We know we’re not there yet, but we can perhaps see some early movement: increasing vindictiveness to the bears for costing investors money.
That’s from Jeremy Grantham’s latest investor letter and it echoes a phenomenon I described at length in ‘“ThereIsNoTopism’ Is Wall Street’s Hottest New Religion.”
Grantham’s letter predicts an imminent “melt-up” in equities (hence the “we’re not there yet” bit), but the passage excerpted above describes the extent to which anyone who expresses the slightest bit of skepticism about the ongoing rally in risk assets is maligned as somehow being involved in a nefarious, coordinated effort to keep everyday investors from getting rich.
That’s usually a tell-tale sign that the people who are waist-deep in the narrative harbor doubts about its viability. You see the same thing in cryptocurrencies and, tellingly, in religions and cults (assuming you can draw a distinction between those two things). When a belief system flies in the face of common sense, continuing to espouse it entails adopting an increasingly defensive attitude. That helps with the cognitive dissonance that goes along with clinging to a thesis that’s detached from reality.
The ultimate irony there is that market skeptics and really, just cynics in general, are often accused of persisting in the same fantasy as the delusional crowd. Something like this: “when are you going to accept the fact that European junk bonds are trading inside of US Treasurys?” Or, “when are you just going to admit that the MSCI World has gone the longest without a 5% correction in history?” Or, “when are you going to come to terms with the fact that Ripple rose 32,000% in 2017?” Or, “when are you going to accept that a magic, bearded wizard who was the son of a divine creator once rose from the dead?”
The answer is: never. Never am I going to accept any of those propositions because none of them make any sense. And the fact people find themselves having to defend them in caustic terms that figuratively and literally demonize skeptics is itself evidence of their not making any sense.
The distinction between fairy tales and asset prices isn’t as clear cut as it seems. Yes, there’s a sense in which asset prices are just asset prices. They’re “real” in that if you sell before everyone else sells, you can lock in gains that are built on quicksand. But if those asset prices are based on an irrational belief system, pressing your luck based on your refusal to acknowledge the irrationality inherent in those beliefs will eventually be met with the same results as someone who convinces themselves that if they just pray enough ahead of time, they can safely wrestle adult crocodiles.
So this shrill cacophony from vol. sellers, and carry traders, and crypto disciples and E*Trading punters about how market skeptics refuse to accept reality is the worst kind of straw man imaginable. No one is saying that Chris Larsen (who no one had ever heard of until last month) didn’t become the 5th richest man on the planet on paper last month thanks to a rally in a cryptocurrency that sports a literal fidget spinner as a logo. And no one is saying that Seth Golden hasn’t made enough money to buy the whole Target store he used to work at by day trading XIV in his underwear. And no one is saying that people holding QQQ haven’t logged triple-digit gains. Just like no one would deny that you wrestled an adult crocodile and lived to tell about it if you did in fact live to tell about it.
Rather, what cynics are saying is that there is no rational narrative that explains any of those things. And when something (be it getting rich off a rally in made-up internet money, logging a 400% gain in nine years on an index fund, or surviving a fight with an apex predator) can’t be explained by reference to a narrative that makes sense, well then it stands to reason that irrationality, luck, and happenstance, are involved in there somewhere.
Of course no one likes to admit (even to themselves) that they’re being irrational and that’s when the derisiveness sets in vis-a-vis “non-believers.” That derisiveness has recently found expression in incredulity from pundits and the media with regard to Wall Street’s year-ahead forecasts. Long story short: those forecasts aren’t bullish enough for people who have become accustomed to 23,000% fidget spinner rallies. I documented this at length back in November. Here’s an excerpt:
But here’s the thing: you can’t very well malign someone for trying to tell you about all the bad things that can happen, then turn around and lampoon the very same group of people for telling you that things are likely to keep going reasonably well. Because that doesn’t leave analysts with very many options. If dour outlooks are examples of “fear sells” and cautious optimism is just “yesterday repackaged as tomorrow,” well then what’s left? Does that mean the only thing that’s acceptable is unbridled optimism?
The answer to that latter question is undoubtedly “yes” and in a testament to the notion that these things have a way of becoming self-fulfilling, the S&P has already blown past at least some year-end targets and is well on its way to hitting the rest of them.
Take Morgan Stanley’s Mike Wilson, for instance. Here’s what he said in late November on the way to upping his 2018 S&P target:
We move our base case S&P target to 2,750 from 2,700. The increase is a result of higher earnings (US$145 in 2018, US$150 in 2019) and a roll forward to 2019 earnings, but at a lower multiple (18.3x) than we previously thought as the market will not reward this later-cycle growth with multiple expansion as in 2017.
Well dammit I knew that was likely to go awry as soon as I read it, which is why the title of my post documenting that call was “Morgan Stanley Is Not Bullish Enough On The S&P For Your Tastes.” Sure enough, we’re already through Mike’s year-end target and are well on our way to hitting Citi and BofAML’s targets as well:
And look, this isn’t just equities. High yield has already rallied more this year than JPMorgan predicted for the entirety of 2018. Back in November, the bank said it sees 20bps worth of tightening this year. Through January 5, the Bloomberg Barclays HY index tightened by 21bps:
That, even as we’re near the end of cycle in U.S. and even as the ECB just revealed that Draghi may be an active seller of junk in the event anything he’s holding in the CSPP portfolio gets downgraded.
Sure, there are myriad incremental reasons why you’re seeing what you’re seeing (commodities rally helping HY, the sagging dollar helping commodities and EM, and speculation about the impact of the tax bill helping to buoy sentiment in U.S. equities, for instance), but the key here is that while the incremental gains may be based on things that make sense, those incremental gains come on top of something that makes no sense. So little sense does it make that we’re blowing through Wall Street’s year-end 2018 targets for risk assets in the first 10 days of the year.
All the while, we’re kinda, sorta acting like all of the other crazy shit happening in the background is somehow not as crazy as it most assuredly is. Just take a second to consider what Mike Novogratz is up to. According to Bloomberg, he’s hell-bent on building what he’s calling “the Goldman Sachs of crypto” and this is how he’s going to do it (from my piece posted early Tuesday):
According to Mike’s “plan”, he’s going to buy a Canadian crypto startup called First Coin Capital Corp., conduct a reverse merger with a Canadian shell company called Bradmer Pharmaceuticals Inc., and then once those two are rolled up, he’s going to rename the combined entity “Galaxy Digital Holdings” on the way to raising $200 million in a private placement. Bradmer Galaxy Digital Holdings, will be listed on the TSX and will have a stake in Mike’s crypto merchant bank.
Since that technically isn’t an IPO, there won’t be a need to file any pesky financial statements with securities regulators, and that’s probably a good thing because, well, because did you read what I just said about how he’s doing this?
You laugh, and I laugh, and everyone was laughing on Twitter Tuesday morning, but are you really laughing? Because it is not readily apparent to me that everyone is connecting the dots here. That batshit crazy “plan” of Mike’s is just another manifestation of the same acute psychosis that now pervades the warped minds of E*Traders, pundits, and punters alike who are engaged in a daily quest to justify hanging on amid a rally that now finds stocks, bonds, and credit the most simultaneously overvalued in 100 fucking years. And I mean that literally:
And look, I think I’ve gotten something of a bum rap lately. I never set out to piss in anyone’s Cheerios. I’m not “that guy”. I get up everyday, read the research, do the math, take a look at what everyone is doing, and listen to what everyone is saying. If it made any measure of sense, then I’d be just as bullish as the next guy. But it doesn’t make any sense. In fact, it makes the opposite of sense.
I’m starting to hear this a lot from readers: “you’ll eventually be right and then you’ll say ‘I told you so.’” No I won’t. I mean, yes, I’ll eventually be right. But I won’t say “I told you so.” In fact, it is highly likely that when this cult finally drinks too much Kool-Aid and poisons itself, I’ll be one of the first ones sifting through the dead bodies for bargains.
So think on that.