A compass that reliably points south is just as valuable as one that reliably points north.
I got a market signal.
Watch out.
In my career as a financial advisor I looked for exit points, moments when the animal spirits of investor enthusiasm went crazy. High points are evident only when looking up from below, i.e, when it is too late. Still, in 30 years as an advisor and another decade as a retiree hoping that my investments will see me through to the end, I looked for times of maximum mania, when as many people as possible have thrown caution to the wind and decided to get in because the gettin' is good. That is when gettin' out is smart.
Fortunately for me, I have a south-pointing compass. A longtime friend and former brokerage client is that compass. Let's call him Tom. He is busy with his law practice, so whenever he calls me with excitement over something that sounds to my ear almost like panic, I know that the party is over. He is very closely attuned to what will sell to a jury or judge. His alertness to mood is what makes him such a successful and persuasive attorney. It makes him extraordinarily sensitive to political signals. He knew Trump would win in 2016, and said so publicly, against all conventional wisdom when he was thought out of touch. Quite the opposite. He felt the vibe. He connects. That is what makes him a good political compass and a reverse compass on investment mania. He hears the vibe of sure-thing-can't-miss-money and he fears missing out.
That is the error in being part of the crowd in investments. The crowd is always late. The crowd piles on. When the crowd is frantic with excitement every lemming has gotten into the very last line to march over the cliff.
He called me a week ago urging me to use any connection I might still have at Morgan Stanley to get him an allocation of shares of Elon Musk's SpaceX. Tom wanted to invest the bulk of his brokerage account money. This isn't a risky investment, Tom said. This is different from other investments because Musk has an edge. Trump is afraid of what Musk could do to him and greedy about what Musk can do for him. Trump is perfectly happy to use the power of the federal government to help his friends with subsidies, contracts, regulatory breaks -- whatever a campaign-contributing billionaire needs. If any of SpaceX's three businesses gets in trouble, Trump will bail it out with contracts or subsidies, so there is a guaranteed floor, backed by the full faith and credit of the federal treasury. Tom is counting on Trump's being willing to trade favors for favors, and that is a very good bet.
We have already experienced a proof-of-concept of Musk's power and Trump's willingness to serve. Musk used his influence on Trump, who used his influence on the indexes to make sure that indexes could include SpaceX almost immediately, against previous policy, and notwithstanding a tiny public float that would otherwise block purchase of SpaceX. All the passive investors who own investments that track the S&P500 or the NASDAQ 100 indexes in their index funds will be buying SpaceX in huge quantities even though the public float of available stock is small in comparison to the required purchases of the index-tracking funds. Mandatory price-insensitive buying creates a squeeze that forces prices up. It is shady; it hurts investors other than Musk and other early insiders; it breaks longstanding consumer-protection practice. But it makes Musk a great deal of money. See? Musk can't get hurt. Musk has an edge. You can't lose.
So what is wrong with that story? Maybe nothing. Maybe Musk can't lose. Musk could invest $50 billion in the midterms to get the "right" judges and the "right" down-ballot state legislators and county officials elected. They are the ones who count the votes, certify elections, and review the appeals. Musk would earn it back with federal contracts Trump steers his way.
But I have seen this movie before. I am reflecting my experience about market sentiment. Excitement and optimism and puffery work as long as people see things going up. Tom isn't looking at earnings, debts, cash flow, or any other metric of investment value and that isn't the source of his investment decision. Tom is attuned to the zeitgeist. It is go-go-go time for Elon Musk, and people are looking at opportunity. They are cheering a winner. Tom is betting on Musk. Momentum is a delicate foundation and at some point Hans Christian Anderson's little girl shouts that the emperor has no clothes. Something breaks the momentum of hope and people start counting. At some point price matters, earnings matter, and numbers matter.
Devil-may-care manic enthusiasm is a contrary indicator.
I feel like a sad old killjoy, and maybe I am wrong. But Tom is the most reliable indicator I know of when the party is over. He says Elon Musk can't lose.
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