There were plenty of red-flags before the big 20% sell-off such as, the housing slump, oil unable to hold a bid, rising interest rates, and a clear global economic slowdown. However, these red-flags have been persistent for years and the market never blinked an eye in its relentless charge upwards.
If I’ve learned anything in my years as an avid market observer and participant is that timing major market moves is impossible. One day, stocks stop going up and start falling; it’s a slow drip drip drip drip that eventually turns into a volatile flush. October 2018, three years after I thought, the QE Bubble popped.
In hindsight, it was going to go down one of two ways. I thought that the mere cessation of QE was going to be enough to derail the train. It did throw some jitters into the market in late 2015 – early 2016. These were my day-trading days. As a futures cowboy, I experienced unbelievable monetary swings and experienced both the extreme highs and lows that only a naïve highly-leveraged trader understands.
What followed was a three year blow-off top. Seemingly every short-seller and skeptic was systematically beheaded in a euphoric tax-cut induced mania. Prices and stock buy-backs pushed all-time-highs as the financial media touted a ‘goldilocks economy.’ Despite the persistent structural problems deeply embedded in the market, no one cared. I paid little attention to the market throughout this period as I went back to school and studied academic finance. Finished my degree and took level I and II of the CFA. Principles of finance never really change, as despite bouts of mania and despair, ultimately fundamental analysis is the only ‘concrete’ concept people have to navigate the madness of markets. I will never forget reading in one of my textbooks that, ‘negative interest rates are impossible,’ as Eurozone Treasuries were trading with negative yields.
It’s always been clear to me that for the most part finance is all smoke-and-mirrors and that this period of QE Induced madness is particularly barmy. Learning academic finance only confirmed my suspicions. In the overarching QE ‘everything-bubble’ many smaller manias flourished. Bitcoin and cryptocurrencies gripped people’s fantasies. I had professors who became crypto-enthusiasts. I met with a guy who had bought something like $30 of Bitcoin years ago for a pizza and forgot about it discover his investment appreciated over a hundred thousand dollars. He actually started his own crypto-hedge fund with outside investors and everything. I remember his certainty that bitcoin was eventually heading to a million dollars a coin. I suggested that his fund diversify in non-crypto assets. I’m not sure what his fate was but in a mania, reason falls upon deaf ears.
That two year blow-off top period of limbo still baffles me but it appears to have wound down with a vengeance. During this period, the Federal Reserve’s Jerome Powell hiked interest rates 8 times as the Monetary Authorities reversed course on a path of ‘Quantitative Tightening.’ QT is essentially rehab for the free-money addicted markets. The central banks are hiking interest rates and letting the mountains of treasuries they bought slowly roll off the balance sheet. It’s hard to foresee this unwind going smoothly. If QE created this asset bubble, logically QT will deflate it. Asset bubbles almost never end smoothly but who knows? It’s human nature to cry, ‘this time is different.’
I still follow markets closely but am no longer gunning futures like a cowboy. I’ve learned enough about the knife edge of leverage to avoid that route. The short-term trading, market timing game is not one for longevity. Working a day-job and observing with some distance allows me to see the forest from the trees. My strategy has been for quite some time to simply employ the timeless principles of reasonable investment. I buy and hold a widely diversified portfolio of profitable companies that pay generous dividends. I then reinvest those dividends into more profitable dividend paying companies. My aim is to eventually amass a large enough cash-flow generating portfolio where I can comfortably live off that income. It’s not as glamorous as futures cowboy, but it’s also much more likely to work. In my mind, an investment pays dividends, whereas a stock that pays nothing is just a capital gain lotto-ticket.
I’ve written in the past about how out-of-whack momentum to value has gotten. Since then, the FANG stocks have crumbled. Chasing momentum works until it doesn’t at which point it fails miserably. This bear market will be unique thanks to the proliferation of passive-investing and high-frequency-trading. There’s no liquidity to be found thanks in part to management’s greed for share buybacks. Everybody is loaded up on ETF’s where indiscriminate buying leads to indiscriminate selling.
I could bore you with market internals and stats but the usefulness of such data is fleeting. At the end of the day the point that needs acknowledgement is that the era of QE Easy Money is over. The market will have astounding rallies and terrifying swoons but volatility is here to stay. In my mind this plays out two ways: either there will be a Debt-Deleveraging where the ecosystem purges the mountains of malinvestment that has been built up with decades of reckless monetary policy and resets itself or the monetary authorities will panic, revert back to money-printing and spur a period of hyperinflation. Perhaps the market can limbo and stagnate for a while as Japan has done since the 1980’s, but ultimately unsustainable policies must be dealt with.