WILL THE “CULT OF THE EQUITY” INVESTOR DIE?
RBS recently published a dramatic and very bearish research note that described equity investors as “the world’s worst cult”. While I thought the note was a bit over the top it did raise some interesting and thought provoking topics. More specifically, they said:
“The big turnover in the US economy will lead to dramatic turns down in valuations we suspect – and may finally destroy the world’s worst cult: the cult of the equity, which has no basis in fact, or history, but yet seems universally accepted.”
The credit crisis is a reflection of our excesses and this is best reflected in the markets. We have become a society that values those who get rich quick over those who create sustainable and productive businesses. This is nowhere more apparent than it is in the financial sector which has become the epicenter of the crisis. Our bloated financial sector steals our best minds and puts them to work doing little of real value while rewarding them excessively. The excess growth of this industry has coincided with Main Street’s obsession with Wall Street. While the buy side reaps the rewards of 2 & 20 or 2% funds fees for what is effectively an index fund (sorry mutual fund managers) the sell side reels the small investor in with the myth of becoming the next Warren Buffett. The result? What RBS would call the worst cult in history – an economy that has become transfixed with making money by effectively doing nothing.
We have spent more than we have and lived well beyond our means. We buy every new Apple product, houses because we believe it is a right and not a privilege, and think of debt as a way to keep up with the way of life that God bestowed upon us. It is not sustainable and this is becoming clear to us all as the economy appears to be in a perpetual stall. The worst part in all of this is that we have tried with all our might to prop up a sector that has failed us all. While Main Street struggles Wall Street is back to their old tricks.
As a nation I sometimes wonder if a depression wouldn’t set us straight. I have often cited the “greatest generation” in this regard. They were not great because they believed they were owed a way of life. They were great because they were raised by a nation of hardened Americans. A generation that fought in a world war, struggled through a depression and was rewarded with another world war. Their children were a product of that environment and a general “toughness”.
Many graybeards have proclaimed that the equity markets likely won’t bottom until we see excessively low valuations. The kinds of valuations that coincide with window jumping and vomiting (usually on ones self). This would likely coincide with a truly breath taking equity decline – a true death of the “equity cult”. In a recent letter John Hussman proclaimed that bear markets generally crush Wall Street to powder:
“quite honestly, it’s difficult to envision a return to long-term saving, productive investment, and thoughtful allocation of capital until – as happens every two or three decades – the speculative elements of Wall Street are crushed to powder.”
Is this time truly different? For the good of the country, let’s hope not….
What RBS would call the worst cult in history – an economy that has become transfixed with making money by effectively doing nothing. TPC
You mean like bankers who create credit in OTHER peoples goods and services and lend it out for interest? Also, due to human progress, the overall stock market should be an excellent store of value, not a plaything of speculators using new money (credit) created from thin air to manipulate prices.
As a nation I sometimes wonder if a depression wouldn’t set us straight. I have often cited the “greatest generation” in this regard. They were not great because they believed they were owed a way of life. They were great because they were raised by a nation of hardened Americans. A generation that fought in a world war, struggled through a depression and was rewarded with another world war. Their children were a product of that environment and a general “toughness”. TPC
That is an extremely expensive and dangerous way to promote character. Will we survive WWIII? And why all this trouble anyway? Isn’t it simply because we have a fundamentally dishonest and unstable money system?
He has told you, O man, what is good;
and what does the LORD require of you
but to do justice,
to love kindness,
And to walk humbly with your God? Micah 6:8
Is it different this time? This is what seems to be different? Emerging economies of the world seem capable and confident, competing effectively in many industrial sectors. Jobs lost in the US seem lost forever. Unprecedented housing debt, or negative equity. The next growth engine has not identified itself. Deflation has arrived, not just a managed threat. And here’s one you can’t put on a chart. People of all ages, that never had time for politics, or the details of the economy, are awake and concerned. That’s different.
Thoughtful post. As a younger person I want nothing more than to see this thesis fulfilled. If it happens, it paves the way for prosperity in the prime of my life. I’m willing to go through some difficult times in the near term if it affords me that opportunity over time. At the same time, my father, as a business owner, is entering his retirement years. I’d hate to see something like this impact his ability to monetize his business. It’s such a complicated paradox, it seems.
A lot of truth, some hyperbole, IMHO. The key connection–stretched long before now, but now completely broken–is that buying a stock is supposedly an investment in a company…a contract because you see value and are willing to effectively lend a corporation money so that it could expand its promise to something larger, and give you a reasonable return on that promise (aka “value” investing). That was never, of course, the complete reality, since there has always been mere speculation. But the astonishing recent increase in liquidity and technology (high frequency trading, proprietary trading, ETFs, web access, VWAP, the Plunge Protection Team, etc) has turned it into a (loaded) casino, with absolutely no brand loyalty from the investor and even less investor loyalty from the corporation or Mr. Market. The stock market of various sorts is around 350 years old. Nothing lasts forever, and maybe we are getting to the point where an alternative model for capitalist investment will form.
Arch Crawford a wall street financial analyst who is also a astrologer and use’s astrology for long term guidance, wrote last year end of July 2010 will be devastating for stocks. In 2002 a prominent astrologer who’s name escapes me right now said that the astrological alignment for the USA is in the most negative pattern since the civil war, this pattern begins 2nd half 2010, this was written in 2002.
Do I know believe in Astrology, not sure, had my Chart interpreted once and it proved amazingly accurate for the future at the time, so I guess I believe more than not.
If you look on some astrological message boards you will see talk of this negative alignment coming.
Sorry I know this is for financials only and I do look at all the indicators to try and get a good idea of were the market is headed, but the Astrological stuff caught my eye in the last year.
Not an endorsement, but here’s an interview with Crawford from Seeking Alpha earlier this year. Note also that Hulbert rated him #1 between 10/01/07 thru 10/31/09. http://seekingalpha.com/instablog/234091-hewitt-heiserman/61457-rare-cardinal-climax-planetary-alignment-this-summer-puts-stocks-at-risk-says-veteran-sky-watcher
I have often cited the “greatest generation” in this regard. They were not great because they believed they were owed a way of life. They were great because they were raised by a nation of hardened Americans. A generation that fought in a world war, struggled through a depression and was rewarded with another world war.
It’s nice to see that historical revisionism is alive and well.
The Greatest Generation were lent money to buy homes with affordable mortgages provided thanks to the FHA and GI Bill, received college educations from the GI Bill, inherited the benefits enormous industrial capacity that could be converted after the war into consumer goods as a result of massive government spending (and indebtedness), and were given nice, shiny new Interstates on which to drive their nice new big cars.
Meanwhile, their military training had taught them how to give and take orders. That rigorous education in management hierarchy served them well in the new corporate order, much of which was operating in facilities constructed with war bonds.
Pretty much the entire package came from government. This wasn’t “toughness”, this was the largest transfer of wealth in the history of the country.
Their children were a product of that environment and a general “toughness”.
Their children were Baby Boomers. It’s tough to deny that this generation jumped with both feet on to the consumption gravy train created by their parents, creating the alleged excesses attacked by the author of this piece.
The very thing that he claims to dislike was spawned by the very generation that he is lionizing. If an analyst can get it so wrong generations after the fact, you have to wonder if his present day analysis could possibly be much better…
Angry MBA, You have no idea what you are talking about. I’m not going to waste my time by rebutting your blather with facts.
OTP
whoa…some truth to that, Angry MBA, but I can well attest those were very hard working folks. My grandparents during the Great Depression refused welfare because they didn’t believe in handouts. My parents paid their mortgage by themselves; paid for our college educations by themselves; never bought anything on credit they couldn’t pay off that month; never defaulted on anything. My father was a small businessman who co-signed for loans for his friend with a telephone call to the bank. His word was his bond. I have little respect for the guy who made money off the term “greatest generation” (Tom Brokaw: a real intellectual mediocrity) and I know that that generation was a product of its environment and that those folks, including my beloved parents, were no better than anyone else. Still, the world they inhabited, which produced some of the worst times possible (the Depression, WWII, the Holocaust) also allowed for the better angels of their nature.
Get the Federal Reserve out of the picture get back on the gold standard. This will restore faith in our nation. The masses have lost faith thanks to Goldman Sachs JP Morgan and the greedy bankers.
I can well attest those were very hard working folks.
I am not knocking the “Greatest Generation.” On the contrary, we are all greatly indebted to them for saving us from fascism and for leaving us with a consumer-based economy that has created unprecedented levels of prosperity to so many millions of people.
What annoys me is when authors such as this one, with their moralizing Mellonism and worship of pain and purging, decide to blatantly rewrite history. These authors invent “facts” out of whole cloth and otherwise stomp on the truth, all in the process of trying to sell their story, instead of taking a balanced approach and looking at what actually happened.
What annoys me even more is when the dupes fall for the rewrite. History is what it is, so it is amazing that there are some among us who willingly lap up the falsehoods. When ideology trumps reality, you end up with these fantasy-world versions of the past that contain a grain of truth but a whole sandbox full of BS.
Well, we all know the dangers of ideology (as you point out, fascism), Angry MBA. But I don’t think TPC was rewriting history. I thought he was pretty much towing the Whiggish line of moderate liberalism (both the 19th and 20th century versions). Seems to me you’re inventing your own straw man to beat. Which would be very cool if we could see it on You Tube
I don’t think TPC was rewriting history
I was under the impression that this came from RBS, not TPC, as TPC has not been suggesting some great cleansing of misery as a solution to our problems.
Looks like it is mostly TPG’s words. And yes, that would be a You-Tube worthy discussion, betwixt TPG and Angry MBA…
It seems TPG gives the greatest credit to the PARENTS of the Greatest Generation, who did indeed suffer through some tumultuous times (WWI, Roaring Twenties, Depression and WWII).
I can only hope that are not repeating that cycle now, and preparing to parent the next “Greatest Generation”. But, like Mark Twain said, ” History doesn’t repeat itself, at best, it sometimes rhymes.”
The cult of the equity investor will certainly NOT die. A lot of the doom and gloomers start to really believe what they’ve dramatized in order to draw some sort of simplistic understanding of a process that is very complex.
Even if there is a massive sell off where the total peak to trough is around 90%, the new generation of moguls will be determined by those willing to venture into the frothy waters and see value where the majority do not. That is always how great fortunes have been made throughout history.
If I were a banker, I would be very interested in the morality and character of the population much as a cattle owner would be concerned about the health of his sheep, the better to shear them. However, this game of looting via credit creation has gotten too dangerous even for the bankers. WWIII will spare few, IMO.
In Japan 6% of folk own stock. In US it was up to 50-60% but that includes millions who have $1200 in an IRA or $850 in a company 401k that they will empty when they transfer to a new job.
Reality is its closer to 30-40% when you take in true investors. You see what 2 decades have done to Japan’s investors. Already many of the boomers cannot afford to lose any more in the “greatest transfer of wealth” on earth to the few elite. Notice who always wins at this crap table? It wasn’t always like this but with crony capitalism and a can’t lose structure for CEOs and their implicit board (Nardelli $200M to walk away from Home Depot, Stanley O’Neil $160M to be “retire” at Morgan Stanley) among countless less obvious things such as taxing profits via huge stock option rewards that happen every quarter yet don’t count in NON GAAP earnings as they are one time.
It’s all become a scam and scams only work when you have new suckers. That should be Wall Street’s worst worry – they have fleeced so many sheep it is tough to find a new generation of suckers. Hard to get blood from stone.
With countless families losing their grip on middle class, when mom & dad need to pay for kids tuition and grandma’s extended care, you can forget about stocks for the masses. It will go back to what it was in the 20s… a rich man’s game.
For certain, our financial community needs to reinvent itself. It will probably take a whole new generation of investors before perceived honor and trust is restored to this profession. If these virtues are truly their vision for the future, they need to start now.
ChukECheese.
Unfortunately you are correct.
That is called dilution. Share holder dilution goes on and on and it’s all legal.
Most people don’t pay attention and buy stocks looking at the company’s potential and future earnings. They should also look at management diluting those gains for there own benefit.
I am sure every one as there own investment criteria’s but one of mine is that I never buy in to a company unless a individual or entity has a very large position. I find that they will almost always have a seat on the board of directors and will tend not to shoot them self in the foot.
The more public a company is the more management gets away with what you talked about.
Unless there is a justification for capital via a new share issue. (Rare)
I always look at the number of shares outstanding in the past years and if it’s moving up I don’t touch. Dilution is the investor’s worst enemy and Wall Street’s best friend.
You are basically correct, but the greatest generation was too busy working to impart their wisdom and ethics to their children. They left it to the public schools, and that was where moral decline began.
While I’m personally excited to have someone of your remarkable expertise on this site, David, I don’t for a nanosecond believe that public education has contributed to moral decline. I know your heartfelt religious beliefs and your homeschooling beliefs from your excellent blog, but it’s a preposterous distortion of history (like that, Angry MBA?) to argue that there was suddenly an overworked generation of parents and/or suddenly public education, or that public education was suddenly teaching the “wrong” thing. I’m more than happy to discuss/debate this with you offline. BTW, best of luck with your site and work.
Governments, pushed to the edge, will inflate the problem away through “money illusion” (ref: Animal Spirits, R Shiller). Populations and journalists will see flat to growing nominal prices, GDP growth, everything green, debt reduction, but lose purchasing power. What remains to be seen is how equities will fare under this environment. In the 70s, inflation pushed PE ratios down so my guess is that stocks would tank if that happened. Yet, Buffett said that stocks would do well under inflationary environments – I don’t understand this one besides “cash is sure to depreciate”. Would love to hear others’ opinions on asset allocation under hyper inflation.
“Greatest generation”
A major difference is that 40 years ago credit was a rational financial instrument and not perceived and abused the way is to day.
In just about 40 years credit became a way of life. We have been bombarded by credit companies, bank advertising easy loans and all kinds of credit cards. It’s cool to have a Gold or Platinum card. Children’s have cards, students are sent cards so they borrow even before they start making money. This is a major change in behavior pattern. Credit as become a way of life almost every where and for every thing in America.
Balancing a budget is hold school.
We don’t even talk about balance budget we talk of deficit to GDP.
Irrational numbers are rationalized by politicians and many economists all day long.
In a way the preceding generation had no choice but to be responsible. It was that or starves.
Credit is not money and its whole purpose is to allow the circulation of goods without money. It’s at every level of consumption whether you buy a car or a computer the sales person will suggest a credit plan or a 12 months interest free deal. Open a investment account and it beacome a marginn account.
In 1980 the total value of global financial assets was equal to the global GDP.
In 1993 global financial assets were worth twice global GDP and
In 2006 it was three and a half times for an astonishing total value of all global financial assets publicly traded shares, bonds, and bank deposits) off $167trillions.
We talk of fixing the economy, perhaps it times to rethink the way we use credit.
I don’t know if it has been mentioned by now, but surely that greatest generation contributed to the speculative rise of the late 20s. I think the true myth is that there was a magic time when society was harder, better, wiser, etc. Let’s follow the example of that great generation in establishing the Fed and blowing up the gov’t a la Roosevelt.
In a purple prose worthy of the poetic capitalist:
The foul society of this day is no worse than those of old, it only stinks more for being contemporary.
Respect due to our elders, but they’re just like us, only we’re growing up in an age of free and easy criticism of the gov’t. Roosevelt didn’t have to deal with blogger’s opinions.
“I think the true myth is that there was a magic time when society was harder, better, wiser, etc”
This is so true I want to cry.
Every generation since the early Sumerians told their kids they don’t know how good they have it. The intergenerational improvements in prosperity have become amplified with the increases in real incomes in the US over the last 200 years. Real GDP per capita in the USA increases at about 1.8% annually with very little deviation. So on average someone 60 years your senior (Grandpa), had about 1/3 as much shit as you do. So they are right, we are spoiled. But most likely we will tell people 60 younger than us, how rough we had it. So nothing much changes. Just humans make more shit. And they were just as guilty of being spoiled relative to those 60 years before them, and so on and so on….
http://blogs.cgdev.org/globaldevelopment/2008/09/crisis-not-if-we-take-a-long-v.php
Hey David, thanks for the Arc Crawford link
Yes…this article would make things easy, huh? We like easy. Ride it down, endure, then get rich. Wow! If only it were that simple.
jr
Nina Schizza
Your are corect and if any thing they where much more naïve naive about Government and the Fed. Imagine confiscating gold from the public to day. It would not be so easy would it?
I generally agree with your philosophical comments, but I disagree a bit with the statement that bankers produce nothing of real value. I’m not a banker and I generally hold them in low regard. That said, conceptually, their role is to facilitate the flow of capital and resources from those that have them to those that can put them to their highest and best use. In my opinion, that theoretical job description is a critical role thas absolutely needs to be fulfilled for any growth, production, or innovation to take place. We can argue about whether or not there are too many bankers, charge too much, or have put their own short term interests ahead of the longer term objectives (yes, yes, and yes),but their role, in the purest sense, is on the critical path to value creation.