FWIW # 11 Three Stooges November 2020

Years ago, the Three Stooges had a comedy routine on radio and television. You can probably still find them on late, late night cable. Their routine was slapstick and cleverly worded phrases designed to make people laugh. Today there are three cleverly designed phrases in the investment markets to make stooges out of the millions of speculators who hear and believe them. Let’s examine each and see how they can make stooges out of believers.

It’s Different This Time (ITDD)

Of course, circumstances are different in some respects. Perhaps a particular sector, industry, or group of stocks is the current darling among speculators. It could even be the level of suppressed interest rates. Every period of market excess is different and happens long enough after the last debacle for speculators to forget the lessons learned. Keep in mind, this and the other two catchy phrases don’t come up when the investment markets are low and speculators have fled. No, ITDD is spoken only when the economy is strong, interest rates are either suppressed or considered low relative to the investment universe, and the stock market is high.

No two periods are characterized by the same super stocks. The Nifty Fifty in the 1960s were totally different from the energy and S&L market leaders of the 1980s, and the dot-com bubble in the 1990s was nothing like the earlier two or the tech hysteria of today. There is a common factor in all of these periods: earnings were high in all except the dot-com excitement. However, the dot-com era was anticipating enormous earnings gains because of Y2K (remember that)?

To understand why it is never different this time, you must peel back the layers of excitement, both manufactured by Wall Street and self-induced by those who like to play Wall Street’s game, like an onion. Carefully stripping away the aura of media personalities and analysts leads to the core of what makes the markets move: supply of shares and demand for those shares. Let’s look at how the laws of supply and demand are manipulated to develop IDTT markets. Analysts and the media begin to develop a premise about a particular industry based on current earnings, painting a picture of a gusher of future sales and earnings growth. The kernels of truth in this spotlighting effort are visible rapid sales growth and a change in fundamental economic activity. The inevitability of market dominance by a small group of stocks is carefully crafted. The logic of future market leadership can easily be seen by market participants susceptible to the premise.

By spotlighting just one group of shares over and over, the hype factory focuses the market’s attention on the limited availability of that group’s supply of shares rather than on all the stocks in the market. As the select few stocks ascend in price, fewer and fewer of their shares are available to buy while the demand for the shares increases. In essence, what is happening is a steady massage of speculators’ greed. The masseur doesn’t care who is caressed as long as more and more speculators are drawn into the game over time. Dips in the stock market or missed quarterly sales and earnings goals are excused away. When the sales and earnings do meet expectations, they are quickly extrapolated into the future. The economy is growing, all stock indices rise, the speculators feel good, the chosen leadership continues to lead the market higher, and it’s different this time becomes the mantra. It’s never different because the basic factors, supply and demand, are always the same. Eventually the demand for the leaders and stocks generally dries up and the stock market falls back to earth.

Fear of Missing Out (FOMO)

Fear and greed are the essential elements in any investment market. FOMO shows up whenever a market has been climbing and a leadership group of stocks moves to the forefront. FOMO is a synonym for greed. It results from backyard barbeques, cocktail parties, office water coolers, and social media interactions. It starts when one person in a social circle mentions they bought XYZ stock weeks ago and have made a lot of money. First, jealousy takes hold of the listeners, followed by resentment that a peer was smart enough to buy the stock or stocks. This triggers greed, resulting in an intense desire to buy some of the same securities so no one in the group gets richer faster. The only problem is the share prices are much higher when those bitten by the FOMO bug act. Nevertheless, at the next social event, the Johnny-come-lately participants feel better and let the others know they own the stocks as well.

There Is No Alternative (TINA)

ITDD and FOMO are examples of greed in different forms. TINA is an example of pure stupidity as well as greed. It is Wall Street’s way of making sure the highest fees are extracted from the most market participants, people who don’t fully understand how their money should be allocated. TINA comes from the significant distortion of the markets by the Federal Reserve (Fed), through its suppression of interest rates and monetization of debt through bond purchases. All of this liquidity (read that as demand) pumped into the markets while shrinking the supply of fixed-income securities puts downward pressure on interest rates. Analysts and the media then use the concept of all investments’ values being linked to the 10-year U.S. Treasury note interest rate for promoting stocks.

To make matters worse, lower available current income from fixed- income investments causes available fixed income money to flow to common stocks since stocks are undervalued relative to the 10-year Treasury yield and have dividends paying more than fixed-income securities. Never mind that the Treasury yield is artificially suppressed by the Fed. Never mind that the Fed’s action indicates the economy is weak without the Fed stimulus. Very little, if any, thought is given to the risk profile inherent in common stocks being far more complex and higher than the risks in fixed-income investments. Common stock dividends are not fixed; they can move up or down. Common stocks do not have a fixed maturity date. Common stocks don’t have any priority for payments in the case of bankruptcy. Speculators and some fiduciaries ignore these obvious asset class risk differences and plunge into stocks at a time when the risks far outweigh the rewards.

Investment principles dictate that investors’ portfolios should allocate money to cash reserves, fixed-income securities, common stocks, and real estate. Market distortions by authorities or market hysteria should not be an excuse for changing the monies allocated to each asset class. If fixed-income securities don’t return the appropriate amount due to authorities’ manipulation, it should be a warning sign, not a reason to transfer monies with a low risk profile to a higher-risk-profile asset class. Why? Because eventually the markets’ fundamental risk profiles will override the manipulation by political authorities.

Serious, real amounts of money are made when the economy goes into recession and all asset values decline. Thank goodness for the stooges who fall into the TINA trap, the FOMO trap, and the IDTT trap, who find themselves without the flexibility to capture the once-in-a-generation opportunities without having to liquidate at a loss their once-in-a-generation disasters created by these three cleverly designed phrases. Serious investors are there to use their properly allocated capital to gather up the opportunities.

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