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Crowded Out

In the interest of full disclosure, I must admit to having a part time investment strategist on staff.   She doesn’t (yet) realize it but it’s my 89-year-old mom, Molly.  We convene every Wednesday over tuna salad & seasonal fruit.   It might seem a bit one-sided as the pay is lousy yet I receive a free lunch, garden walk and her market musings.   And when we[i] really get her riled up, she’ll pepper a few political & religious hot takes.  The Molly Index (TMI) is more of a broad societal appraisal than actual investment picks.  She might cover the price of gold, the Pope and Neil Cavuto’s tie in the same breath.

While I wouldn’t rudely consider mom a contrary indicator, I do believe she takes the mainstream temperature pretty well.  She did ask me about Bitcoin late last year – when I couldn’t provide a coherent explanation, her interest fell accordingly with the price.  Thankfully, she occasionally has divergent views.  She’s directed me to lighten up on energy stocks if oil gets to $90/barrel.   She doesn’t want to profit off high gas prices at others’ expense.  This confuses me.

But it makes me wonder how she or anyone else will react to the next mania or ‘bubble’.  We all like to think we can identify them in advance but history says otherwise.  What about the Dutch Tulip Mania from 1637? In effect, common tulip bulbs were being bid up for more than luxury homes before the market subsequently collapsed.  Or the 1720 South Sea Bubble where even the British government got duped purchasing IOU’s for 100 million pounds[ii] that inevitably became worthless.[iii]  

On a more contemporary basis: early 1980’s Cabbage Patch Kids[iv], the 1998 Asian Financial Crisis, 2000 Dot-Com Crash and the 2008 Real Estate implosion are pretty impactful memories.  Is Bitcoin up next?  All of these events have a few common denominators. 

  • The ‘story’ is a can’t miss. Long Term Capital Management which imploded the Asian currency markets was was run by self-appointed geniuses and perfectly hedged.  In less than 1 year, $4.4 billion of its 4.7 billion capital was lost.

  • There is an inexplicable, parabolic run up in prices. went public at $10 and topped at $72 its first trading day.  It filed bankruptcy within a year.  Bitcoin went up 4-fold the last 6 weeks of 2017 before losing it all back a month later.  

  • Banks eagerly provide funding & liquidity.  The subprime lending playbook: no income no problem. 

  • Gets full coverage from the main stream media and dominates the news cycle. Remember all those seductive Real Estate infomercials and how anyone can flip homes with no money down?

  • The greater fool theory comes into play:  we’ll be able to sell at a higher price.

  • The high price volatility usually ends in tears and heavy losses.  Greed gets the best of us.

Below is Sir Isaac Newton’s unfortunate South Sea adventure.

In this age of social media and 24/7 news, information gets disseminated quickly.  Unfortunately, it can encourage groupthink and ill-informed echo chambers.  It’s human nature to gravitate towards those that think like us and confirm our own beliefs.  We feel safer in numbers.  And if I’m wrong, I have plenty of company.  Why do most analysts have buy ratings on stocks?  Crowds may be comforting to sheep and teenage girls; rarely to good investors. 

I’m not sure what or when the next big bubble (global debt?) is coming.  It’s almost become vogue to predict one – usually means not yet.  Manias, unfortunately, usually give little notice and cleverly disguise themselves.  Fortunately, I am armed with the TMI.  The current readings are cautiously neutral.  That can change any given Wednesday. 

Fiscal Fitness is a publication of Houlihan Asset Management, LLC for the benefit of its clients and friends.     Houlihan Asset Management.  Wealth Counseling/Asset Management. Copyright 2018

[i] Brothers Jim & Pat sponge too.

[ii] About $10 billion in today’s dollars.

[iii] Martin Fridson, Extraordinary Popular Delusion and the Madness of Crowds, (John Wiley & Sons 1996), 69,113.


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