Bob’s Journal for 11/17/22
The Bubbles Keep Popping
The Fed’s easy monetary policy since 2009, and especially during 2020 and 2021, inflated many bubbles.
A few of those bubbles have burst, but there likely are more to come. Last week’s rapid demise of the global digital currency exchange FTX was the latest instance.
We’ve had rolling blowups since the Fed began to tighten monetary policy, and even had a few before then, such as the sudden collapses of the meme stocks that soared in the early days of the pandemic. When the central bank pumps a lot of money into the economy and lowers real interest rates to around zero, people become less discriminate about where they invest money.
As prices of some assets soar, people experience the fear of missing out (FOMO). Investors suspended belief when investing in FTX.
While we’re used to individual investors doing this, perhaps the biggest surprise of FTX is the number of big-name venture capital firms and pension funds that invested in FTX. Unlike in most other investments, the major firms didn’t receive a single board of directors’ seat in return for their investments.
Indeed, there appears to have been no traditional board of directors, audit committee, chief financial officer, or chief compliance officer at FTX. As best as we can tell, FTX was a remarkably opaque organization while claiming to be transparent.
If you want an explanation of how apparently sophisticated people can be duped into such investments, go to Wikipedia.org or your favorite search engine and look up Rene Girard and his psychology of desire theory and mimetic theory.
Not everyone was taken in by FTX. Here’s an interview in which, about two weeks before FTX failed, a short seller gives a high-level view of the problems with the firm and hints there are a lot more issues. The interview starts at about the 35-minute mark. (Caution: Expletives are plentiful in the interview.)
If you’re interested in the specific events that caused a firm valued at about $35 billion to lose all its value in a week, here’s a Reuter’s report on the key actions of the last days.
The good news is the damage appears to be confined to investors in FTX and the cryptocurrencies in general. There doesn’t appear to be much potential for widespread effects.
But I don’t think we’ve seen the end of failures of firms and investments that were fueled largely by the Fed’s easy money policy. That’s why it’s important to have a margin of safety in your investments and why throughout 2022 I’ve been recommending reducing risk.
U.S. Dominates Global Markets
Returns on U.S. stocks have been so much better than in the rest of the world’s markets that U.S. stocks now dominate global indexes.
Back in the 1980s, Japanese stocks accounted for a majority of the global stock market indexes, such as the MSCI World Stock Index. After the Japanese stock market bubble popped, U.S. stocks were 50% to 60% of the global index.
By 1995, U.S. stocks were down to 35% of the index. But strong returns in the United States and weaker returns elsewhere pushed U.S. stocks to 50% of the index by 2009.
Because of the Fed’s easy money policy and other factors, U.S. stocks have had far higher returns than markets in other developed countries since 2009. Recently, U.S. stocks accounted for about 70% of the MSCI World Index.
Theoretically, stock market returns should roughly match the growth of GDP, and they have over time. But that isn’t always the case in the short term. Super GDP growth isn’t the reason for the recent dominance of U.S. stocks.
While GDP has been slower in the United Kingdom, Europe and Japan, that gap accounts for only a fraction of the outperformance of U.S. stocks. Indeed, prices of U.S. stocks have increased faster than GDP and corporate earnings for about two decades.
I believe that trend is unsustainable. U.S. stock prices shouldn’t be able to increase faster than earnings and the economy indefinitely, even if the U.S. economy grows faster than other developed economies. Investors in U.S. stocks need to focus more on value and fundamentals and less on momentum and what’s popular.
Here’s Some Interesting, Unrelated Data
I found these data points interesting and combined them here instead of giving each a separate discussion.
Since 1980 (43 years), real wages for Americans increased 6.9%. That’s in total, not per year.
More than half of Airbnb’s listings have been added since 2020.
2022 is the worst year ever for 10-year treasury bonds going back to 1788, according to BofA Global Research.
After inflation exceeds 8%, it usually takes about two years for it to fall below 6%, according to Deutsche Bank.
The MSCI China stock index is down more than 30% this year. That means it has a 0% return since late 2010 and also a 0% return since its inception in 1992, thirty years ago.
The Data
The Consumer Price Index (CPI) for October was below most economists’ expectations. In October, the CPI rose 0.4% from September and 7.7% over 12 months. The 12-month increase is the lowest since January 2022. The 12-month increase peaked at 9.1% in June.
The core CPI (excluding food and energy) increased 0.3% in October after rising 0.6% in both September and August. Over 12 months, the core CPI increased 6.3%. In September the core CPI had increased 6.6% over the past 12 months, which was the highest level since August 1982.
The Producer Price Index (PPI) increase 0.2% in October, the same increase as in September. Over 12 months the PPI has increased 8%, down from 8.4% at the end of September.
The core PPI, which excludes food and energy, was unchanged in October after a 0.2% increase in September. Over 12 months the core PPI increased 6.7%, as of October, down from 7.1% at the end of September.
The Empire State Manufacturing Index was 4.5 in November. That’s a big improvement from negative 9.1 in October.
That’s the first positive month in the index since July. But businesses said they expect conditions to worsen in the next six months.
The Consumer Sentiment Index from the University of Michigan sank to 54.7 at the end of November from 59.9 at the end of October. The measures of both current economic conditions and expectations declined.
Inflationary expectations increased for both the year ahead and the next five years.
New unemployment claims rose by 7,000 to 225,000 in the latest week.
Continuing claims increased to 1.493 million from 1.487 million.
The Markets
The S&P 500 rose 4.32% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.36%. The Russell 2000 increased 4.45%. The All-Country World Index (excluding U.S. stocks) added 5.65%. Emerging market equities advanced 6.36%.
Long-term treasuries gained 5.23% for the week. Investment-grade bonds increased 4.27%. Treasury Inflation-Protected Securities (TIPS) added 1.30%. High-yield bonds rose 2.38%.
The dollar declined 2.88%.
Energy-based commodities fell 0.58%. Broader-based commodities rose 1.15%. Gold advanced 3.85%.
Bob’s News & Updates
My next book will be “Retirement Watch: The Essential Guide to Retiring in the 2020s.” The official publication date is Jan. 3, 2023. You can make a pre-publication order or learn more about the book by clicking here and here.
My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It’s received mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.
The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.
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