Blain’s Morning Porridge, 18 February 2022 – Introducing the D-Jay Wave; a 35-year cycle of Irrational Exuberance
“You go back, Jack, do it again, wheels turning round and round…”
This morning: I’d like to introduce you to my latest theory on markets: the D-Jay Wave, a 35-year recurring cycle of irrational market exuberance. I have carefully and diligently researched this over a couple of pints.. It’s therefore better underpinned than most SPACs or Disruptive Tech funds. (Glossy pitchdeck not available.)
Good luck to my all friends back home in my village of Hamble-le-rice this morning.
They are being hit by Hurricane Storm Eunice, which is whipping across the South Coast of Blighty. The weathermen are predicting a storm surge and record high tide – which is bad news as my race dinghy is sitting right by the beach in the boat park.. (If anyone spots BatFoux drifting out to sea… I’ll buy the pints if you return it.) She-who-is-Mrs-Blain and our little dog, Dee-Jay (full name: Dinnerjacket Wrigglebottom because he’s black with a white chest, and his bottom wriggles a lot), will have a grandstand view if it’s pushed up the river.
It will apparently be the worst storm, a “spike jet” bomb, since the great 1987 Hurricane the BBC famously said wasn’t going to happen.
Ah… that brings back memories….
That moment of national shock (and very angry letters to the BBC) was immediately followed by the Black Monday Stock Market crash on October 19, 1987. I don’t remember investors jumping off ledges, but I first heard the term ‘Dead Cat Bounce”, and I remember the storm well.. the parks and roads were closed for fallen trees, the trains (unsurprisingly) weren’t running. It was all a bit unreal… adding to the unreality when the stock market crashed 25% the next business day. (Which I remember was bright and sunny!)
1987 was my first real stock crash. At the time I was working as a journalist for Euroweek, part of the Euromoney financial news group. I’d only just joined after a couple of fantastic years learning all about bonds at Morgan Stanley. (I’d always wanted to be a journalist – but a few years on a penurious Fleet Street wage and a very empty wallet persuaded me back into investment banking 2 years later.)
My first experience of market madness had been earlier – the great Perp Crash of 1986.
This occurred when the prices of subordinated callable debt issued by banks suddenly crashed. These notes paid a decent coupon for their first five years when they were callable by the issuer. If, for any reason, they weren’t called then the coupon converted to a floating rate over Libor (the now banned London Inter-bank offered rate). Everyone assumed the bonds would be called, till someone read the small print and figured out there was absolutely no reason why the banks would call a cheap piece of perpetual subordinated debt. The bottom fell out the market in moments. I last traded some of the still outstanding bonds issued by one bank some five-years ago..
Since then…. Market Crashes? Seen it all mate.. Hardly notice anymore.. blasé is my middle name.. Russia? Argentina? Hong Kong? Mexico? Thailand? Dot.coms? 9/11? The GFC? Greece? Taper Tantrums? They were the big ones. The small ones are just as interesting… the companies that proved scams and lies; the Enrons, the Madoffs, the Maxwells, the Guptas, Greensill, We-work, Theranos… so many.. so many more to come..
Markets are carried along on long-term waves of irrational exuberance. That’s the way crowds work. It’s the way we are programmed..
I’m therefore delighted to announced how I’ve uncovered a previously unknown long-term 35-year cycle of market stupidity. I shall name it the D-Jay wave – not because my darling little dog is stupid, but because no matter how many time he’s told not to jump up, his sheer joy of life means he always will. The Wave is long-term because 35-40 years is about how long it takes the market to chew its way through the careers of participants who might remember why it happens.
When we’re done.. all that experience is lost forever.. “like tears in the rain..” (Name the film.) There are only a handful of us around today who remember 1986 and 1987… which is why we are doomed to repeat the past. (They say that about history… but, it’s even more true in markets. A good history book has a decent chance of being interesting. Interesting and financial market history don’t go together… No one ever got rich writing financial history.)
I am very fortunate at work. I am surrounded by very clever and enthusiastic younger fund managers and traders. They do listen, and they are prepared to argue with me. I find myself repeatedly counselling them on exuberance, and the fallacy of the “this time it’s better/different” myth. If you want to be a great investor learn to be sceptical. If you want to be a great trader – learn to read the phycology of the market herd. As I say they individually listen… but… do they collectively learn?
The key lesson of the D-Jay Wave is we will keep making the same mistakes over and over again. It’s entirely predictable. Investors won’t do their due diligence, buyers will get sucked in by extravagant claims and glossy presentations and pitch decks, and savers will let rising prices fill their mind with visions of improbable wealth.
It’s an inevitable tendency of markets – follow the herd, group-think and Do It Again…
Allow me a short interlude as noted behavioural scientists and observers Donald Fagen and Walter Becker sum it up:
Now you swear and kick and beg us that you’re not a gamblin’ man
Then you find you’re back in Vegas with a handle in your hand
Your black cards can make you money so you hide them when you’re able
In the land of milk and honey, you must put them on the table
You go back, Jack, do it again, wheels turnin’ ’round and ’round
You go back, Jack, do it again
Ah… that takes me back…
This particular D-Jay Wave has peaked. This age of exuberance seems to be grinding to some sort of conclusion:
- The SPAC market was hailed a cheap and effective way for great firms to swiftly access markets. Now its exposed as a wash that made founders rich and the punters paid. Its dead and buried – most deals have massively unperformed, and they’ve now become a vehicle to park cash in the expectation you can get it back when they don’t make an acquisition or by turning it down. They are just an arbitrage game now.
- Crypto is increasingly desperate searching for the last few greater fools – which is why they are advertising anywhere and anything. Everything associated with crypto – like Squirrely Squirrel NFTs – are just bunkum trying to catch the last falling penny.
- The retail revolution last year was the froth as the wave peaked – they are now nursing significant losses and are chastened having learnt the market is not the Willy Wonka’s what they believed it was.
- Disruptive tech is played out on the basis folk are relearning what profits, margins and competition mean in terms of future dividends and prospects.
- There is a crescendo of rising corrupt practice approaching as the movers and shakers who’ve been milking the markets try a final monetisation to set off with their bags of loot before it all tumbles.
The market’s focus is back on reality – the D-Jay exuberance Wave is headed towards an inevitable trough.
Yet, all these things will return.. I guarantee it.. I absolutely guarantee it… (although I’ll probably be dead and gone..)
Finally: PJ O’Rourke
I was saddened to read the obituary of PJ O’Rourke, the noted right-wing US political satirist and “Republican Party Reptile” – his own words, not mine. He might have been from the other side of the political spectrum, but he was a great writer, said it like it is, and made some very telling observations about the absurdity of politics. Pretty uniquely among right-wing Americans, O’Rourke was honest to himself about Trump. He said he favoured Hilary on the basis she was “wrong about absolutely everything, but wrong within normal parameters.” If only the current GOP had such self-awareness.
Five things to ruin your weekend:
Garuniad – UK Green Economy has failed to grow since 2014, according to official data
FT – Shari Redstone won the battle for her media empire – now comes the streaming war
Bberg – Morgan Stanley Relationships Across Wall Street Snared in Probe
FT – Sequoia earmarks $500mm for push into cryptocurrency markets
WSJ – Tesla Tells Federal Judge That SEC is Harassing Musk and the Company
Out of time, and have a great weekend..
Strategist – Shard Capital
Oh I remember the Perp Crash of 86…..I was at the AIBD conference in Montreux when all of a sudden some Perp traders left…..never to return !!
We are both old enough and ugly enough to know that it is never entirely “different this time”……except this time there is one major difference……interest rates…..
In 87, 90, 98, 00 and 08 if you decided to sell out of stocks you could at least shelter in 10 Year UST Govt bonds yielding 9.5%, 9%, 6.5%, 5.75% and 4.75% respectively providing small positive real returns…….now if you puke stocks you need to “shelter” in Govvies yielding neg real returns…..which is why BTFD is a “thing” because as a fund manager you can’t be holding assets yielding neg real returns for very long…..
Low nominal/negative real returns are a curse bestowed on us by central banks……only in this grotesque parody of monetary policy can things like Bitcoin, NFT’s and other digital “assets” exist……in a world of positive real rates of return on risk free assets those “things” would wither and die on the digital vine…..
Let’s not conflate or confuse digital advances (including blockchain) which benefit mankind overall with the “suspension of disbelief” fraud currently being perpetrated by purveyors of myriad digital scams……
By all means markets might “crack”…..but the quantum of outstanding debt (deeply deflationary if allowed to implode) means central banks are obliged to intervene at a point….investors know that…..they also know neg real rates force their hands as well…..
Trust me…..I’d love to see markets/house prices etc halve in value and for central banks to grow a pair and allow positive real rates to “be a thing” again……but that ain’t going to happen…
Spot on.. but scary… very scary..
Glad I wasn’t the only one to know this!
TRUE: “Low nominal/negative real returns are a curse bestowed on us by central banks……only in this grotesque parody of monetary policy…”
FALSE: “…but that ain’t going to happen…”
Respectfully, consider that these two statements are incongruent; in that, IF curse THEN choice exists between stay-the-course/curse or break-the-curse/course (TINA=DEATH or TINA=LIFE). It certainly is an existential-paradox, yet no-less-true because of this; and which necessitates simplicity to discern, imho. Just like the apothegm by Rudyard Kipling “OH, East is East, and West is West, and never the twain shall meet, Till Earth and Sky stand presently at God’s great Judgment Seat;” so too there is a similar construct/pattern in the relationship between “The Matter” and “The Spirit” (see: Numerous Letters from Saint Paul for to explore all of the depths one can muster on one-human-breath).
Without prolonging discourse, consider that the correlation between curse-and-blessing may be something akin to a “replacement-cost” in the material-realm. So, depending on which blessing(s) have been lost; that is, converted into curse(s) for any scope of reasoning (usually via complacency or lack of “interest” lol) – it will be incomparably more difficult to regain a status of grace/blessing(s), than the sunk-cost incurred in having lost the said grace/blessing(s). Thus, any Path-To-Redemption (SPIRITUAL+MATERIAL) will invariably involve PAIN. How much pain is a factor of how far from the mean we/markets/construct the matter may have diverted (i.e. DIVERSION=GIRLSJUSTWANNAHAVEFUN – https://ok.ru/video/3430241604013 ); that is, how faraway from the state-of-blessing/grace the situation, individual or collective, is found to be in at the “sobering”-moment of acceptance/repentance/contriteness/etc. By all manner of reckoning from various individuals of various intellects, the collective “WE” will not survive the banquet-of-consequences (see: TOGETHERWESTAND=|=DIVIDEDWEFALL). Sooner or later matters-not, except in that as the said “curse” continous to grow the greater the pain in reverting-to-mean (see: THE-PATENT-D-JAY-WAVE (-:) Hence all manner of pseudo-apocalyptic scenarios also provided with names like the 4TH-TURNING, MAD-MAX, ARMAGEDDON or any other similar thoughts conceived by the mind-of-man. To wit, HELL (i.e. NOT-MILK+NOT-HONEY) is the usual concept from our collective-understanding as the “preferred-method” of the divinities for PAIN-DISTRIBUTION ¯\_(ツ)_/¯ ??
If this should be deemed satis-fact-tory enough by the censor-criterion of our gracious-host; then herein next is a good commentary from today. Please excuse in advance the method in making-use of an article from ZeroHedge contributors (anyones preferred variety of ROY-G-BIV propaganda-aside, lol); however, kindly understand that this iteration of the Ramirez-meme is a pauper and cannot pay for subscription-wall/con-tent )-: – https://coub.com/view/2l2whi
“Logically, we stay where we unhappily are right now, with high inflation and fading growth; or rates stay ultra-low to finance the government boosting physical capacity via industrial policy, subsidies, and forced onshoring of supply chains – so MMT; or you have to raise rates to make it more attractive to invest in physical production and supply chains rather than speculation in financial assets. (The latter being a point made repeatedly by always interesting @ektrit, who combines liquidity and theology.) Yet MMT then means the need for protectionism/decoupling; and raising rates means your exchange rate soars if only you do it –and why should anyone else do it if you are?– so again implies the need for more protectionism/decoupling.
It’s not paranoia – the underlying illogic of how we have built things is out to get you.
The question I personally focus on is how many policymakers grasp this truth, and what they believe are the best solutions available. My suspicions are almost none and almost none. So, perhaps we can squeeze a few more years out of this failed paradigm yet, until someone has the intestinal fortitude to join the dots and offer an alternative model. Which *is* happening in geopolitics, which is also hitting markets.”
AGAIN-INCONGRUENTLY-SAME-AUTHOR-CORRECTLY-EX-PLA-INS=G-REA-TEST-IRON-Y-IN-MMT-ONLY-POSSIBLE4CHINALOL – https://www.zerohedge.com/markets/rabobank-only-question-how-long-until-feds-policy-error-and-how-large-it-will-be
“I can summarize the whole MMT argument here: Yes, it works –which will infuriate many of you– but only if you have spare domestic supply [CHINACHECK=USSAMATE] and/or a trade surplus to firewall your currency [CHINACHECK=USSAMATE] – which will infuriate those advocating it who don’t want to recognize that this makes it a zero-sum geopolitical issue.”
Blade runner. The good one.
I see a lot of TV ads for and get junk phone calls from companies selling auto repair insurance in the US. To me this seems the financialization of the economy has hit become complete. If the only thing left to monetize is automobile repairs and since there is a data base that can be harvested that reveals when new cars go off manufacturers warranty cold calling people and offering them warranty extensions makes sense.
Then I remembered there is one final frontier that corporate America has not been able to take over. Women’s hair salons. This seems to be a natural for a ‘We-Work” type scam. Buy the leases on women’s hair salons and then sublease them back to hairdressers. Its kind of how the industry operates anyway only it has not been spacced and consolidated into an IPO. Mr. Blain if you think this can be done I am not greedy like We-work;s Adam Neuman. Just give me 1% of the shares and you can have all the rest of the profits and glory.
I detect the germ of an idea here…
I joined Morgan Stanley bond department in March 1987. You must have had left by then as I do not remember seeing you. Dommage
The crash of 1987 is to this day one of my busiest day ever although it was more on the Tuesday.
I had a client with a $300 million long call US 10Y. That saved the option trader
Also funnily enough the guy who triggered the perp crash was a good friend of mine, Victor M who was syndicate manager at CSFB and who shorted his own new issue which collapsed the market
You are absolutely right. None of the “traders” in the market have experienced a serious bear market/ market crash Russia? Argentina? Hong Kong? Mexico? Thailand? Dot.coms? 9/11? The GFC? Greece? Taper Tantrums?
The companies that proved scams and lies; the Enrons, the Madoffs, the Maxwells, the Guptas, Greensill, We-work, Theranos Parmalat, Polly Peck etc..
I remember the first time I heard the expression : catching a falling knife” was my first bond crash in early 1990.
Those were the days
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