How to Blow $12.2 Billion in No Time Flat

One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.

The stock market, like the President, knows the art of ballyhoo.  Day after day, stocks behave in shocking and unpredictable ways.  They bluster and then recoil with the inconsistent elegance of a President Trump twitter tirade.

Wild multi-hundred-point swings on the Dow Jones Industrial Average (DJIA) have become the norm.  Up 300 points one day.  Down 300 points the next.  Do you hear anything?

All we hear from the stock market is a giant racket.  There’s much noise being made.  But there’s nothing of substance behind it.

Certainly, after a nine year bull market there’s risk of a massive sell off.  That much is abundantly clear.  Perhaps it could be another 50 percent bloodbath like what happened in 2008-09.  But when will the next great panic hit?

Is all this volatility of late coinciding with the actual market top?  At this point, the verdict is still out.  Remember, market tops are unknown until well after they pass.  Market tops are also a process; not a single event.  What to make of it?

Two Short-Term Data Points

Any old halfwit can venture an endless supply of guesses as to why the market is doomed for a massive panic attack.  What follows is a running list:

Rising interest rates.  Diminishing liquidity.  A new Fed Chairman.  Quantitative tightening.  Rate hikes.  Trump trade tariffs and a new trade war.  A new fighting war.  The 115th U.S. Congress.  Kim Kardashian.  Extreme valuations.  A market that is overripe for rot.  An economy that may be weaker than advertised.  Inflation.  Deflation.  And much, Much More!

You name it.  Any one of these prospects sound like a valid reason for an imminent market crash.  Make of them what you will.  Here at the Economic Prism we like to keep things real simple.  Hence, we’ll offer two other short-term data points to be on the lookout for…

The DJIA hit an all-time high on January 26 of 26,616. Then, after an explosive decline, the DJIA hit an interim bottom of 23,360 on February 9.  Since then, the DJIA has bounced around within this range, fluctuating wildly on a day-to-day basis.

What is important to watch for is if the DJIA first breaks out above the January 26 high or if it first drops below the February 9 interim low.  Should the market first drop below the February 9 interim low, it could continue down for another step or two lower.  Moreover, it increases the likelihood that the bull market’s days are numbered.

One Fight Too Many

Over the last nine years those who followed the mantra ‘buy the dip’ were rewarded for their mindless optimism.  However, at some point one of these dips will not be the dip to buy.  Rather, the subsequent bounce will be the bounce to sell.

The stock market has a way of humbling even the most successful investors.  A body of work built up over decades can be rapidly wrecked by a bear market.  Sometimes there’s no coming back.

Boxing champions always seem to hang around for one fight too many.  Time has a way of sneaking up on even the greatest fighters without them knowing it – or being willing to recognize it.  Money and glory often cloud their decisions.

Some champion boxers lose their desire.  Some lose their physical edge.  Some lose both at the precise moment they’re in the ring, functioning as a human punching bag.

Muhammad Ali should have passed on his 1980 fight with Larry Holmes.  He was near 40-years-old.  He’d taken a lot of punches.  He’d lost his edge.

But he fought anyway.  He needed the money.  Boxing writer Richie Giachetti called it “…the worst sports event I ever had to cover.”

Ali should have quit while he was ahead.  Now may be a good time for investors to quit while they’re ahead too.  Otherwise, they could be setting themselves up for something ugly…

Achieving the Impossible

Bill Miller knew he was smarter than the stock market.  He knew this not because he believed it was so.  He knew he was smarter than the stock market because he had the track record – data – to prove it.

As fund manager of the Legg Mason Value Trust fund, Miller outsmarted the stock market for 15 consecutive years.  From 1991 to 2005, Miller beat the stock market every year.  No other fund manager we know of matched this near impossible achievement.

Was it innate intelligence?  Was it luck?  Did he guess the correct coin flip 15 times in a row?

Most likely it was a combination of hard work, shrewd acumen, an attuned gut, and dumb luck.  Indeed, Miller could do no wrong.

On New Year’s Day 2006, Miller should’ve hung it up.  He had nothing to prove.  He should’ve quit while he was ahead, and taken to wood whittling or restoring old cars.

Like an aging fight champ, Miller had lost his edge.  He just didn’t know it yet.  The market had changed.  He hadn’t.  In short, he’d become a disaster waiting to happen.

How to Blow $12.2 Billion in No Time Flat

When the stock market peaked out in mid-2007, in the early days leading up to the 2008-09 crash, Miller knew exactly what to do.  Like now, it was unclear in the fall of 2007 if the moderate decline that had occurred was merely the market coiling for the next spring upward or if it was rolling over for a more advanced decline.

Miller held his licked finger up to the air and felt an amiable warm breeze blowing across the land.  So, like what he’d always done, he seized the moment, and began Martingale betting the market.  What we mean is he was buying the dip with ever increasing bets.  Business Insider, in a December 10, 2008 article titled, The Fall of Bill Miller, offered the gory particulars:

“Mr. Miller was in his element a year ago when troubles in the housing market began infecting financial markets.  Working from his well-worn playbook, he snapped up American International Group Inc., Wachovia Corp., Bear Stearns Cos. and Freddie Mac.  As the shares continued to fall, he argued that investors were overreacting.  He kept buying.

“What he saw as an opportunity turned into the biggest market crash since the Great Depression.  Many Value Trust holdings were more or less wiped out.  After 15 years of placing savvy bets against the herd, Mr. Miller had been trampled by it…”

Between late-2007 and late-2008 the Legg Mason Value Trust fund collapsed nearly 60 percent, wiping out the gains that had been accrued in the funds lengthy market beating win streak.  Fund assets under management collapsed from $16.5 billion to $4.3 billion.

There are many fun and interesting ways to blow $12.2 billion in no time flat.  Some people buy professional sports teams.  Others buy expensive hotels and private tropical islands with outdoor air conditioning.  Some build indoor ski resorts in the desert.  Others start businesses that consume massive amounts of capital producing electric cars.  Some even get mixed up with questionable women with names like Stormy Daniels.

Miller, no doubt, was lacking in creativity.  For Miller did none of these things.  He merely flushed $12.2 billion – which represented the hard work, hopes and dreams of countless fund investors – down the toilet.  What a waste.

“Every decision to buy anything has been wrong,” said Miller following his disastrous performance.

There are dips to buy and dips not to buy.  The stock market dip that occurred between mid-2007 and mid-2008 was a dip not to buy.  Most likely the next stock market dip will be a dip not to buy too.

Sincerely,

MN Gordon
for Economic Prism

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