Lynch on Gizzard Squeezers; U.S. stock market No. 2; Twitter and Bank failures
The Narrow Rally; “The Ascent of Money."
Today at a Glance:
· One Quote: Peter Lynch on Gizzard Squeezers
· One Market: USA No. 2
· One Narrow Rally: Popping the Hood
· One Game Changer: Twitter & Banking Failures
· One Documentary: “The Ascent of Money”
Lynch on Gizzards
“Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply…and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”
Peter Lynch’s acerbic dismissal of technical analysis and macro investing rivals any Charlie Munger quote.
Lynch was known for focusing on “10-baggers”-stocks that he believed would rise tenfold.
According to Lynch, “the best place to begin looking for the ten baggers is close to home, down at the shopping mall.”
Lynch was a growth investor. In contrast, Warren Buffett and Charlie Munger earned their investment spurs as value investors.
But at its core, Lynch’s advice echoes that of Buffett and Munger: Focus on companies, not reading tea leaves or outguessing the Fed.
As Munger observed: “Micro-economics is what we do, and macro-economics is what we put up with.”
US Stocks No. 2
US stocks enjoyed a remarkable past decade.
I track 47 foreign markets daily through country ETFs.
The broadest measure of the US- Vanguard Total Stock Market ETF (VTI)-has ranked second over the past five and ten years, respectively.
You can thank the performance of US tech stocks. These companies dominate our daily lives, as we spend five hours a day on iPhones, search on Google, browse Facebook, order on Amazon, and wind down with Netflix.
Who was number one?
iShares MSCI Denmark ETF (EDEN)-a favorite of US political scientists.
But what about the decade ahead?
Even after a rough 2022, US stocks remain highly valued.
The cyclically adjusted price-to-earnings ratio for the S&P 500 index is currently just under 29, higher than the long-term average of around 17.
Perma bears like Jeremy Grantham suggest that US stocks will return negative 7% through 2028.
What is an asset allocator to do?
Some fund managers are looking for opportunities overseas.
But finding alternative markets with long-term potential and the ability to outperform the US takes a lot of work.
The exorbitant privilege – even if waning- of the US dollar as the world’s reserve currency provides US stocks a perennial safety net.
The eurozone is synonymous with weak growth. Moreover, continued tensions in Russia and Ukraine could also impact the region's economic stability.
China's stock markets are recovering. But geopolitical tensions have made it borderline uninvestable.
The bottom line?
Over the short term, there are some promising markets. For example, Grantham is focusing on overseas value stocks. You can do the same by buying Cambria Global Value ETF (GVAL).
Finding an alternative destination that outperforms the US long-term is easier said than done.
One Narrow Market Rally
Popping the Hood
Yes, the S&P 500 is up almost 8% this year.
But that figure hides as much as it reveals.
It turns out that an ever-smaller number of technology companies are driving an ever-larger share of the gains in the US stock market.
About 80% of the S&P 500’s increase has been driven by just seven companies.
Call them “MAGMA+.”
MAGMA consists of five of the current largest and least volatile technology companies listed on the NASDAQ – Microsoft (MSFT), Apple(AAPL), Google (GOOGL), Meta (META), and Amazon (AMZN).
Add in Invidia (NVDA) and Tesla (TSLA) to complete the seven.
This trend is several months old. But the gap has been widening recently.
That puts investors in a bind.
First, some investors are becoming nervous about the sustainability of the rally. But FOMO is tough to resist. And Bulls point out that leading stocks are still off their pre-pandemic highs.
Second, the arrival of artificial intelligence may have already launched a new mania. And unlike the dotcom boom, it may be dominated by today’s tech giants.
Finally, the Federal Reserve may have stopped interest rate hikes. But, at the same time, investors remain concerned about the economic outlook.
As a result, with government bonds yielding close to 5%, large money managers shying away from risky assets.
On Twitter and Bank Runs
Social media has played a big part in the mini-banking crisis of 2023.
Add First Republic to the list of bank failures that started with Silicon Valley Bank earlier this year and spread to Credit Suisse.
Speculation against each bank started on social media.
And that has changed the terms of the game for good.
All banks rely on the confidence of their depositors. As a result, speculative rumors have always been a problem for banks.
But social media has made traditional banking impossible.
Speculation about the safety of any bank could come from anywhere.
Before social media, it was far less easy to spread information.
There were only so many people you could tell in person.
At least newspapers fact-check stories. But no one on Twitter checks for accuracy. Meanwhile, information flies around the world in an instant.
Twitter was a particularly powerful platform for the collapse of SVB and the First Republic.
You can thank the tech community’s presence on Twitter and habit of sharing information online.
These banks are always going to be just one rogue tweet from disaster.
Social media has changed the risks of banking.
The only real option is to have the central bank guarantee deposits 100%.
Don't do this, and the collapse of the next bank is not a question of “if” but “when.”
The Ascent of Money (2008)
All professional investors should study financial history.
They would have a far greater perspective on how the finance world operates.
And it’s a far better use of your time than burying yourself in the arcana of bond math to pass, say, level III of the CFA.
In The Ascent of Money, Stanford historian Niall Ferguson traces financial history from the ancient city of Babylon to the 2008 global financial crisis.
The Ascent of Money covers financial history from the Babylonian futures contracts and Francisco Pizarro's exploitation of the Cerro Rico de Potosí—a mine that flooded Europe with silver.
You also learn the origin of the word “bank”- from the Italian word for “bench” from which the Jewish merchants worked in Renaissance Italy.
Overall, watching this documentary is a far better use of your time than binging on Ted Lasso.
It's a good one. Ferguson writes some very good books. He's actually local to you, based at the Hoover institution at Stanford.
Mr. Vardy, thanks for the documentary recommendation. I just ordered it from eBay.