Week #39: Mr. Market, the Drunken Psycho ; "King Dollar”; Whither the Small Cap Effect?;Niall Ferguson on Cold War 2; “Mammas Don't Let Your Babies Grow up to Be Elon Musk”

Today at a Glance:

• One Quote: Mr. Market, the Drunken Psycho

• One Currency: ‘King Dollar” 💵

• One Asset Class: Whither the Small Cap Effect?

• One Interview: Niall Ferguson on Cold War 2⚔️

• One Book: “Mammas Don't Let Your Babies Grow Up to Be Elon Musk”

One Quote

Mr Market’s Moodswings😥

“This imaginary person out there -- Mr. Market -- he's kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he get really enthused, you sell to him and if he gets depressed you buy from him. There's no moral taint attached to that.”

-Warren Buffett

Mr. Market is at it again. Our manic-depressive business partner is now offering stocks at a massive discount compared to just six weeks ago.

Mr. Market is a metaphor for market sentiment- a vastly underappreciated part of investing.

For many years, measuring investor sentiment was simply doing the opposite of what the headlines told you. And I believe that is still a good start.

Today, my favorite “quick and dirty” measure of investor sentiment is CNN’s Fear & Greed Index.

A composite of seven underlying indicators, the Fear & Greed Index provides reliable insight into Mr. Market’s current mood.

You read the Fear & Greed Index much as you would a speedometer. If the indicator rises above 75, it signals “extreme greed.” If it falls below 25, it signals “extreme fear.”

I have been tracking the indicator for about a decade. Over that time, it has fallen below 20, an average of about twice per calendar year.

I have seen it drop to zero on half a dozen occasions, including the bottom of the coronavirus crash in March 2020.

But here’s the most critical thing… In every instance, I can recall, “extreme fear” was a terrific time to buy stocks.

So, where does the Fear & Greed Index stand today?

All seven indicators are in bearish territory, six in “fear” or “extreme fear.” The overall index stands at 26

Investing in the stock market during times of extreme fear is challenging.

Often, it feels just plain wrong.

Here’s what hard-won experience has taught me: The worse an investment feels when you make it, the more likely it is to become profitable.

Combine your knowledge of market history, investment psychology, and the Fear & Greed Index, and you come to one conclusion.

Today’s market is (almost) a screaming “Buy.”

One Currency

King Dollar is Back💲

“The U.S. dollar is a high yielding, high growth, safe haven — an unusual and powerful combination”

-Andrew Ticehurst, Nomura Inc.

The greenback is reaffirming its status as the world's premier safe haven asset.

With Treasuries cratering, investors are flocking to the dollar over traditional safe-haven assets like gold and the yen.

Why?

The stars have aligned so that the U.S. dollar offers a unique blend of high interest rates, growth prospects, and liquidity.

First, the impending U.S. government shutdown spotlights America's fiscal recklessness. Investors expect greater bond issuance in the years ahead. This profligacy pushes investors out of bonds and toward the U.S. dollar.

Second, the Federal Reserve's hawkish stance has kept interest rates high. With money market funds yielding 5% or so, the U.S. dollar is an appealing destination for yield-seeking investors.

Finally, the dollar is a rare combination of high yield, high growth, and safety. Both the yen and the Swiss franc lack growth. Gold provides no yield. The U.S. dollar trumps them all.

The dollar index has already gained over 2% in September as alternatives like the yen, franc, and gold have declined.

King Dollar stands tall as the premier destination for capital seeking shelter from gathering storms.

One Asset Class

Whither the Small Cap Effect?📈

The 2020s have been all about the unrelenting ascent of U.S. mega-cap technology stocks.

This rise has relegated small caps to the back seat. At one point, Apple’s market cap alone exceeded that of the entire Russell 3000.

That relegation flies in the face of well-known small-cap premium: small caps outperform large-cap stocks.

Higher risk.

Higher return.

But the tech giants have upended the prevailing wisdom.

Still, economic history suggests this is all temporary. Market leadership waxes and wanes. The universal factors that gave smaller, innovative firms an edge still apply

Here are three key factors that suggest small caps will regain their edge.

First, smaller companies grow earnings faster. That allows their share prices to outpace their larger counterparts. This persists across decades. Yes, mega-caps are shining now. But historical data firmly supports mean reversion to the long-run small cap premium.

Second, today's market concentration in a handful of tech giants is a historical anomaly. Thousands of small firms drive growth, compete for talent, and foster innovation across industries. This expanding universe of small caps provides the fuel to ignite a rebound.

Finally, the outperformance of mega caps will continue- until it doesn’t. Small caps are trading at 22-year lows relative to large caps. When the trend reverts to the mean, early investors profit. With small caps trading at historically low valuations, it’s a matter of when not if.

Mega-cap tech has ruled the last decade. But markets evolve. Keep an eye on small-cap stocks. When they start to rebound, make your move.

I’m so convinced of the opportunity, I am focusing on small cap stocks in the coming years.

You can join me as I launch my new investing service, Microcap Moonshot Millionaire.

One Interview

Niall Ferguson on Cold War 2💣

"What is really significant about this historical moment is that we are in the first inning of Cold War 2…Whether it's in solar panels or in artificial intelligence, a competition is intensifying between two superpowers, the U.S. and a communist-led superpower. Now, is this starting to sound familiar?

-Niall Ferguson, Hoover Institution, Stanford University

I have degrees in economics, history, law, and finance.

Which of these disciplines has been the most valuable in my investment career?

“History" by a long shot.

That is in sharp contrast to 99% of investors who suffer from the absence of a historical perspective.

That blind spot, in turn, leads to seeing the world as a lot worse than it really is.

Today, it seems we are awash in pessimistic projections.

Between AI, the Cold War with China, climate change, and the hot war in Ukraine - it may seem to historical virgins that the world has never been more unstable.

But “the good old days” never seemed as good when we were living them.

You could have hugely pessimistic conversations in 1923 (50 million deaths from Spanish flu, Prohibition, "Red Scares") or 1973 (Energy Crisis, Stagflation, Cold War) or 2003 (Post 9/11, Iraq War, Afghanistan) as you can in 2023.

Most of today's pundits have long forgotten each of these seemingly insurmountable crises.

Enter Niall Ferguson, who deftly applies the lessons of history to current events.

https://omny.fm/shows/exponentially-with-azeem-azhar/the-dawn-of-a-new-age

Ferguson acknowledges that A.I. signals a paradigm shift in technology.

Yet, he also points out that geopolitical realities trump the rise of ChatGPT.

The U.S. needs a 21st-century version of Cold War alliances to deter China. The world needs safeguards for technologies like AI that could spiral out of control.

New era. New problems.

But in that way, today is no different than the past.

Plus ca change, plus ces’t la meme chose.

One Book

“Mammas Don't Let Your Babies Grow up to Be Elon Musk”🚀

I've just completed listening to Walter Isaacson’s biography of Elon Musk.

A divisive figure, Musk runs Tesla (including Solar City), SpaceX, the Boring Company, Neurolink, and most recently Twitter.

Some view him as this generation's Henry Ford or Thomas Edison.

 Others view him as a charlatan and a mountebank.

With Musk's track record of huge exaggerations and missed deadlines, I’ve always considered him more the latter than the former.

This biography changed my mind.

From his violent upbringing in South Africa to his Herculean efforts across all his companies, Musk is cut from a different cloth than rivals Jeff Bezos at Amazon or Bill Gates at Microsoft.

His work ethic and ambitions are as relentless as his life is unadulterated chaos.

Musk suffers countless psychological demons. He has diagnosed himself as bipolar. He is addicted to Ambien. His personal life is a disaster. He has 11 children from five different women.

Musk is addicted to drama. Driven by demons. H thrives on chaos.

And hell hath no fury when Musk goes into “demon mode”-when his autistic brain lashes out at everything and everyone in his path.

Musk is often right. Sometimes wrong. Frequently just a petty jerk.

I found Musk’s poker strategy is a terrific metaphor for how he does business.

Musk barely knows the rules of poker. To win, he employs the martingale style of money management. Under the martingale system, you will always come out ahead if you have an infinite amount of money to bet.

So when he plays poker, Musk bets huge on every single hand. If he runs out of money, he gets more money. And he keeps going.

And the moment he wins, he gets up from the table and leaves to play another game.

My conclusion?

As Waylon Jennings and Willie Nelson warned listeners: “Mammas Don't Let Your Babies Grow up to Be Cowboys.”

I’d say the same about Elon Musk.