What is up with the stock market?

The US unemployment rate is 14.7%, the worst since the Depression.  Here in LA County it’s 24%.  We’re not supposed to leave our houses for non-essential purposes or go to the beach.  Every bar is closed, almost every store is closed.

And yet the “stock market” is not really down that much.  Here is a one year chart of the S&P 500, which The Wall Street Journal often uses as a standard benchmark for “the stock market.”

Actually a little higher than it was same time last year.

How can this be?

There are many explanations offered by people better informed than me.  Here is Gunjan Banerji’s take in WSJ, and Joe Weisenthal in Bloomberg.

Both point out:

• the belief in a v-shaped or “Nike swoosh”* recovery
• the Federal Reserve keeping interest rates at close to zero
• the Federal Reserve buying $2.4 trillion in government debt, and indicating it would buy more, making it clear that the government can inject essentially infinite money into the economy, “backstopping” everything.

As an amateur enthusiast on this topic, I’d like to offer some additional explanations.

• The stock market is rigged to go up.  This is just a sort of understood but rarely stated fact.  The stock market is one of the few measures the President cares about.  Every tool at the disposal of the administration and at the supposedly independent Fed is used to keep the stock market up.

• The stock market by definition is big, public companies.  These are the S&P 500 companies.  Big companies are benefitting from the demise of their various small competitors.  Big companies can survive by taking on debt in ways small businesses can’t.  They did a great job getting a chunk of the federal money made available.  Consider if I have Steve’s Burger Stand.  I just don’t have the bureaucratic ability, relationships, time, to get a loan the way Shake Shack did.  If anything, are huge companies are seeing their small scale competitors destroyed?
  • Kind of an addendum to the last one: the federal government gave out the free money via big banks like Wells Fargo, Bank of America, BlackRock which themselves are part of the S&P 500!  Big boys feed first!

• Money has nowhere else to go.  The Fed’s actions reduce the benefits of alternative investments like bonds or just putting your money in the bank.

• Trading has become free! I feel crazy that this never gets mentioned.  Starting with Schwab (I think?) last fall, and then flowing on to competitors, trading stocks became free.  Instead of $8 or $4 to trade stocks, it’s free!  You might think this might’ve just created more volatility, maybe it did, but once the barrier to entry for the retail investor is zero, it’s as easy to flow your extra money into the stock market as it is into the bank.  This is, in my opinion, a dangerous or at least explosive change that hasn’t really been reckoned with.  See what Robin Hood is up to.  It might be as easy to bet your money on Tesla or Amazon as it is to tuck it away in the bank.  It’s frictionless, it can be done on your phone.  That might be dangerous!

• There’s nowhere else to gamble.  Again, I feel crazy that this is never acknowledged as a factor.  Consider that Americans spend something like $100 billion on gambling a year.  At the moment, there’s nowhere to do that!  Casinos are closed.  Sports are stopped.  I do not think it’s unreasonable to imagine there are billions of dollars in gambling money going into the stock market as simply a place to gamble and trade.  See Dave Portnoy of Barstool Sports, who personally injected half a million dollars.

I’m not here to make predictions.  It’s probably a cognitive bias to believe the stock market “deserves” to go down, but that’s what I believe.  Then again, when you think about the stock market, it’s not just rich assholes, it’s like the pensions of firefighters and teachers.

Is it possible that the stock market is not calculating the biggest risk, some kind of massive social upheaval coming from disgust at this system?  The stock market is not built to calculate “what if we ruin society, make things so unequal and so unfair and grotesque that this system no longer functions?”

Maybe that’s “baked in” as they say.

So said Warren Buffett at the annual meeting.  Happened to be reading this speech by Stanley Druckenmiller from 2015 which I found on Valuewalk:

Remember your competition:

This chart is illuminating:

via Plan Maestro on Twitter

It’s good for me to write about the stock market, because I’m guaranteed to get an email saying something like you stupid clown you don’t understand anything.  But the more I study the stock market, the more convinced I am that sometimes the experts, overwhelmed by information, become blind to the obvious.  Consider this case reported by Bloomberg as a representative example.  Do you really need to use a machine-reading program to determine that things are looking a bit grim?

There’s the famous story about Joe Kennedy knowing it was time to sell when the shoeshine boy gave him stock tips (bullshit, he was insider trading).  What if you’re the shoeshine boy?

* I don’t understand the Nike swoosh recovery idea.  Isn’t the long part of the swoosh roughly equal to the short part?  So in a swoosh recovery, wouldn’t we just take a very long time to get back to where we were?  and that’s the optimistic take!

Buffett bits (and Munger)

Did not watch, but read a transcript of this year’s Berkshire Annual Meeting. Even though he tends to repeat himself, especially once you’ve gone over a few of his letters, there’s something comforting and eternal about going over the wisdom again, like reading The Bible.

Is there simpler investment advice?

I would love to talk to Ajit Jain for a few minutes:

I didn’t know about this event:

from the National Archives:

The morning after was an archivist’s nightmare, with ankle-deep water covering records in many areas. Although the basement vault was considered fireproof and watertight, water seeped through a broken wired-glass panel in the door and under the floor, damaging some earlier and later census schedules on the lower tiers. The 1890 census, however, was stacked outside the vault and was, according to one source, “first in the path of the firemen.”(11)

Could be a good clue in a National Treasure style mystery.

Speculation and rumors about the cause of the blaze ran rampant. Some newspapers claimed, and many suspected, it was caused by a cigarette or a lighted match. Employees were keenly questioned about their smoking habits. Others believed the fire started among shavings in the carpenter shop or was the result of spontaneous combustion. At least one woman from Ohio felt certain the fire was part of a conspiracy to defraud her family of their rightful estate by destroying every vestige of evidence proving heirship.(15) Most seemed to agree that the fire could not have been burning long and had made quick and intense headway; shavings and debris in the carpenter shop, wooden shelving, and the paper records would have made for a fierce blaze. After all, a watchman and engineers had been in the basement as late as 4:35 and not detected any smoke.(16) Others, however, believed the fire had been burning for hours, considering its stubbornness. Although, once the firemen were finished, it was difficult to tell if one spot in the files had burned longer than any other, the fire’s point of origin was determined to have been in the northeastern portion of the file room (also known as the storage room) under the stock and mail room.(17) Despite every investigative effort, Chief Census Clerk E. M. Libbey reported, no conclusion as to the cause was reached.

previous coverage of Buffett and Charlie Munger.

Charlie Munger unfortunately couldn’t be in Omaha, but looks like he had interesting things to say as always at the Daily Journal annual meeting in February:

Question 28: You talk frequently about having the moral imperative to be rational. And yet as humans, we’re constantly carrying this evolutionary baggage which gets in the way of us thinking rationally. Are there any tools or behaviors you embrace to facilitate your rational thinking?

Charlie: The answer is, of course. I hardly do anything else. One of my favorite tricks is the inversion process. I’ll give you an example. When I was a meteorologist in World War II. They told me how to draw weather maps and predict the weather. But what I was actually doing is clearing pilots to take flights.

I just reverse the problem. I inverted. I said, “Suppose I wanted to kill a lot of pilots, what would be the easy way to do it?” And I soon concluded that the only easy way to do it, would be to get the planes into icing the planes couldn’t handle. Or to get the pilot to a place where he’d run out of fuel before he could safely land. So I made up my mind that I was going to stay miles away from killing pilots. By either icing or getting him into (inaudible) conditions when they couldn’t land. I think that helped me be a better meteorologist in World War II. I just reversed the problem.

And if somebody hired me to fix India, I would immediately say, “What could I do if I really want to hurt India?” And I’d figure out all the things that could most easily hurt India and then I’d figure out how to avoid them. Now you’d say it’s the same thing, it’s just in reverse. But it works better to frequently invert the problem. If you’re a meteorologist, it really helps if you really know how to avoid something which is the only thing that’s going to kill your pilot. And you can help India best, if you understand what will really hurt India the easiest and worst.

Algebra works the same way. Every great algebraist inverts all the time because the problems are solved easier. Human beings should do the same thing in the ordinary walks of life. Just constantly invert. You don’t think of what you want. You think what you want to avoid. Or when you’re thinking what you want to avoid, you also think about what you want. And you just go back and forth all the time.

How about this:

Question 30: My question is about electric vehicles and BYD. Why are electric vehicles sales at BYD down 50 to 70 percent while Tesla is growing 50 percent? And what’s the future hold for BYD?

Charlie: Well, I’m not sure I’m the world’s greatest expert on the future of electric vehicles, except I think they’re coming generally and somebody’s going to make them. BYD’s vehicle sales went down because the Chinese reduce the incentives they were giving to the buyers of electric cars. And Telsa’s sales went up because Elon has convinced people that he can cure cancer. (laughter)

And then by Question 33 he really gets going.

 Lots of luck if you’re an impulsive person that has to be gratified immediately, you’re probably not going to have a very good life and we can’t fix you. (laughter)

Buffett is like beer, Munger is like whiskey.

(via latticeworkinvesting)