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David Robertson: The Inherent Trouble With Bubbles

The trouble with bubbles
During the fourth quarter, the economy continued to recover but remained well below pre-pandemic activity levels. Simultaneously, the political environment became even more fraught as challenges to the presidential election confir

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The trouble with bubbles

During the fourth quarter, the economy continued to recover but remained well below pre-pandemic activity levels. Simultaneously, the political environment became even more fraught as challenges to the presidential election confirmed the worst fears of political divisiveness.

Despite these challenges, the fourth quarter continued with a strong performance as the Russell 1000 index was up 11.78% in November alone. The Market Ear captured the frothy sentiment: “Upside remains the panic trade.” The open question for investors is to make of the increasing dissonance between the market and underlying conditions?

A Bubble By Any Other Name

Indeed, trying to make sense of that dissonance was an ongoing challenge throughout the last three quarters of 2020 and into the new year. The coverage of the phenomenon by earlier market reviews entitled “Calibrating the craziness” and “Should I stay or should I go?” and also traced out by the weekly “Observations” newsletter.

More recently, Jeremy Grantham came out with a note, Waiting for the Last Dance, that expresses his assessment of the dissonance between markets and fundamentals:

Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of marketsit is intellectually exciting and terrifying at the same time … “

The critical point here is that the current market environment is like to have an enormous impact on investors. Although it doesn’t matter what you call it, Grantham does refer to it as a bubble.

Criteria 

Fortunately, there are ways to identify and manage through bubbles, albeit on a more qualitative basis than some investors might prefer. Grantham describes:

The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals.

Not surprisingly, there is plenty of evidence of crazy investor behavior. There has been a strong foundation of just “regular crazy” investor behavior. The phenomenon of the massive capital raises at a record pace despite economic travails, and widespread insider selling is the highlight of a previous blog post. New equity issues garnered special attention as the IPO market re-ignited and special purpose acquisition companies (SPACs) became all the rage.

Incidents of “really crazy” behavior were initially sporadic but became increasingly prominent as the year wore on. Many involved the actions of individual investors. A slew of technological developments combined with the discovery of options vastly reduced friction and increased leverage for individuals eager to capitalize on rising stocks.

First, Nasdaq and bitcoin outperformed other indexes, and then in the fourth quarter, bitcoin launched into an even higher trajectory. Story stocks, most-shorted stocks, and stocks preferred by individual investors outperformed. Inflows into stock funds were strong. John Authers reported, “that behavior is indeed moving to the ‘barking mad’ end of the dial.”

Implications

One of the critical implications is that market drivers are primarily behavioral ones, not objective, fact-based ones. The line between behavioral motivations and objectively based views are never obvious, but at times of excess, a subjective narrative applies to every detail.

For example, the purpose of investing in stocks with low valuations is to provide a margin of safety against the downside. As John Authers relates in a recent commentary, however, the effort to protect against downside risk has been completely abandoned in the Russell 2000 index:

“The P/E of the Russell 2000 topped at above 10,000 last month. For the last three weeks, the index hasn’t had a P/E because on aggregate it has had no E; the losses of its constituent companies have more than counterbalanced the profits.”

Even crazier situations have occurred in individual stocks. Tesla was the poster child of bubble behavior in 2020, but several instances of bankrupt stocks were panic bid. Axios reported the stock Signal Advance continued its surge on Monday “as the stock rose by 438%, after previously gaining 1800% during one 24-hour period.” The catalyst was a tweet by Elon Musk regarding the messaging app Signal, not the company Signal Advance. On Tuesday, it was down 74%.

A Really Crazy Run

Suffice it to say, the condition of “really crazy” investor behavior got met in spades. Once this happens, the proposition of being exposed to stocks changes in subtle but important ways.

One marker of the change is when investment commentary shifts from the realm of the “probable” or “expected” to the realm of the “possible.” The question, “What is to stop stock prices worldwide going on a really crazy run?” by the Economist is a great example.

When the standard transforms from the probable to the possible, the risk profile also transforms. While there may be opportunities for trading, the opportunities for long-term investors saving for retirement diminish.

Herein lies the rub of bubbles. Rapidly expanding markets and individual instances of explosive gains can prove alluring to all kinds of investors. Such becomes a very slippery slope for long-term investors. It is all too easy to fall for the prospect of impressive short-term gains without accounting for the implication of considerably lower long-term expected returns.

It is easy for short-term traders to get caught up in bubble excitement as well. When stocks make big moves more often than not, it is tempting to try to get a piece of the action. Such is especially true when other options to increase wealth are hard and fraught with their challenges.

Also, this exposes a common misunderstanding about trading. So much of the thrill is in making short-term gains. Many novice traders don’t realize that making money is the easy part; keeping the money is the hard part. Doing that over an extended period requires diligence, discipline, and risk management. Without those, all of the actions that produced gains in a bull market will also produce losses when things change.

Lessons

But this is the problem with bubbles; it is tough to tell when things change. There are no objective criteria. There usually aren’t warning signs. Everything is situation-specific, so few rules exist to provide guidance. As Grantham explains,

The great bull markets typically turn down when the market conditions are very favorable, just subtly less favorable than they were yesterday. And that is why they get missed.

Further, it is not like the big investment houses will be helpful either. They will be more likely to be egging investors on well after the bubble pops than to provide a suitable warning in advance. Grantham describes:

“So, don’t wait for the Goldmans and Morgan Stanleys to become bearish: it can never happen. For them it is a horribly non-commercial bet. Perhaps it is for anyone. Profitable and risk-reducing for the clients, yes, but commercially impractical for advisors. Their best policy is clear and simple: always be extremely bullish. It is good for business and intellectually undemanding.”

With so many people on one side of the market, there are opportunities for investors and advisors who can afford to take, and stick to, a contrarian position:

“Fortunes are made and lost in a hurry and investment advisors have a rare chance to really justify their existence. But, as usual, there is no free lunch. These opportunities to be useful come loaded with career risk.”

Finally, investors must contend with their own worst tendencies of being too smart by half. Almost everyone who trades in bubble conditions believes they can exit just before others do. Such cannot be the case in aggregate. Worse, because the appropriate time to leave only gets known in hindsight, most traders remain engaged long after the bubble pops.

A Real Humdinger

While bubbles are extreme events that can radically reorder investment outcomes, there are good reasons to believe this time around will be even more disruptive than usual.

For one, technology has significantly enabled bubble-like behavior. Commission-free trading eliminates the cost of trading. Smartphone trading apps and gamification make trading both fun and convenient. Fractional share trading further reduces obstacles. Today there is exceptionally little friction to inhibit reckless trading.

Besides, the social mores around gambling have softened considerably. Whereas gambling used to be taboo and kept out of the limelight, it is now openly embraced and promoted. It is hard to watch a sporting event without seeing ads for DraftKings or some other gambling service. People who strike it rich get lauded more than people who work to earn their money.

Finally, the structure of the market has changed in ways that amplify bubbles. Mike Green of Logica funds recently discussed this issue on a podcast hosted by Grant Williams and Bill Fleckenstein. He argued that because passive funds do not care about stock prices, as long as net money flows remain positive, there is nothing to “stand in the way of insanity.”

What is worse is there is nothing to stand in the way of insanity during the decline. As Green described, “When the scale [of selling] that hits the market is incapable of being absorbed by the market … that’s where chaos occurs”. In other words, there are likely to be instances of massive price disruptions once the selling gets started.

 Conclusion

Bubbles can be hard to navigate because of their insidious ability to prey on human weaknesses. Long-term investors get lured into making short-term wagers. Risk management discipline gets discarded for a shot at spectacular gains. It is all so tempting and looks so easy. Grantham captured this point perfectly:

“And when price rises are very rapid, typically toward the end of a bull market, impatience is followed by anxiety and envy. As I like to say, there is nothing more supremely irritating than watching your neighbors get rich.”

So, the trouble with bubbles is they prove very tempting opportunities to do the wrong thing. Many investors will take their chances and disregard the warning. They will follow overly optimistic projections to the top and will also follow them back down to the bottom. Some will try but fail to resist the temptation. Grantham explains the challenge:

“For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.”

However, some others will be able to draw on their grit, adhere to their long-term plan, and avoid the worst of the pain. As a result, another aspect of bubbles is they represent significant transformations. Namely, “These great bubbles are where fortunes get made and lost.”

The post David Robertson: The Inherent Trouble With Bubbles appeared first on RIA.

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Homes listed for sale in early June sell for $7,700 more

New Zillow research suggests the spring home shopping season may see a second wave this summer if mortgage rates fall
The post Homes listed for sale in…

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  • A Zillow analysis of 2023 home sales finds homes listed in the first two weeks of June sold for 2.3% more. 
  • The best time to list a home for sale is a month later than it was in 2019, likely driven by mortgage rates.
  • The best time to list can be as early as the second half of February in San Francisco, and as late as the first half of July in New York and Philadelphia. 

Spring home sellers looking to maximize their sale price may want to wait it out and list their home for sale in the first half of June. A new Zillow® analysis of 2023 sales found that homes listed in the first two weeks of June sold for 2.3% more, a $7,700 boost on a typical U.S. home.  

The best time to list consistently had been early May in the years leading up to the pandemic. The shift to June suggests mortgage rates are strongly influencing demand on top of the usual seasonality that brings buyers to the market in the spring. This home-shopping season is poised to follow a similar pattern as that in 2023, with the potential for a second wave if the Federal Reserve lowers interest rates midyear or later. 

The 2.3% sale price premium registered last June followed the first spring in more than 15 years with mortgage rates over 6% on a 30-year fixed-rate loan. The high rates put home buyers on the back foot, and as rates continued upward through May, they were still reassessing and less likely to bid boldly. In June, however, rates pulled back a little from 6.79% to 6.67%, which likely presented an opportunity for determined buyers heading into summer. More buyers understood their market position and could afford to transact, boosting competition and sale prices.

The old logic was that sellers could earn a premium by listing in late spring, when search activity hit its peak. Now, with persistently low inventory, mortgage rate fluctuations make their own seasonality. First-time home buyers who are on the edge of qualifying for a home loan may dip in and out of the market, depending on what’s happening with rates. It is almost certain the Federal Reserve will push back any interest-rate cuts to mid-2024 at the earliest. If mortgage rates follow, that could bring another surge of buyers later this year.

Mortgage rates have been impacting affordability and sale prices since they began rising rapidly two years ago. In 2022, sellers nationwide saw the highest sale premium when they listed their home in late March, right before rates barreled past 5% and continued climbing. 

Zillow’s research finds the best time to list can vary widely by metropolitan area. In 2023, it was as early as the second half of February in San Francisco, and as late as the first half of July in New York. Thirty of the top 35 largest metro areas saw for-sale listings command the highest sale prices between May and early July last year. 

Zillow also found a wide range in the sale price premiums associated with homes listed during those peak periods. At the hottest time of the year in San Jose, homes sold for 5.5% more, a $88,000 boost on a typical home. Meanwhile, homes in San Antonio sold for 1.9% more during that same time period.  

 

Metropolitan Area Best Time to List Price Premium Dollar Boost
United States First half of June 2.3% $7,700
New York, NY First half of July 2.4% $15,500
Los Angeles, CA First half of May 4.1% $39,300
Chicago, IL First half of June 2.8% $8,800
Dallas, TX First half of June 2.5% $9,200
Houston, TX Second half of April 2.0% $6,200
Washington, DC Second half of June 2.2% $12,700
Philadelphia, PA First half of July 2.4% $8,200
Miami, FL First half of June 2.3% $12,900
Atlanta, GA Second half of June 2.3% $8,700
Boston, MA Second half of May 3.5% $23,600
Phoenix, AZ First half of June 3.2% $14,700
San Francisco, CA Second half of February 4.2% $50,300
Riverside, CA First half of May 2.7% $15,600
Detroit, MI First half of July 3.3% $7,900
Seattle, WA First half of June 4.3% $31,500
Minneapolis, MN Second half of May 3.7% $13,400
San Diego, CA Second half of April 3.1% $29,600
Tampa, FL Second half of June 2.1% $8,000
Denver, CO Second half of May 2.9% $16,900
Baltimore, MD First half of July 2.2% $8,200
St. Louis, MO First half of June 2.9% $7,000
Orlando, FL First half of June 2.2% $8,700
Charlotte, NC Second half of May 3.0% $11,000
San Antonio, TX First half of June 1.9% $5,400
Portland, OR Second half of April 2.6% $14,300
Sacramento, CA First half of June 3.2% $17,900
Pittsburgh, PA Second half of June 2.3% $4,700
Cincinnati, OH Second half of April 2.7% $7,500
Austin, TX Second half of May 2.8% $12,600
Las Vegas, NV First half of June 3.4% $14,600
Kansas City, MO Second half of May 2.5% $7,300
Columbus, OH Second half of June 3.3% $10,400
Indianapolis, IN First half of July 3.0% $8,100
Cleveland, OH First half of July  3.4% $7,400
San Jose, CA First half of June 5.5% $88,400

 

The post Homes listed for sale in early June sell for $7,700 more appeared first on Zillow Research.

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Survey Shows Declining Concerns Among Americans About COVID-19

Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat"…

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Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat" to the health of the US population - a sharp decline from a high of 67% in July 2020.

(SARMDY/Shutterstock)

What's more, the Pew Research Center survey conducted from Feb. 7 to Feb. 11 showed that just 10% of Americans are concerned that they will  catch the disease and require hospitalization.

"This data represents a low ebb of public concern about the virus that reached its height in the summer and fall of 2020, when as many as two-thirds of Americans viewed COVID-19 as a major threat to public health," reads the report, which was published March 7.

According to the survey, half of the participants understand the significance of researchers and healthcare providers in understanding and treating long COVID - however 27% of participants consider this issue less important, while 22% of Americans are unaware of long COVID.

What's more, while Democrats were far more worried than Republicans in the past, that gap has narrowed significantly.

"In the pandemic’s first year, Democrats were routinely about 40 points more likely than Republicans to view the coronavirus as a major threat to the health of the U.S. population. This gap has waned as overall levels of concern have fallen," reads the report.

More via the Epoch Times;

The survey found that three in ten Democrats under 50 have received an updated COVID-19 vaccine, compared with 66 percent of Democrats ages 65 and older.

Moreover, 66 percent of Democrats ages 65 and older have received the updated COVID-19 vaccine, while only 24 percent of Republicans ages 65 and older have done so.

“This 42-point partisan gap is much wider now than at other points since the start of the outbreak. For instance, in August 2021, 93 percent of older Democrats and 78 percent of older Republicans said they had received all the shots needed to be fully vaccinated (a 15-point gap),” it noted.

COVID-19 No Longer an Emergency

The U.S. Centers for Disease Control and Prevention (CDC) recently issued its updated recommendations for the virus, which no longer require people to stay home for five days after testing positive for COVID-19.

The updated guidance recommends that people who contracted a respiratory virus stay home, and they can resume normal activities when their symptoms improve overall and their fever subsides for 24 hours without medication.

“We still must use the commonsense solutions we know work to protect ourselves and others from serious illness from respiratory viruses, this includes vaccination, treatment, and staying home when we get sick,” CDC director Dr. Mandy Cohen said in a statement.

The CDC said that while the virus remains a threat, it is now less likely to cause severe illness because of widespread immunity and improved tools to prevent and treat the disease.

Importantly, states and countries that have already adjusted recommended isolation times have not seen increased hospitalizations or deaths related to COVID-19,” it stated.

The federal government suspended its free at-home COVID-19 test program on March 8, according to a website set up by the government, following a decrease in COVID-19-related hospitalizations.

According to the CDC, hospitalization rates for COVID-19 and influenza diseases remain “elevated” but are decreasing in some parts of the United States.

Tyler Durden Sun, 03/10/2024 - 22:45

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Rand Paul Teases Senate GOP Leader Run – Musk Says “I Would Support”

Rand Paul Teases Senate GOP Leader Run – Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump…

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Rand Paul Teases Senate GOP Leader Run - Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump into the race to become the next Senate GOP leader, and Elon Musk was quick to support the idea. Republicans must find a successor for periodically malfunctioning Mitch McConnell, who recently announced he'll step down in November, though intending to keep his Senate seat until his term ends in January 2027, when he'd be within weeks of turning 86. 

So far, the announced field consists of two quintessential establishment types: John Cornyn of Texas and John Thune of South Dakota. While John Barrasso's name had been thrown around as one of "The Three Johns" considered top contenders, the Wyoming senator on Tuesday said he'll instead seek the number two slot as party whip. 

Paul used X to tease his potential bid for the position which -- if the GOP takes back the upper chamber in November -- could graduate from Minority Leader to Majority Leader. He started by telling his 5.1 million followers he'd had lots of people asking him about his interest in running...

...then followed up with a poll in which he predictably annihilated Cornyn and Thune, taking a 96% share as of Friday night, with the other two below 2% each. 

Elon Musk was quick to back the idea of Paul as GOP leader, while daring Cornyn and Thune to follow Paul's lead by throwing their names out for consideration by the Twitter-verse X-verse. 

Paul has been a stalwart opponent of security-state mass surveillance, foreign interventionism -- to include shoveling billions of dollars into the proxy war in Ukraine -- and out-of-control spending in general. He demonstrated the latter passion on the Senate floor this week as he ridiculed the latest kick-the-can spending package:   

In February, Paul used Senate rules to force his colleagues into a grueling Super Bowl weekend of votes, as he worked to derail a $95 billion foreign aid bill. "I think we should stay here as long as it takes,” said Paul. “If it takes a week or a month, I’ll force them to stay here to discuss why they think the border of Ukraine is more important than the US border.”

Don't expect a Majority Leader Paul to ditch the filibuster -- he's been a hardy user of the legislative delay tactic. In 2013, he spoke for 13 hours to fight the nomination of John Brennan as CIA director. In 2015, he orated for 10-and-a-half-hours to oppose extension of the Patriot Act

Rand Paul amid his 10 1/2 hour filibuster in 2015

Among the general public, Paul is probably best known as Capitol Hill's chief tormentor of Dr. Anthony Fauci, who was director of the National Institute of Allergy and Infectious Disease during the Covid-19 pandemic. Paul says the evidence indicates the virus emerged from China's Wuhan Institute of Virology. He's accused Fauci and other members of the US government public health apparatus of evading questions about their funding of the Chinese lab's "gain of function" research, which takes natural viruses and morphs them into something more dangerous. Paul has pointedly said that Fauci committed perjury in congressional hearings and that he belongs in jail "without question."   

Musk is neither the only nor the first noteworthy figure to back Paul for party leader. Just hours after McConnell announced his upcoming step-down from leadership, independent 2024 presidential candidate Robert F. Kennedy, Jr voiced his support: 

In a testament to the extent to which the establishment recoils at the libertarian-minded Paul, mainstream media outlets -- which have been quick to report on other developments in the majority leader race -- pretended not to notice that Paul had signaled his interest in the job. More than 24 hours after Paul's test-the-waters tweet-fest began, not a single major outlet had brought it to the attention of their audience. 

That may be his strongest endorsement yet. 

Tyler Durden Sun, 03/10/2024 - 20:25

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