Prior to the stock-market crash of 1929, Joseph Kennedy warned that when your shoeshine boy is giving you stock tips, it’s time to exit the market. He was right, of course, and history appears to be repeating itself as the proverbial shoeshine boys are being replaced by Uber drivers and Robinhood traders.
Kennedy’s warning should sound familiar to the current situation: “Taxi drivers told you what to buy… My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.” The only difference is that the “gale” of the 2020’s hasn’t happened yet.
The 34% dip in the S&P 500 shouldn’t count as a bona fide crash as the losses were almost entirely recovered in a matter of months. The March 23 bottom was daunting at the time, but market participants were so forward-looking that they quickly priced in a vaccine that hasn’t been discovered yet.
They also priced in a Federal Reserve rescue package in the form of unprecedented asset buying. And indeed, the Fed has delivered as they’re fully committed not only to buying government bonds now, but also junk-bond ETF’s and corporate bonds.
Overeager traders have only added fuel to the rally as everyone has easy access to low-commission or no-commission stock and option trading on their phones now. Open access to the markets is a double-edged sword because some traders are buying up assets without due consideration of what they’re buying.
However, not everyone is buying into the feeding frenzy on Wall Street. For example, Sevens Report founder Tom Essaye warns that asset prices, which have been pumped up on the presumption that a Covid vaccine will be discovered soon, are vulnerable to “vaccine disappointment.”
Essaye cautions that investors should be “careful about corporate press releases, versus actual trial data and getting something approved, and I think over the next couple of months that’s really going to come to a head.”
He’s also bracing for the possibility that an upcoming government stimulus package could underwhelm the markets. “Essentially all it will have done is delay the pain from say April, June, July, to now November, December, January of next year… It’s all a question of how much does the government keep shelling out in stimulus versus how quickly does the economy recover,” Essaye elaborated.
And Essaye isn’t the only one seeing trouble in paradise. Much like Joe Kennedy’s alarmed response to the popularity of stock trading in 1929, billionaire and Dallas Mavericks owner Mark Cuban’s reaction to the current buying frenzy is heavily tinged with caution.
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Cuban, whose net worth is estimated to be $4.2 billion, became famous as an angel investor and panelist on the television program Shark Tank. He’s been in the investing game long enough to witness the dot-com bubble and the crash that followed it in the early 2000’s.
You can almost hear Joe Kennedy’s spirit speaking through Cuban when he says, “My 19 year-old niece is asking me what stocks [she] should invest in… Everybody’s a genius in a bull market and everybody’s making money now because you have the Fed put.”
Notice, though, how Mark Cuban acknowledged that there’s a difference between previous market bubbles and the current one. That difference is central-bank intervention, but Cuban seems to suggest that the analogy between 2000 and 2020 still applies: “In some respects, it’s different because of the Fed and liquidity. On a bigger picture, it’s so similar.”
Courtesy: Gary Gordon
Moreover, Cuban doesn’t deny that bubbles can last for a surprisingly long time: “I have to keep reminding myself that the Internet bubble lasted for years… and so it’s difficult to have patience and recognize that there’s still a lot of money,” he explains.
Perhaps the biggest problem is that many of today’s traders aren’t aware of the historical boom-and-bust cycles in the markets. Worse yet, even if they are aware of the finite nature of asset bubbles, they simply might not care because right now their accounts are in the green.
When financial titans like Joseph Kennedy, Ray Dalio, Mark Cuban and others issue cautionary notes, surely they’re aware that most folks won’t heed the warnings. It’s commendable that they’ve at least tried to educate the public, but unfortunately the warnings will likely be ignored until they can be ignored no longer.
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