Dear Financial Samurais,
You never know when a bull market will end. But with stocks melting up in 2019 and reaching all-time highs again, the chances of seeing a correction are getting closer and closer.
The last day of euphoria during the previous downturn occurred on October 1, 2007 when the stock market simply stopped going up. There were folks warning about a bubble of course, but most people ignored the warnings, including myself. In retrospect, the take-under of Bear Sterns at $10/share by JP Morgan was the clear signal for everyone to get the hell out of the stock market for at least a year.
Bear markets happen due to a aggressive change in sentiment. It’s OK if a small minority of investors start selling everything, but at some point, the dam breaks and there’s no power on Earth that can put the water back. We just don’t know what the trigger will be.
Given I live in SF, I’ve been following the current burning of the Venture Capital community with great fascination. The industry was already under scrutiny due to dismal returns and expensive fees. Now it turns out that not only is the industry an underperformer, it’s also filled with a bunch of homogenous jerks who abuse their power or turn a blind eye to the transgressions of their colleagues.
Of course most people in the industry are good people, it’s just interesting to see how quickly sentiment has soured against VCs. You’ve got a billionaire VC apologizing for his actions before anything else rises to the surface. You’ve got a popular incubator founder apologizing, saying he’s a creep. Rightly or wrongly, at this moment, the only people who want to become a VC or join a company like Uber after all that’s happened are people who care more about money than anything else.
All this makes me wonder: is this the bear market trigger none of us expected?
Let’s say there is a massive pullback in venture capital investing because people are disgusted with their behavior along with their terrible returns. Many younger companies will no longer receive funding so they die, flooding the market with excess labor. The larger private companies will also see less funding at lower valuations. As a result, there will be more layoffs and more disillusionment.
With less M&A, public investors start wondering where the innovation will come from to grow earnings to satisfy sky-high valuations. Then out of the blue, some market darling announces an accounting irregularity that makes everyone panic. Then a class action discrimination lawsuit is filed against the CEO of one of the largest companies on the NYSE because the people previously too afraid to speak up found inspiration by those who did. Suddenly, everybody can’t wait to sell.
A crisis of confidence can occur at any time. It’s good to keep the mind sharp and think of various scenarios when you have real money at stake. Your guess is as good as mine on when the good times will end.
In the meantime, just beware the yield curve is flattening as the Fed hikes the short end while the long end continues to trade down since the beginning of the year. A flattening yield curve is like a game of chicken that tends not to end well.
The Fed is trying to contain inflation at 2% while managing an unemployment figure under 5%. However, the bond market is telling the Fed there’s no need to raise interest rates because inflation isn’t a problem because the economy is weaker than the Fed believes.
I think the Fed is going to continue raising the Fed Funds rate to make us eat some short-term pain so asset prices don’t get outrageously more expensive. A series of small earthquakes are better than one devastating one.
Finally, the reason why so many people are unwilling to speak out against mistreatment has everything to do with money. If you don’t need funding or don’t need a job, you will have infinite courage to fight back. Not having to tolerate any baloney from anybody should be a key motivator for you to achieve financial independence sooner, rather than later.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
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