That's not even crash pricing. That's pricing for 'return to normality'. If we do the 'nasdaq dumped 78% in the last tech crash' assumption and apply to AMD's peak price, we get $164 peak, x 0.22 = $36. Even in the last 12 months, AMD was priced at $72.50. In 2020, <$40.
So whichever point of view you take, there's a lot of air still underneath these prices potentially.
And yet AMD and Netflix are about as good as it gets for overall company quality, duopoly, and potential growth among the tech hype meme bubble darlings. If AMD and netflix holders may have heavy bags for years to come, what happens to all the purely-meme crap holders?
Can it happen? Sure it can. Look at the Intel, Microsoft share prices between 2000 to 2015, Cisco etc. These were the technology hype darlings of the time. It really happens. It can take literally 20+ years to get your money back out again.
Mortgage rates.
US mortgage rates were around 2.5% for 30 years merely 4 months ago.
Recently they've been over 6%. If you assume most people 'buy as much house as they can afford for a monthly payment', then that equates to every $500k house becoming a $400k house, even absent a recession or any other factors like change of housebuyer sentiment in the market. It seems to me a lot of people haven't figured this out. r/rebubble has more.
Likewise, in Australia and Canada, did you know that most mortgages are adjustible rate (around 90% in both cases, though less among the most recent mortgages). In the past, short-rates had to rise above inflation to control inflation, eg over 10% rates. Can you imagine what these two countries will look like with 10% rates? Personally, I surely would not be investing in Australian or Canadian banks right now.
Of course, banks make more money long-term when rates are high, usually, but they tend to suffer crippling short-term losses during the period of 'rates becoming high' beforehand. It's like the difference between simply having a muscular physique and the pain you have to go through to get there at first. Hence, we see banks making significantly increased loss provisions currently. I expect to see bank stocks get slammed pretty hard this year, even more than we've seen already. JPM & BAC are about as good as it gets globally for banking, but my price target on JPM for example is around $90, which is more in line with historical lows for the stock given growth over the years. For BAC I'd struggle to persuade myself to pay above $20-25. The thing is, I remember just how bad it got in the 2008 crash for banks. Last time around I saw Citigroup drop 99% from peak at one point, in 2008. Which wasn't the worst of it. I watched half the banking sector completely go out of business in months here. I saw major international banks dropping 40% off their share price in minutes on no news, in 2008, and that wasn't during the start of the crash when prices were sky high, that was late on, prices already low as we got deeper into credit markets locking up.
General bad backdrop, potential risks
Russia/Ukraine, Covid, are not going to make inflation and supply/demand problems go away. They're not going to lower taxes or energy/food costs. Russia is set to formally default on its debt around 4th May, 30 days after the payments were due (Star wars day! May the fourth be with you!). If Putin decides to test the 'escalate to de-escalate' (aka total insanity) theory, and starts throwing nukes around to show off, the market is not going to rally up on that.
We saw several major new strains of covid in the last two years. Alpha was 'tougher', Delta was 'tougher', and Omicron unlocked the 'spread to the planet in 2 months' feature. Consider original SARS in 2000 and the death rate it had, that's how bad this could get with a coronavirus -we know, because it already did!
If we get a strain of omicron with the lethality of SARS-2000, the market is gonna have a bad time. is it priced in? no. Meanwhile: plenty of countries looking at hyperinflation (south america, turkey, russia). Meanwhile: plenty of countries looking at stupidly priced housing markets due to collapse (Canada, Australia, NZ, UK, much of Europe, China, Taiwan…).
Remember Evergrande from last year, the Chinese property company with the biggest debts of any company on the planet? That hasn't gone away! People are just ignoring it as it slowly plays out. There's just a lot of really bad shit playing out in the background and not a lot of good shit to balance it out.
Though I'll admit: seeing Europe, USA, UK, Japan, Australia, etc coming together re: Russia/Ukraine? That's encouraging! That bodes well for the future, the more these important countries work together and try to do the right thing even when it's costly to do so. Democracy bros gotta be true bros, because there's a lot of bad bros out there. Oh and while it's in my mind, though I've been a bit dismayed at the state of the USA in the last decade, I have to say, you guys are certainly doing some great things lately in helping Ukraine defend itself. Nice one!
The dollar is probably overvalued and if it weakens, inflation will go even higher in the USA.
There is an idea in the currency markets that real rates impact currency value. Assuming two countries were of similar attractiveness, you'd be better investing in the one giving the most return on your capital after taxes & inflation. Yet real rates in the USA are awful just now! The dollar is completely mispriced in my view. Having said that, short term it will probably continue to strengthen for the simple reason that 'in times of crisis, capital flees to perceived safety'. i.e. in the short term, in a crisis, 'return of capital' becomes more important than 'return on capital'. But long term? Ouch.
One of the problem of investing in US value stocks is that value stocks take typically years to play out, and in that timeframe you are maybe looking at a large loss on an overvalued currency. It might not even be possible to make money as a value investor outside the USA just now because of currency effects, unless you have a currency hedge. US investors may not care, but europoors should beware. This is already almost the worst time in 20 years for a european to be buying dollars. Check out the EURUSD rate on a 20 year chart. Yikes.
Crypto
I was reading that young people nowadays prefer buying crypto to stocks or gold as a long term investment. e.g. https://edition.cnn.com/2022/03/03/investing/india-cryptocurrency-investing-future-hnk-intl/index.html
Let's be real. Somewhere between 98 and 100% of crypto coins are completely, hopelessly worthless. Probably 100%. It's like religion when you're an atheist: the reason I don't believe in your god, is probably the same as the reason you don't believe in 1000 other religion's gods. No special exceptions for your favourite crypto, sorry.
Considering e.g. Tether, I can't help but think the best epic-scale rugpull is still to come. People are only in crypto for the hope of rapid, massive gains yet they pretend it's 'about to be adopted as money'. It ain't happening guys. It's been 12 years now since Buttcorn came along and no one is using it as money.
Even you don't really use it as money. And if it ever did start acting like money, it won't produce 'gains'. If it produces 'gains', it can't be used as money. That's the thing about money; if it becomes an asset it stops being money. Even if crypto WAS money – and it's not, specifically because there's no tax system to physically enforce continual demand, and tax systems are what makes money-like into money – 'bad money drives out good', that's Gresham's law. The only thing keeping the crypto game going is the warm oxytocin glow of the bubbles, mania, euphoria in everything, the low rates.
Wait till you can't pay to keep the heating on in winter. Wait till you can't afford fuel for your car to get to work. Wait till the bank sends their final demand for payment. Then you'll find out who's a HODLer, who 'believes in the crypto dream'.
Repent, ye bulls!
It's never to late to realise you have possibly fucked up and decide to become a bear or a kangaroo. Times change; models of investing that worked in the past may not work in the future and you won't be warned when the change is happening, when you are entering dangerous waters, when the tornado is about to arrive. Underwater caves are filled with the skeletons of skilled open-water divers. [1]
Remember, you don't need to always be in the market. It's OK to hold cash for a while, even with inflation devaluing it. Just ask any netflix shareholder.
Look at the 1970s, I think it might be a good model for what comes next. Sure, 8-10% inflation. But the stock market was a kangaroo market regardless, you could trade in and out of stocks/cash every few months that entire decade and still do far better than anyone who held only-cash or only-stocks the entire period.
[1] the film version of Ender's Game is awful, but there is one scene that is good, watch the scene where Ender meets Mazer Rackham. You are Ender, the market is Mazer Rackham.
Fin
Well I hope someone found this interesting. If it made you very annoyed, you should probably reflect on why that is, it probably says more about you and the risks you're taking, than it does about this post.
I wish all of you good luck because, to be blunt, we're all going to need it, me included. Thankfully there are still niches in the market where the tired investor can find peace and comfort, rare areas of well-priced shares with OK growth potential and decent economic prospects.
I'm not going to tell you where they are, because I spend hours every day looking for them, and lately, it's been like finding an oasis in the desert when I find some. But times change, hopefully in a few months, we will see the rains arrive and the desert bloom, and the bears and kangaroos and value investors can all dance together with joy in a beautiful paradise of good stocks at good prices. Talking of deserts…
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