"The Universe Is Under No Obligation To Make Sense To You..."

Authored by Simon Black via SovereignMan.com,

In 1999 my colleague Tim Price had front row seats to the first Internet bubble.

He tells a great story about being a private client portfolio manager at Merrill Lynch in London at the time, and describes how clients were clamoring to buy technology stocks.

‘Giddy’ doesn’t really do the mania justice. ‘Insane’ comes closer to describing the popular mood.

James Glassman and Kevin Hassett had just published a book, Dow 36,000 (the title speaks for itself), and Merrill Lynch thought it fitting to give a copy to every single person on staff.

The NASDAQ stock index, which was heavily comprised of the technology companies that everyone loved so much, consistently hit fresh all-time highs. It was practically a daily occurrence.

Stock valuations soared; companies that lost grotesque amounts of money were “worth” billions of dollars simply because investors no longer cared about conventional metrics like profit.

Warren Buffett blasted this “irrational exuberance” and wrote that “a bubble market has allowed the creation of bubble companies– entities designed more with an eye to making money off investors rather than for them. . .”

But Buffett was dismissed as a foolish old man.

1999/2000 was also when investment guru Jim Cramer told everyone to buy incredibly expensive tech stocks at all-time highs– like Digital Island, 724 Solutions, and Exodus Communications.

(If you haven’t heard of any of those companies, it’s because they all spectacularly flamed out after losing billions of dollars of their investors’ capital.)

Tim tells a story about a website that existed back then called f**kedcompany.com.

The website showcased ridiculous businesses that were burning through money, and over time it developed into a chat room for venture capitalists, stock investors, and professional asset managers.

Tim describes a post he read once in 1999 from somebody who called himself ‘Stanford MBA’.

It was brief and to the point:

“We have stumbled upon the perfect business model. We will lose money on every sale, and we will make up for up it in volume.”

The market peaked just a few months later. And when it came crashing down, the NASDAQ lost 78% of its value.

As a matter of fact, when adjusted for inflation, the NASDAQ is still 17.6% below its March 2000 peak.

In other words, investors have waited nearly two decades and STILL haven’t recovered their losses from the dot-com bubble.

With the benefit of hindsight, it’s easy to see the obvious warning signs.

The mania in 1999 was palpable. No one cared about profit. Retail investors were piling in at record pace. And the ‘experts’ said it would last forever.

We’re seeing similar indicators today.

Some of the largest, most popular companies in the world have been inflating their stock prices by borrowing money to purchase their own shares. Others, including ExxonMobil, AT&T, Verizon, Netflix, etc. have NEGATIVE free cash flow, meaning that their businesses are burning through cash and increasing debt.

Yet despite this cash burn, stock valuations are currently at their highest levels since the financial crisis, and have only been higher two times in history. (One of them was the Great Depression.)

And retail investors have been piling in at record levels; Charles Schwab recently reported unprecedented amounts of investors are opening new brokerage accounts.

Of course, if stocks are highly overvalued, bonds are even more ridiculous.

Governments that are completely bankrupt have been able to borrow trillions of dollars at yields which are NEGATIVE.

Perhaps most astonishingly, last month the government of Argentina sold $2.75 billion worth of bonds that will not mature until the year 2117– ONE HUNDRED YEARS from now.

(Bear in mind that Argentina has spent 75 out of the last 200 years in some state of default.)

And the experts tell us that the good times will last forever. No other than Janet Yellen stated a few weeks ago that we will not see another financial crisis in our lifetimes.

The list goes on and on. Stocks are at all-time highs. Bonds are at all-time highs. Real estate is at all-time highs.

So is, by the way, consumer debt, government debt, and margin debt. (The latter means that investors are borrowing record amounts of money to buy stocks.)

None of this makes sense.

Astrophysicist Neil DeGrasse Tyson opens his book Astrophysics for People in a Hurry with a great quote: “The universe is under no obligation to make sense to you.

The same can clearly be said about financial markets. They can remain irrational and expensive for years even though it makes absolutely no sense.

And yes, markets could become even MORE irrational and expensive.

But this is hardly a reason to participate in such madness.

There are always other options… including the option to do nothing at all.

Personally I am building up a large cash position right now and waiting patiently for a major correction (or even crash).

This is one thing we do know for certain– nothing moves up or down in a straight line. Asset prices rise and fall in boom/bust cycles.

And when those crashes occur, having cash is critical.

Remember the 2008 crash? Bank lending dried up. It was nearly impossible to borrow money to invest.

And the most incredible opportunities were available exclusively to investors who had plentiful cash and the will to act.

This might mean waiting months or even years for the opportunity to strike.

But when it comes to investing, the long-term risk-adjusted rewards of being patient and conservative almost invariably outweigh the short-term gains of chasing the latest fad.

Do you have a Plan B?

Comments

logicalman knukles Thu, 07/13/2017 - 18:34 Permalink

The universe is likely stranger than humans can imagine, but it's worth the time to ponder.Humans evolved to deal with the parts of the universe close to them and at scales that had some bearing on their continued survival. Our brains aren't much different to early man. We have much better tech, but that just gives us information we struggle to get our heads around.Concepts such as D-branes, 11 dimensional universes and quantum theory can definitely hurt your head - in a good way!Quarks, gluons, Higgs at one end and black holes with the mass of 12 billion suns at the other.Strangely, humans scale is just about in the middle. Maybe that's why we can look both ways.Everything's interesting if you look closely enough! 

In reply to by knukles

francis scott … logicalman Thu, 07/13/2017 - 20:10 Permalink

 

"Humans evolved to deal with the parts of the universe close to them and at scales that had some bearing on their continued survival."  

But there are many parts of the universe close to us that have to do with our continuedsurvival that are not found on the periodic table and involve morality, ethics and a healthydose of humanity toward our fellow earthlings, who wander in the same universe with nobel lauriates, but whom our government murders like they were vermin. THE UNIVERSE IS AWARE OF SUCH BEHAVIOR AND EVENTUALLY PROVIDES OURAGGLOMERATION WITH AN UNREADY, BUT NECESSARY REACTION OR REMEDY.      UNIVERSES MUST DO THAT IF THEY DON'T WANT TO RETURN TO THEIR                       BEFORE-BIG-BANG-BEING.

In reply to by logicalman

logicalman francis scott … Thu, 07/13/2017 - 21:49 Permalink

I would agree that there are the things you suggest, no argument, but when it all comes down to it, we are here largely by chance.Look back at geological history - Mass extinctions cause by events on scales that dwarf humanity - Deccan Traps - Chicxulub meteorite strike are two examples.Every time there's been a huge extinction event another animal group has become dominant.The dinos lasted about 160 million years, humans have been around for about 2 million, in some form reasonably close to us.Problem is, humans have found ways to produce the same levels of damage as nature can and those in control don't care so long as they get MORE.I doubt the univese is aware, in any sense that we can relate to.The main thing to remember, when looking at the universe is thermodynamics.I think that's the 'big one'The whole 'before the big bang' thing is a real thorny problem.If old Mr. Einstein is right on spacetime, then time came into being with the Big Bang so to ask what came before it is not a reasonable question.Apologies for the ramble, but it's a BIG subject. 

In reply to by francis scott …

runnymede Arnold Thu, 07/13/2017 - 19:43 Permalink

A good friend got a near million dollar settlemrnt in late 2000 and against my advice piled it into the Nasdaq. Got out with a fraction of that. The mania is hard to describe for anyone who didn't go through it. I think it was even greater than what it is today.  Ask jeeves was the google of its day, and it basically blew chunks, but was bought out for big $ IIRC.

In reply to by Arnold

Too-Big-to-Bail (not verified) Thu, 07/13/2017 - 17:26 Permalink

The world has become crazy since 2008 and even moreso since Trump was elected. I used to worry, but now I just grab the popcorn and wait for the 'poclips. Just hope I get to kill myself a money changer

Turin Turambar Thu, 07/13/2017 - 17:25 Permalink

Blah, blah, blah...  the runup will continue.  I'm expecting a rip-roaring short squeeze to new all time highs in August based solely on them msm stories about a potential crash.  Get all the sheep on the short side and then fleece them all.  After that, burn it to the ground.

DuneCreature Thu, 07/13/2017 - 17:38 Permalink

The universe makes sense,.....the markets don't, because they are RIGGED, Simon.

Just buy the dip and bail when the big banks bail. ... Assuming they send you the memo.

Live Hard, Or Buy Gold, Armed Guards And Fortifications In Equal Proportions, Die Free

~ DC v7.3

DuneCreature francis scott … Thu, 07/13/2017 - 20:54 Permalink

We could always invest in Pichai Sundararajan's Secret Mars Base.

https://www.youtube.com/watch?v=fJOx9VlP0JE
(Forward to 6:00)

Is that terra incog-neat-o enough for you?

The growth potential is out of this world and I don't think the elite jackal has taken it IPO yet.

Live Hard, I'm Just Going To Grow My Own Food And Shoot All Of The Varmints Trying To Raid My Garden At About 500 Yards Out, Die Free

~ DC v7.3

In reply to by francis scott …

Rebelrebel7 (not verified) Thu, 07/13/2017 - 17:49 Permalink

I have a plan B. Repeal the Federal Reserve Act of 1913 and restore the right to coin and regulate the value of money to Congress as granted in Article 1,Section 8 Clause 5 of the constitution.It is impossible to reduce the national debt without destroying the economy since the money supply is based on government debt.There would be no need for estate, capital gains, or income taxes and there would be no need to reduce spending since the government could simply issue the currency required to finance its operations.We could employ millions with infrastructure projects and build desperately needed nursing homes for the aging babyboomers.

Bernardo Gui Thu, 07/13/2017 - 17:54 Permalink

Sitting on cash in a zero interest rate environment indefinitely while waiting for the next crash does not sound like sound financial planning, unless you have money to burn.

adr Thu, 07/13/2017 - 18:46 Permalink

The world would have been fine if 2008 was allowed to play out. Most real companies wouldn't have gone out of business, but the bullshit ones would have. We wouldn't have seen a company that makes shitty coffee machines build billions in paper value. Amazon surely wouldn't have gone to $1000 a share. Fucking fast food burritos wouldn't be given triple digit P/Es. NEVER WOULD A MONEY LOSING CAR COMPANY THAT SELLS TENS OF THOUSANDS OF CARS BE VALUED AT THE THIRD HIGHEST AUTO COMPANY IN THE WORLD!!! All eggs wouldn't have been put in the stock market. Cryptocurrencies wouldn't have even gone past a value of hundredths of a penny. The world would have made sense and the productive economy would have flourished. Instead, Trillions were printed and given to those who least deserve it. We get $2000 PCLN and a total fuck like Zuckerberg worth tens of billions. The only thing that makes sense to me is the thought of relieving Wall Street bulls of their heads. 

oldguyonBMXbike (not verified) Thu, 07/13/2017 - 19:30 Permalink

The universe is simple. It is men who make things complex so they can confuse and enslave the masses. 

brushhog Thu, 07/13/2017 - 19:53 Permalink

Remember Simon, the universe is under no obligation to make sense to YOU either. We could see asset prices continue to rise for another decade. We've all been very wrong before...remember the hyperinflation that never happened? Collapse of the dollar? Negative interest rates? Cash bans? Gold to 10k?Nobody knows whats going to happen.

consider me gone Thu, 07/13/2017 - 20:09 Permalink

Study quantum physics and you'll come to truly know that you don't know sheet and the Creator can do anything he damn well pleases, if he (just gender convention for conversation sake) pleases. And don't try to tell me all the math I studied was written by a void possessing no mass, energy or logic. Whatever is going on, it is waaaaay over our heads. But I think the best  clue is God is Love. Tough, tough, tough love if you ask me, but love none the less.A great line from The International is "Fiction has to make sense, reality doesn't."