The Fading Trades of the Decade
Oh how the mighty have fallen! This current stock market rout, which by my reckoning has only just begun, is already taking a serious toll.
The slightest earnings miss or forward guidance disappointment and then… Let the punishment begin! The Street dumps shares en-masse and issues reset down 10-30%.
In the era of the “Everything Bubble” you should expect no less given this bull-market inflated on trades that were the absolute antithesis of value investing or any other sound long-term, fundamentals-based, investment strategy.
Short term hyper-enthusiastic blind-speculation is the dominant function of today’s stock-jobber and this type of “investing” (with reckless abandon) is a story as old as “investing” itself and with an inevitable ending that we are well aware of if not yet willing to consciously admit.
But the real bull-run we have today is not in stocks, housing or cryptos but in the ranks of stock-jobbers themselves!
The Fed’s misguided decade+ long 0%-interest rate policy and associated quantitative easing madness has created the most fundamental and widespread bubble in history… the “Everything Bubble” where white-hot money coupled with a multitude of innovations in financializtion and an utter lack of any basic risk-free or nominal-risk real returns has pushed wide swaths of the population, particularly those of retirement age who historically should have no exposure to risky assets, into an excessively speculative posture.
For the young, the downdraft will be similar to the lessons learned by past generations. They will take their shellacking losing 15-30% on their housing assets or 50-80% on their stock portfolio or 100% on their various crypto holdings or possibly even all three but the primary lesson will be positive, namely that real wealth does not accrue overnight and certainly not as a function of other speculators feverish FOMO.
For the old, the Boomers, on the other hand, we are in uncharted territory!
Far too many Boomers are fully invested and with their average age somewhere in the 60s, this generation is wholly unprepared to either wait-out another major economic collapse or replace the lost wealth through some form of current income.
The most sensible strategy for any Boomer today is to hedge their bets and move away from risk, dispensing with stocks and other highly speculative holdings and preparing for a long, dull and boring period of modest fixed-income particularly as rates reset upwards.
Boomers may ultimately loose wealth in real-terms with this strategy but even with a 5% annual loss in real purchasing power, they will still have about 60% of their wealth 10 years from now, an obviously better trade than possibly taking a 40%-60% (or more) haircut right now.
But they can’t all de-risk at once! That’s not really how the game works on Wall Street.
So, what we are seeing today are the makings of an obvious, and probably epic, stock market bust as Boomers race for the exists but, when they fail to all successfully pile out of stocks, what then?
They will probably ultimately turn to tapping other, more tangible real wealth, such as their housing assets, to fund their ongoing needs.
But in an era of rising interest rates and likely falling home prices (… coming soon), don’t expect them to just take out HELOCs to ATM their current homes. It will be much more sensible to simply sell their property and set their sights on a new house or condo in a lower cost of living area.
So, you can see where all of this is going… a Fed-fueled highly speculative decades-long frenzy in stocks and other highly risky assets gives way to a transformative macro-economic function as an immense aging generation downshifts to a more sensible, more conservative wealth preservation strategy for the final phase of their lives.
How well we will all manage this complex period of inflation and deflation is hard to predict but, with past periods of economic tumult as a guide, it is safe to say that there will be much friction, many bag-holders, many losers and some winners.