The Epic Wall Street Crash Just Around the Corner
I sat down to write this, trying to think of a way into this letter. And the first thing that popped into my head was, “This is the kind of stuff that keeps me up at night.” But I quickly realized that’s exactly what one would expect to read atop a story about the crazy risks Wall Street represents these days. And, more important, I realized…it’s a lie.
Thing is, Wall Street’s nonsensical valuations don’t keep me up at night. Too much tea while binging Netflix at midnight…that keeps me up at night.
As I wrote last summer, I moved largely out of U.S. stocks and the dollar. I kept a bunch of healthcare and gold exposure, and I replaced 75% of my dollars with Swiss francs. And a few months ago, I snapped up at a discount a sizeable investment in a bank that owns a horde of cryptocurrencies and which will stairstep higher with every rise in bitcoin and Ethereum (it’s already up more than 200% in the three months I’ve owned it, and it has a long ride higher from here).
All of that together makes me feel secure in my stock market portfolio. But I worry about other people.
I hear all the excitement in my 24-year-old son’s voice when he talks about what he’s doing in his brokerage account. I applaud him. I am so happy for him. I want him to knock it out the park with every investment he makes. But I also hear what he’s telling me about the research involved, and the fliers his friends are taking on sketchy stocks because Wall Street is a no-lose proposition.
That’s the exact same form of delusion that led to the 2007-2008 housing collapse. Everyone assumed real estate was a one-way bet. I remember it so vividly. I was writing about it at the time through the lens of the stock market for The Wall Street Journal. It was always going to end badly. Pros and amateurs—all blinded to reality and greed. All making brainless decisions because it was “different this time.” Only rarely is it ever different, and those moments of true difference only emerge when something radical is fundamentally changing society (i.e. cryptocurrency).
Back in the early 2000s, there was nothing fundamentally different about the housing market. There was nothing fundamentally different about investing in the stock market. Aside from minor operational tweaks and a few product enhancements, the stock market and the housing market in 2007 were no different than they were in 1987…or 1957, for that matter.
Fundamentals always mattered, regardless of year.
It’s the same today, only worse.
One of my investing heroes is a long-time money manager named Jeremy Grantham (he is a founder of GMO in Boston). He is soberminded, and after all his decades on Wall Street, he has a very big big-picture view of the past, present, and future. Better yet, he’s been quite right on sweeping market trends over the years. In his January letter, he wrote that the current bull market—in place since 2009—”has finally matured into a fully-fledged epic bubble.” Here’s a more complete take:
“Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000…this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake—for the majority of investors today, this could very well be the most important event of your investing lives.”—Jeremy Grantham
Like I said, he’s soberminded. So I have to imagine he chose the words to convey a precise feeling he’s having.
It’s the feeling I had back in the summer, when I made my move. I concede that my timing was early, and that I’ve missed a big run in stocks that occurred over the last several months. But I don’t mind. I was never going to ring the bell at the very top. I am happy to have taken my bite out of the meatiest part of the apple, and then to sit on the sidelines while everyone else scrambles for the last bit of scraps.
Thing is, of course, that the investors who think it’s onwards and upwards from here don’t yet realize they’re the ones battling for scraps. “It’s always darkest before the dawn,” translates into Wall Street speak as, “It’s always easiest before the crash.”
It’s like that proverbial Thanksgiving turkey who spends his life pampered and well-fed…until the day he’s not.
We could very well see a final charge higher on Wall Street. But it will prove to be an investors’ Waterloo, Custer at Little Big Horn, Hitler’s epic blunder in fighting a land war in Russia in winter. When that happens, I will be quite content to own a boatload of drug stocks, some tobacco and marijuana exposure, and a pile of Swiss francs…and a bunch of cryptocurrency, but that’s a different story.
I say all of this only to serve as a flashing, caution light. I know the sweat of earning a dollar, and I don’t want you to lose that dollar just because Wall Street has lost its mind.
I’ll leave the last word to Mr. Grantham: “Good luck.”
By Jeff D. Opdyke