Excess & Eccentricity
By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group
Typically, this time of year, the musings is focused on a Christmas or Holiday theme. Instead of our usual movie or song relating to both the holidays and the markets, I'm going to weave a tangled web of characters into this posting's theme of excess and eccentricity as markets continue to post all-time-highs. Typically, this time of year, the musings is focused on a Christmas or Holiday theme. Instead of our usual movie or song relating to both the holidays and the markets, I'm going to weave a tangled web of characters into this posting's theme of excess and eccentricity as markets continue to post all-time-highs.
- An obvious starting place is with Dr. Seuss' "The Grinch." Famous, not for possessions, but for taking the possessions of others.
- His cousin, who came long before him, is Charles Dickens masterful character Ebeneezer Scrooge. Scrooge maintained his possessions by being a miser and failing to see how he could share a portion of his wealth.
- The modern day version of Ebeneezer found his way to the silver screen in 1988's "Scrooged" in the form of Frank Cross. Frank took the character to a whole new level by not only benefiting from the misfortune of others but also by using his wealth to gain more power.
- The progression from Scrooge moves into the excess categories where Randolph & Duke Mortimer are so bored with their wealth that they subjugate poor Lewis to poverty just to see how he will react in 1983's "Trading Places." They also seek to enrich themselves further by stealing key crop information in order to illegally trade orange juice futures.
- The cold and aloof boss in the beloved Christmas movie "Christmas Vacation" is embodied by Frank Shirley, who withheld traditional holiday bonuses with a "one year membership in the jelly of the month club."
- Then there's Drew Latham, an advertising executive who has more money than he knows what to spend it on, so he pays a family to try and recreate his childhood holiday experience in the 2004 movie "Surviving Christmas."
- And finally, the most heinous of our evil examples, is Mr. Hans Gruber of the 1988 hit "Die Hard." As I pointed out two years ago, I don't consider "Die Hard" a true Christmas movie, but since several of my co-workers argued in favor of it, I'm placing the movie in this grouping. The portrayal of Hans Gruber made Alan Rickman's career and cemented this character as one of excess and eccentricity who didn't know when to quit.
Here's what we've seen so far this week..
Excess. Sometimes, investors get caught up in the excess of bull markets. Several weeks ago we previewed a valuation chart of global equities which showed, US equities far above other global regions and countries. Well, the updated, most recent chart is worse. Back in mid-October, US Equities had a forward P/E (price-to-earnings) of 22. That has since inched higher to 22.8. In addition, when we strip out Big Tech stocks from US equities, the previous P/E was 19.6, but is now 20.3. This is evident in the strong appetite investors still have for US equities. Just two months ago US equities saw massive inflows of more than $12 billion in one week. Last week, that number was dwarfed as flows of $20.1 billion were seen going into US equities. The danger in these types of figures is that extremes are easily visible, which is typically when markets correct. If we compare US total equity market cap versus US GDP, the numbers look even more staggering. The ratio of equity market cap to GDP has never been greater for US stocks. When that ratio reaches significant peaks, as it did in 1999, 2007, 2019, and 2021, equity markets corrected soon thereafter. There is no way to predict when we'll see some type of pull back, but as we typically point out, while history may not repeat exactly, it tends to rhyme. How can investors adapt to soaring valuations? First, just because valuations are out of whack, doesn't mean that markets will correct tomorrow. Some excess markets continue on for quite some time. Unfortunately, investors typically don't know when to stop while they're ahead - just like our friends mentioned in the intro. Second, diversification is a strategy that can help get out of the way some of the downside. Third, and lastly, keeping a little cash on hand for when the correction does occur and put that cash to work in lower share prices. While it's very difficult to time markets - and we generally don't recommend doing such - missing the "worst" days can help put a floor on portfolios. If investors own significantly appreciated shares in Big Tech and AI, taking profits now wouldn't be a bad approach.
Eccentricity. The other area that gives us reason for pause is the current state of eccentricity we're seeing in the markets and in our culture. This too is reminiscent of previous excessive bull markets. During the 1990s, Enron was a global leader in energy trading. By 2000, at the height of the Dot.com bubble bursting, it was discovered that there were accounting irregularities at the company. The company went bankrupt in 2001 and became one of the largest accounting fraud cases in U.S. history. While testifying in court, Paula Rieker, a former Enron Executive Secretary, stated, "He (Lay) was using Enron like a damn ATM machine." Former Nasdaq Exchange chairman, Bernard Madoff started his own investment fund and took investments from thousands of investors, even high profile celebrities and actors. His fund was essentially a "ponzi" scheme in which he took money from investors but never really invested it. During an interview after his conviction as to why he did it, he stated, "I had more than enough money to support any of my lifestyle and my family's lifestyle. I don't know why." We're now beginning to see some of the same excesses and eccentricities as we did in 2000 and 2008. Last week, a piece of art (we can debate about whether or not a banana taped to a wall is "art") was purchased by cryptocurrency entrepreneur Justin Sun for the sum of $6.2 million. The "art" titled "Comedian" by Maurizio Cattelan was purchased from a New York fruit stand and taped to the wall. After purchasing the art, Sun decided to use his new investment wisely by taking the banana down from the wall and immediately consuming the piece of fruit. As if that couldn't be topped, the 15-minutes of fame granted to the "Hawk Tuah girl," formally known as Hailey Welch, has apparently culminated in the launch of her own cryptocurrency "HAWK." The coin was launched this week and quickly rose to a market cap of more than $500 million. That wouldn't last long, though...just a mater of hours, in fact, as the value of the coin plunged by more than 97%. Today, the coin is priced at $0.001. There's nothing wrong with wealth and investing. However, working with financial professionals and managing risk is typically the better strategy, as opposed to taking advice from individuals outside of the financial markets.
It was difficult to pick just one scene of the various malcontents this week, but here's one of my favorites...
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