There is no easy way to say it, except to get it out of the way. My stock trade that I divulged as a matter of disclosure at the start of the week was probably the stupidest move I’ve made since starting this blog. I failed to follow my own advice.
That failure cost me a 6% loss in both of our 401Ks. Now, to put that in context, I did take my own advice earlier in the year and got entirely back out of stocks in late January and, thereby, avoided a 30%+ loss that many who remained in the stock market took.
Still, I was down 2% in one 401K and up 2% in the other (each 401K of approximate equal size), so I was flat for the year, as the third is too small to matter. My wife and I need our 401Ks to grow for retirement, which we hope is not far off; and we need to do that to be responsible so that we are not living off our children or grandchildren when we retire.
So, I thought I saw a chance to bet on the continued stupidity of the market and make an easy 6% in about a month, then get back out and call it quits until the market got the stupidity pounded back out of it. That’s all I would call it — a bet.
Turns out betting on stupid to remain stupid is … stupid!
Why on earth did I do this?
From a practical standpoint, it’s like Bill Blain just wrote:
Compare bond yields pre QE – around 5%, and today at 1%. If you ignore everything else… that means a bond returns 20% of what it did 10-years ago. Call that financial asset inflation.
It’s equally true in stocks. Investors have been forced out of bonds into stocks in search of returns. A stock that once cost $1 to yield 10%, now costs $10 and yields 1% – yet it make the same profits each year. You get the drift? Its financial asset inflation.
To get the same return from investments you made 10 years ago, you have to invest 10 times as much.. which is why most of us will never ever be able to retire. Dang!
Feeling the retirement pressure is an argument many people use. While I was roundly told how immoral that is in the comments to the last article, finishing your life as a burden to your own children or grandchildren is immoral if you can prevent it. That doesn’t make my choice less dumb; it just explains the compulsion behind it. (The morality, I’ll address later.)
Unfortunately, some people saw the very smallest part of my last article to be the core of it. The article was not about my stock trade. That was merely disclosure, nothing more (therefore not advisory either!). The article was about how stupid the market is to believe in a V-shaped recovery, and it made clear I definitely don’t believe in that. Writing against that was the whole actual purpose of the article. Nothing in what the article was actually about was wrong; BUT my own trade unfortunately undercut the message by running the other way.
I tried to make the point that, by betting on stupid to remain stupid a little while longer, I was not in any way thinking this market was not going to crash soon. I said I believed the market would go up short-term for two reasons — one of which was foundational to the market’s move; the other of which was the driver:
The foundation was Fed and government support. Without trillions in new QE flowing into the market from the Fed, it would not have the cash it needs to go up from continued stock buybacks that certainly were not being financed by soaring business profits being returned to corporate owners. A good part of the money was financed by owners using their business’s credit for buybacks to enrich themselves. It was financed by the government to some degree as some Robinhood traders used part of their government stimulus checks to buy stocks.
The driver of the market was clear by headlines everywhere: “A V-shaped recovery is coming.” That, I said clearly over and over was a false bet. I’m sad that real theme of the article got overshadowed by my own trade; but truth-be-known, I don’t invest our 401Ks for the sake of making points in my articles stronger. I do what I think is best for the 401K and for our personal retirement future so that I am not utterly dependent on others down the road. And I felt honesty required disclosing that. I knew it was to the detriment of the article to disclose it and maybe to my reputation, as I didn’t think anyone would run right out and say, “Brilliant, David!”
My reasoning was simple: I believed the re-opening would give the market stupidity a sudden burst of oxygen on a very temporary basis that would enflame the stupidity all the more. What happens to a room smoldering with heat when you break open the windows and let oxygen in? It explodes in flames. So, my belief was that re-opening, IN AND OF ITSELF, would be filled with headline news that would feed the V-shaped recovery narrative for a month or two until the grim reality of the dawning Epocalypse began to show through the smoke.
My caveat, which I stated clearly more than once, was that a resurgence of COVID-19 outbreaks would overwhelm any superficial good news from the reopening. So, I stated that was essentially my stop for this trade. I would be vigilant for the first signs of COVID-19 poking its head through the headlines again (as I said I was certain it eventually would); but at the time, the virus was idling along. I did exactly what I said I would do:
I will be looking for the end of the reopening surge as the point to jump back off or the return of the COVID surge.
Because stupid is a pretty safe bet right now. The only caveats to all of this for the next month or two will be if the flow of superficial good news from reopening causes the Fed and government to rapidly back down on the support the market is fully dependent on (unlikely) or if the coronavirus returns this summer with a vengeance due to reopening, instead of waiting until normal flu season (unpredictable but not too unlikely).
I’m betting that the reopening yields enough record good news to feed the delusion until the stimulus-funding starts to dry up and the knock-on effects of the shutdown start to show up and the virus eventually returns or the repo crisis returns in full force. The return of the coronavirus in full force could be extremely soon with so much social narrowing and mixing during the George Floyd protests
The return of the coronavirus scourge came sooner than I expected, but I backed out as I said I would because the whole false narrative false apart as soon as the number of coronavirus cases flares up. (Whether real as reported or not is irrelevant to the impact or response). As you saw, that is exactly what happened as soon as the headlines hit.
I also knew that it would take a day for my 401Ks to complete any sell order I put in. They always do. So, I knew I would take a one-day loss. I didn’t know the one-day loss would be as great as 6%, but I knew it could be fairly large. However, I also believed I would have, at least a week or two of seeing the V-chasers push the Dow to reach its old heights; so, thought I would, at worst, make enough in that last hurrah to offset the loss.
The virus had other plans, and it showed back up and caused me to back out my trade before realizing any gain. (The previous days of the Dow going down were a wash with the Nasdaq going up because my stocks were about equally split; but when all indices plunged yesterday, I took the 6% loss before the sell-order cleared).
Betting on a virus to cooperate a little with your bets is also a desperate move … and stupid.
What I didn’t count on — something I’m saving for another article but will, at least mention here — is J. Powell being so candid in his presser after the Fed’s meetings as to state unequivocally there will be no V-shaped recovery!
While the Fed did not pull out its underlying support, I didn’t expect Powell to pull the plug on the only narrative that was driving the market up. (Though it’s not too surprising he did since causing the opposite of what he appears to want seems to be a talent of his.)
Obviously, hearing this from their Great Guru-in-Chief was enough to crack the delusions of the investors in a market that is largely supported by the Fed and driven by hope in the “V-shaped recovery” Powell seeming sought to kill. That one-two punch explains why the market fell more quickly than I thought it would.
All the commentators I read agree those two things reversed the momentum — the resurgence of COVID-19 in the news and Powells clear statements that there is no V-shaped recovery to hope for. I think investors have also mistaken the shape of the market for the shape of the economic recovery in sort of a self-feedback way that perpetuated the market’s upward momentum as far as it went.
Powell actually promised the market more support. He promised to stop decreasing QE (the path the Fed had been on) and to continue QE at its present level and even increase it if necessary.
But the Fed is dead. Without the recovery narrative, the mere promise of continued support by the Fed is no longer enough to send chills of ecstasy down the market’s spine. It may brace it against falling, but I doubt it can do even that (as we saw yesterday). It remains, however, essential support for a rise built of more than just that support.
So, the most irrational exuberance ever imploded.
I accept fair criticism and will take my licks
Having made the admission that “stupid is as stupid does,” let me also be clear that I did, after writing, the article try to warn others away from following me and taking the same risk. It didn’t really occur to me that others would be likely to follow my risky path, since I don’t ever give actual investment advice even when asked for it. I certainly did not state is as advise, but as disclosure. If I thought they would, I would have warned against it in the article. When I thought later a few might, I wrote the following in the comments:
(I would not advise anyone to follow my lead as betting on continued stupidity for another month or two may be the stupidest thing I ever did….)
That’s pretty clear. Well, it’s probably not the stupidest thing I ever did because I have done other stupid things and plenty of them over the course of sixty years. It was, however, the stupidest investment thing I ever did.
Betting on stupid to stay stupid, however, could be a stupid bet, even if it looks like a few weeks of superficial good news will help it along to its last hurrah.
It’s not an investment I’m recommending to others….
I regret that honest disclosure of my own stupid trade undercut the message of the article for some who got more hung up on the disclosure than what the article was all about. Even though that was less than 5% of what I wrote, I understand why it became a hangup. I hate it when I see people piling into the market and driving it up when it has no sound reason for rising. It’s not so much the drive up I hate as the denial behind it.
In this case, my reason for piling in had nothing to do with the main reason being spoken all over the place. Some saw that as a betrayal because, by joining the pile, I was helping the market go up, even though I was clear I was doing it for different reasons than believing in the market. And supposedly somehow I was hurting the innocent who were all going to get as badly hurt now matter what I did … because they were going in full speed regardless. My article was actually telling those people, “Don’t. It’s stupid to believe in an impossible recovery scenario.”
But, you know what? I don’t make my personal financial decisions based on how they will push market momentum, nor are my finances big enough to have any impact. Still, I had to hold my nose to enter this market as I have the few times I’ve entered while writing this blog. I wish I hadn’t since it undercut the article and profited me nothing anyway.
Was it stupid to take a risk that stupidity would hold out longer?
If I stayed in regardless of the COVID breakout, maybe I would have recovered that loss and still taken a ride up, as there is no way to say the Powell’s jolt and the COVID scare have shaken all denial out of the his insane market. But I decided with others that betting on the continuance of stupidity was not a risk I really wanted.
So you can criticize me for betting on stupidity to hold out awhile longer and say it was the dumbest thing I ever did here, and I can take that, and agree! Getting back out right away may prove equally dumb, too! It’s not fun, but I suppose it is deserved.
As I wrote in the comments,
a few said — perhaps rightly — that I was being equally stupid to bet on the stupidity prevailing….
And when criticized in a fair manner as I was in this comment …
Good luck with the market David, but remember the words of one Vietnam Era Army Sergeant…”Stupid is as stupid does.”
I responded with,
Fairer warning never given. Although this Stupid is doing it for a different reason…. Maybe it will just be stupid is a stupid does, and I did just like stupid, even if for different reasons.
So, I can own that and tell you it tastes really bad, knowing full well my crow would love to hear I’m eating crow on this one.
Now, let me deal with the criticism that I joined the corruption
What I won’t take are the one or two accusations that my trade was corrupt or a sin. So, let me clear that up.
To shoot someone in the face as being as corrupt as all the market manipulators because of a single trade and a single article, after a decade of my doing nothing but writing against the corruption and to do so in an article that states over and over how stupid the market is being, so that the article, itself, speaks against the interest of the trade I’m disclosing, is categorically unjust.
I have corresponded for many years here with readers who tell me they are making trades in the stock market; never have I told them they are corrupt for participating. Never have I even thought that. If you’re not trying to rig the market or trying to get others to buy stocks when they shouldn’t so you can make money selling them yours or brokering theirs, you’re not among the corrupt.
It’s an argument of moral equivalency that has no grounds at all. As much as I am critic of all the market corruption, I’ve never once felt anyone who is in stocks is corrupt just for being in stocks. I think that, in itself, is a stupid argument.
Beyond that defense that would apply to anyone who reads this site and invests in stocks, the only money I have ever placed in the stock market during all these years of writing this blog is our three 401Ks. So, here’s where the moral issue becomes crystal clear for me.
There are ZERO pure and clean investments available in our three 401Ks, and I’ve never added my own money to them. (I don’t think it would be wrong if I did, but I’m being clear it hasn’t been me putting money into stocks.) My employer and my wife’s employer put the money there. I don’t have the option of telling them not to put the money in the 401Ks and to put it elsewhere, nor would they likely break with company policy if I did the ridiculous thing of telling them to just stop giving us the money because we don’t like the options available for how to invest it.
Here’s where the corrupt participation argument falls to shreds:
These 401Ks have only about twenty different funds in each of them, and the funds in each of them fall into three categories — stock funds, bond funds, and “cash” funds.”
At all times, the full 401K must be invested in one of those funds. Sometimes I have them in stock funds, even though I’m sick of a world where stocks are rigged so those times are rare. I long for a world where my money could be in those funds just because I thought business was doing well and I wanted to own a part of it.
So, let’s say I move the money in the 401K into bond funds (as I have done at times). There are only one or two bond funds available in each 401K, and each is a mix of all kinds of bonds. They have government and corporate bonds combined. One fund emphasizes corporate bonds. If I put my money in there, I am supporting the very thing I HATE MOST about the stock market! Most of those corporate bonds are issued to make stockholders rich by piling up corporate debt so they can do stock buybacks! If I make that move, I am helping fuel something I detest.
Suppose, on the other hand, I choose the fund that is mostly government bonds. Well, it still has corporate bonds, so it is STILL not pure and clean of supporting stock buybacks; and are the government bonds morally purer? If I buy into those, am I not supporting the low interest rates that entice the government to continued deficit spending by helping provide the government with a market for its bonds? Am I not supporting the kind of deficit spending that I also DETEST and write against all the time???
Next, let’s say I move all the money to the one other kind of fund available (as I just did yesterday) — the cash funds. Well, guess who owns a lot of the instruments that are held by those funds? BANKS! All of the cash funds are filled with interest-bearing certificates of deposit, bank-owned money-market funds, insurance contracts, and MORTGAGE-BACKED SECURITIES! They even have instruments owned by the banks I hate most — Bank of America and Wells Fargo!
Banks are the most corrupt and greedy entities I devote this blog to writing against! They are the ones, more than any other entity, that brought the entire global collapse upon us! They are the ones, FAR more than any other entity, that benefited from the bailouts during the Great Recession!
So, if I move my money to “cash,” I am entrusting my future to corrupt banks AND I’m giving the corrupt banks more profit.
THERE IS NO PURE GROUND TO STAND ON HERE, PEOPLE!
There is nothing in those 401Ks that is any more pure than anything else! That’s why I do not even try to make my investment decisions on those 401Ks based on the moral high ground. There is none! It’s like trying to by “made in America” when everything has Chinese parts. I try if I can find something that really is, but most of it is just assembled in America, so I don’t put a lot of effort into making that kind of choice.
I just try to do my best to protect our little family from a collection of investments that are ALL riddled with deep flaws because of how our debt-based economy is run and try to make some money on them so that my retirement doesn’t leave me dependent on others later on.
All the while, I do everything I can to keep writing against the corruption and to disclose my own moves honestly. Even our home is an example. We just sold it because the market is high, and I think it’s going to crash. We sold it to others who want to farm it. Do I feel bad if it crashes in value after I sold it to them. No. That’s their choice. I certainly did not say a word to cause them to believe it will go up in value. Nor are they buying it with the hope that it will go up in value as their main reason. They are buying it to farm it. I am selling it because I think we can sell high and buy low later.
Should I feel confined to taking the whole drop in value because I think I know it’s going to happen? Then none of has a moral right to sell high and buy low if we think that is the way things will go. I’m certainly not going to try to persuade them to believe the market will go up, though. And, if they asked what I thought, I’d probably tell them something like “I think the market is in trouble right now, but who knows for sure?”
Because I don’t know for sure. Even though we’ve sold it on a deal that allows its to live here at low rent until next spring, I wonder, “What if I’m wrong and prices go up all year, and we’re in a worse place?” It’s always possible. I’ve made a move based on what I believe will happen, but I don’t know.
If you have a credit card or a bank account, you’re participating in the corrupt system, too. You may not like it. I don’t like it, and I have both. You may say you have no other options. My 401Ks have no other options! I suppose I could try to ask that they just be destroyed or hurt myself by taking all money out of them as fast as it goes in and pay endless penalties and interest for doing that each month and end up more dependent on others when I retire, but I’m not that self-destructive for the sake of claiming some mirage of moral high ground that won’t make a shred of difference to anyone, outside of the harm it does to me and my family.
My moral compass
Since my most ardent critic on this issue chose to attack my faith, I’m going to answer that criticism, too. (Spoiler alert, stop here if you’re not interested.)
This complexity of a world where everything is corrupted to some degree is why Jesus, himself, said “Be in the world but not of the world.” He didn’t just mean “live on the planet.” That would be a useless statement. What he meant was, “You don’t have to extricate yourself from the world’s systems or from society. You can be in its governments, its financial systems, etc., but never be part of its wrongful ways, causing the corruption of the systems. You can even be a tax collector for Rome, but be an honest one. Do your best to add light and kindness where you can. To the best you can, speak against corruption. Jesus was harsh in his very public criticism of corruption and of his critics if they were acting self-righteously.
Jesus, for example, told Jews to pay tax to Rome. We have his statement on that. He did so, knowing Rome used a lot of its tax money to imprison Jews and take other nation’s lands while overfeeding overstuffed senators and caesars who slept with their sisters. That was THEIR moral problem, not the responsibility of those paying taxes.
Jesus was pragmatic. He was asked about whether it was right to pay taxes to Rome because some Jews of his time thought Jews should not pay taxes. They should rebel and not feed the empire. Jesus knew Rome would punish those who did not pay, and he knew fighting Rome was not going to be a winning battle.
He also knew that, for all their wrong, Roman leaders were the government that built roads and aquaducts and useful things that require taxes and that also policed crime. He and his followers counseled people to obey the government because it is there for our good, even when it is corrupt.
Things are worse without it. (Take Seattle right now, which has given up governmental control of part of the city where crime is flourishing under total anarchy.) The ways government officials used the money wrongly were ALL ON THEM once the money was dutifully turned over to them.
I apply that as to the ways banks use my money wrongly also being all on them. Once I turn it over to them, I have no responsibility for where they go with it. That’s a little different than if you deliberately fund an evil endeavor. And I do try to avoid the most obviously corrupt or greedy banks like Bank of America, but I cannot avoid them all.
In telling my local banker I wouldn’t take out a loan with him if he was going to sell it to Bank of America, he agreed not to … and then sold it to Wells Fargo! Oh well. I could have told him he couldn’t sell it to any major bank, and then he would have told me to go shopping elsewhere, and I wouldn’t have a home. So, here I am paying interest to Well’s Fargo and participating in the whole next housing bubble.
Jesus knew the people had no choice but to participate in Rome’s dominance over them, and he didn’t want to see them take punishment because of the abusive system forced on them. Their lack of paying taxes wasn’t going to change Rome. His own critics criticized him for not using his leadership against Rome to raise an insurrection like surely a true messiah would do. They also criticized him for wining and dining with tax collectors and Roman soldiers, of which we have a few accounts.
Jesus was practical in his morality and, yet, willing to die for what he believed. He knew full well he would be killed for his very public criticism of the religious establishment of his time.
You can stand against all the wrongdoing but you still have to live in this world, AND you will never find only pure people to dine with or pure anything to involve yourself with. Jesus still taught in the synagogues run by the religious establishment that he criticized. He still praised the poor woman who gave her last penny to the temple for her generosity.
Just make sure YOU are not causing the corruption, and do your best to speak against it. That, at least, is my way of understanding morality. Fight the actual evil. But to try to hold your money only in things that are not corrupt … good luck with that!
I follow his lead as best I can in a mired world, and sometimes I get mud on me. Maybe sometimes I even make mud without meaning to just by walking in dirt and water. It’s a messy world. I try not to make it worse, and hope in small ways to make it better. And, while I answer the accusations of others, I hope to forgive those who wrongfully speak against me so we can move on as friends because that is far, far better.
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