Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I’ve never seen such heightened speculation across the wide investment spectrum. There’s been spec before - but I fear the new crop of retail investors is unprepared for what may happen. Should we worry? Not a lot. But a good analogy might be driving 70-80 mph on a crowed interstate surrounded by other nearby vehicles operated by drunks or folks who aren’t watching the road. All can seem perfectly “normal” until someone begins swerving out of control and brake lights begin flashing in every direction. In the end, everyone pays for the excesses of a few.
Noteworthy among small retail investors, there’s significant leverage being employed. And there has arisen a plethora self-made internet gurus who amass large followings ready to pounce on their next recommendation - or perhaps sell some hapless stock all on the same day. As the M* piece notes, markets can remain in a state of elevated exuberance for years or even decades. But, if history is a guide, the eventual declines can last for years at a time and be brutally painful.
I can’t recall such wild swings in the value of some assets. Energy stands out to me, with crude oil futures going negative in early 2020 and than rapidly gaining about $140 per barrel to $86 about 15 months later. This leads me to believe there’s a lot of hot money chasing assets. If it’s happening to oil, it’s likely happening to other assets. Can’t even get my head around crypto. But it makes the above mentioned swings in oil meager by comparison. Jamie Dimon, head of J.P. Morgan, is no idiot. His assessment is that Bitcoin is worthless.
There’s notably less public concern today than in the late 90s before the “tech-wreck” which saw the NASDAQ drop about 50% in a matter of days, while dragging down other markets along with it. It was more than a decade before the NASDAQ got back to its 2000:high. Where is Alan Greenspan with his “irrational exuberance” warnings of the late 90s? Or Vanguard with its “Trees don’t grow to the sky” cautionary statement to its investors around than?
What to do? Anybody’s guess. None of us can predict the future. Saying that many assets are in speculative territory does not lead to any particular solution. Some of the answer resides in age, risk tolerance and individual skill-set. Some in ancillary issues like pension, home ownership, dependents, life style. A good portion of the answer, however, resides in one’s macro view of how things will evolve going forward. For example, one view is that asset prices will eventually deflate. Another view says paper currencies will be devalued (thru price inflation) making today’s asset prices reasonable. Politics (often heated) here and abroad, has also become an ingredient to be reckoned with when trying to assess the macro view. And there exists, too, a middle road on which there may be winners and losers. We tend to segregate “investments” into domesticstocks and bonds. Simplistic of course. That overlooks potentially attractive foreign markets. And there are assets like real estate, commodities, infrastructure, floating rate loans, gold and silver; as well as derivatives like puts, calls, options, futures that a skilled professional can use to advantage or to reduce overall risk in heated markets. Funds that lean on such approaches have been highlighted recently in the MFO commentary. While I own some such funds, I don’t find them particularly worthy of note.
The rise in oil was worth a good swing trade but I don't see it as a viable long-term investment. Sure we'll continue to use/rely on it for the time being but alternative energy investments are the wave of the future. Hint: buy what the millennials are interested/investing in.
@hank : Did you catch any of the oil rise ? I didn't.....!
Hi @Derf - I’m pretty much a static allocation person. Typically 7-8% of portfolio has been allocated to “real assets”. What I had in terms of oil going in was PRAFX - Price’s Real Assets Fund. Took a hit on the way down. I was quite new to Invesco at the time (long story), but did buy into their commodities fund BRCAX near the bottom in oil and enjoyed a nice bounce on the way up.
I change the ingredients within the real assets sleeve from time to time, seeking out the underperformers. I’ve long since sold PRAFX. Still have a bit of BRCAX. And have gone heavier into metals and mining of various sorts. Also a bit of global infrastructure in the mix.
Short answer = Yes, I caught a bit of the bounce. (You may have too, indirectly, through some of your diversified funds.)
Its too soon for me to be certain its different this time. But, the global central banks have been astute and activist enough in recent years to keep investors engaged and satisfied -- garden variety stock market corrections excepted. Accommodative global fiscal policies also made important contributions to this outcome during the past couple of years. Current and projected economic conditions suggest this recent trend could continue through 2022. That said, I suspect any future stock market gains through 2022 will be more modest and will be more interrupted along the way than they have thus far been in 2021.
Concur with davfor’s assessment. Having the Fed and other foreign Fed entities participating in (or as part of) the stock market is unprecedented. Will see how this tapering plays out in the near term.
Mr. Hank is spot on. Excess liquidity and no suitable option to equities. Inflation is getting away and the Fed is still playing with themselves. "anything happens. my fault, your fault, nobody's fault, the boy dies."
That said, I see no reason to panic or do anything silly. Check your allocation and rebalance as needed. Make tax moves as it's November. Maintain some cash and we'll see what happens;
One word of caution for the older investors, you probably do NOT have sufficient time to recover from a 20% crash if you're making withdrawals. Your principal takes too much of a hit. It happened to wifey in the 2000 meltdown. She had retired 12/31/99 and had a lump sum pension and 401k. The pension went to Vanguard where it was invested very conservatively and subject to pension like withdrawals. It did not survive the dotcom meltdown. The 401 went to Price and was not subject to withdrawals and had plenty of time to recover and has done nicely TYVM.
Barron’s is exceptional in the latest (Nov.7) issue. Several good articles touch on this overall theme. (And I’ve posted the cover art)
- One writer makes the distinction between “market peaks” and asset “bubbles.” He thinks what we’re witnessing qualifies as the latter (good). When a peak turns into a correction or crash, most everyone gets hit. With bubbles you can move assets out of the overpriced bubble(s) gradually and into more reasonably valued assets (ie: funds, stocks, sectors).
- One article visits a large public Crypto Conference recently staged in NYC’s Times Square. It hones in on a 30 -something aged woman who is amassing a collection of high priced “non-fungable” tokens. These digital certificates give the owner the “exclusive rights” to things like dog photos or images of funny looking hats that are actually free to view on the internet, In other words worthless. She learned how to “invest” on U-Tube and has also taught “investing” to her mother and siblings, who are now investing in these assets.
@hank: thanks for the good laugh. Since it is time to think about taxes, I’m wondering if I could satisfy my yearning to travel by going to NYC or elsewhere to attend a Crypto Conference, with travel costs deducted as an “investment expense.”
The Fed released its 6-month risk assessment yesterday. Here’s a short excerpt from the story in today’s (11/9) Wall Street Journal. The note on some types of money market mutual funds / cash management vehicles / bond and bank loan mutual funds is interesting. I’m wondering if that’s primarily in the institutional variety or whether there’s concern at the retail level?
Article - “Fed Says U.S. Public Health Among Biggest Near -Term Risks to Financial System”
“Asset prices may be vulnerable to significant declines should risk appetite fall, progress on containing the virus disappoint, or the recovery stall,” the central bank said in its semiannual Financial Stability Report. Still, other parts of the financial system appear resilient. Banks remain well capitalized, the central bank said, and key measures of vulnerability from business and household debt have largely returned to pre-pandemic levels. “Little evidence exists of widespread erosion in mortgage underwriting standards or speculative practices,” the report said. “However, with valuations at high levels, house prices could be particularly sensitive to shocks.” he Fed also warned that structural vulnerabilities persist in some types of money-market mutual funds and other cash-management vehicles, as well as in bond and bank loan mutual funds. The vulnerabilities could amplify shocks to the financial system in times of stress, as they have in prior crises, the central bank said. Fed officials monitor asset prices to gauge risks that a sudden, sharp decline might pose to the broader financial system.
Personal note: I recall that decades back some government bond funds experienced serious stress after making bets on interest rates that didn’t materialize, Recently (according to another WSJ article) some hedge funds have experienced big losses after betting that long term rates would rise when in fact those longer rates (out to 30 years) have been falling (here and abroad) in recent weeks.
There is a write up beginning on page 18 of the FRB Assessment that focuses on Retail Investors, Social Media, and Equity Trading. They appear to be in the "monitoring with concern" phase of the evaluation process regarding meme stocks, evolving trading strategies, etc.
The main body of the report ends with a list of most sited potential sources of shock to the financial system.
Comments
Noteworthy among small retail investors, there’s significant leverage being employed. And there has arisen a plethora self-made internet gurus who amass large followings ready to pounce on their next recommendation - or perhaps sell some hapless stock all on the same day. As the M* piece notes, markets can remain in a state of elevated exuberance for years or even decades. But, if history is a guide, the eventual declines can last for years at a time and be brutally painful.
I can’t recall such wild swings in the value of some assets. Energy stands out to me, with crude oil futures going negative in early 2020 and than rapidly gaining about $140 per barrel to $86 about 15 months later. This leads me to believe there’s a lot of hot money chasing assets. If it’s happening to oil, it’s likely happening to other assets. Can’t even get my head around crypto. But it makes the above mentioned swings in oil meager by comparison. Jamie Dimon, head of J.P. Morgan, is no idiot. His assessment is that Bitcoin is worthless.
There’s notably less public concern today than in the late 90s before the “tech-wreck” which saw the NASDAQ drop about 50% in a matter of days, while dragging down other markets along with it. It was more than a decade before the NASDAQ got back to its 2000:high. Where is Alan Greenspan with his “irrational exuberance” warnings of the late 90s? Or Vanguard with its “Trees don’t grow to the sky” cautionary statement to its investors around than?
What to do? Anybody’s guess. None of us can predict the future. Saying that many assets are in speculative territory does not lead to any particular solution. Some of the answer resides in age, risk tolerance and individual skill-set. Some in ancillary issues like pension, home ownership, dependents, life style. A good portion of the answer, however, resides in one’s macro view of how things will evolve going forward. For example, one view is that asset prices will eventually deflate. Another view says paper currencies will be devalued (thru price inflation) making today’s asset prices reasonable. Politics (often heated) here and abroad, has also become an ingredient to be reckoned with when trying to assess the macro view. And there exists, too, a middle road on which there may be winners and losers. We tend to segregate “investments” into domestic stocks and bonds. Simplistic of course. That overlooks potentially attractive foreign markets. And there are assets like real estate, commodities, infrastructure, floating rate loans, gold and silver; as well as derivatives like puts, calls, options, futures that a skilled professional can use to advantage or to reduce overall risk in heated markets. Funds that lean on such approaches have been highlighted recently in the MFO commentary. While I own some such funds, I don’t find them particularly worthy of note.
+1
Best,
Baseball Fan
Have a good weekend, Derf
I change the ingredients within the real assets sleeve from time to time, seeking out the underperformers. I’ve long since sold PRAFX. Still have a bit of BRCAX. And have gone heavier into metals and mining of various sorts. Also a bit of global infrastructure in the mix.
Short answer = Yes, I caught a bit of the bounce. (You may have too, indirectly, through some of your diversified funds.)
Regards
Go Pack Go, Derf
Mr. Hank is spot on. Excess liquidity and no suitable option to equities. Inflation is getting away and the Fed is still playing with themselves. "anything happens. my fault, your fault, nobody's fault, the boy dies."
That said, I see no reason to panic or do anything silly. Check your allocation and rebalance as needed. Make tax moves as it's November. Maintain some cash and we'll see what happens;
One word of caution for the older investors, you probably do NOT have sufficient time to recover from a 20% crash if you're making withdrawals. Your principal takes too much of a hit. It happened to wifey in the 2000 meltdown. She had retired 12/31/99 and had a lump sum pension and 401k. The pension went to Vanguard where it was invested very conservatively and subject to pension like withdrawals. It did not survive the dotcom meltdown. The 401 went to Price and was not subject to withdrawals and had plenty of time to recover and has done nicely TYVM.
and so it goes,
peace and wear the damn mask,
rono
- One writer makes the distinction between “market peaks” and asset “bubbles.” He thinks what we’re witnessing qualifies as the latter (good). When a peak turns into a correction or crash, most everyone gets hit. With bubbles you can move assets out of the overpriced bubble(s) gradually and into more reasonably valued assets (ie: funds, stocks, sectors).
- One article visits a large public Crypto Conference recently staged in NYC’s Times Square. It hones in on a 30 -something aged woman who is amassing a collection of high priced “non-fungable” tokens. These digital certificates give the owner the “exclusive rights” to things like dog photos or images of funny looking hats that are actually free to view on the internet, In other words worthless. She learned how to “invest” on U-Tube and has also taught “investing” to her mother and siblings, who are now investing in these assets.
Enough said.
peace
Article - “Fed Says U.S. Public Health Among Biggest Near -Term Risks to Financial System”
“Asset prices may be vulnerable to significant declines should risk appetite fall, progress on containing the virus disappoint, or the recovery stall,” the central bank said in its semiannual Financial Stability Report. Still, other parts of the financial system appear resilient. Banks remain well capitalized, the central bank said, and key measures of vulnerability from business and household debt have largely returned to pre-pandemic levels. “Little evidence exists of widespread erosion in mortgage underwriting standards or speculative practices,” the report said. “However, with valuations at high levels, house prices could be particularly sensitive to shocks.” he Fed also warned that structural vulnerabilities persist in some types of money-market mutual funds and other cash-management vehicles, as well as in bond and bank loan mutual funds. The vulnerabilities could amplify shocks to the financial system in times of stress, as they have in prior crises, the central bank said. Fed officials monitor asset prices to gauge risks that a sudden, sharp decline might pose to the broader financial system.
Personal note: I recall that decades back some government bond funds experienced serious stress after making bets on interest rates that didn’t materialize, Recently (according to another WSJ article) some hedge funds have experienced big losses after betting that long term rates would rise when in fact those longer rates (out to 30 years) have been falling (here and abroad) in recent weeks.
The main body of the report ends with a list of most sited potential sources of shock to the financial system.
Financial Stability Report