Martin Pelletier: Current levels of investor euphoria seeking growth and employing speculative strategies ignores looming risks
Published Dec 16, 2024 • Last updated 1 hour ago • 4 minute read
Big tech companies have been able to take this near-zero cost of capital, and the bitcoin, memcoins and fartcoins generated, and grow their earnings at an impressive level, writes Martin Pelletier. Photo by OZAN KOSE/AFP via Getty Images files “Charlie Munger was right about it not being easy. I’m convinced that everything that’s important in investing is counterintuitive, and everything that’s obvious is wrong.” — Howard Marks, co-founder Oaktree Capital Management Inc.
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As this year ends, I am witnessing things that I have only rarely seen in my investment career, going back nearly 25 years, with the current levels of market euphoria reminding me of what I saw in 1999 and 2007.
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This includes Wall Street veteran and well-known bear, David Rosenberg, offering an apology for his stock-market pessimism, BlackRock Inc. writing a piece saying that the world economy has exited the “boom and bust cycle,” and some market strategists calling for the S&P 500 to be as high as 15,000 in the next four years.
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It has reached the point that I’m now seeing pictures of Benjamin Graham’s book The Intelligent Investor being thrown in the garbage on social media, and a cryptocurrency named fartcoin with a market cap at the time of nearly US$800 million.
In response to this, someone recently posted on my X feed an interesting take on why being older and going through a few market cycles can actually work against you during such times: “If my memory serves Gerald Tsai who was a portfolio manager (PM) at Fidelity in the 60s had a comment about needing to hire young PMs in bull markets cause the older vets were too timid to go all in and stay invested throughout. Few individual investors even remember 2008/2009 anymore I find.”
For those targeting today’s higher growth and highly speculative strategies, this is probably a fair comment. However, while everyone is cheerleading the strong returns from bitcoin recently, I still have a very hard time seeing how the average investor or portfolio manager could stomach their clients experiencing three major drawdowns, -78 per cent, -82 per cent and -55 per cent, over the past 12 years. With the last large correction being only three years ago, maybe market participants are even that much younger than I think?
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The same kind of rationale can be applied when looking at the S&P 500. I am now humble enough to admit that, though there are some major differences this go around compared with other bull market runs, it took me a while to catch on. I found that so many portfolio managers of my vintage didn’t understand the power of massive liquidity from the U.S. Federal Reserve post-2008 and then again post-2020. This is understandable, as we had never seen this level of money printing before in our careers, while for newer investors this is all they have ever known.
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Quantitative Easing has clearly transformed the U.S. economy into a global powerhouse. Big tech companies have been able to take this near-zero cost of capital and grow their earnings at such an impressive level.
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A lot of this growth has resulted in the stealing of market share from other developed countries. For example, back in 2006, the U.S. represented less than 45 per cent of the share of G7 GDP, and has since grown it to nearly 60 per cent. Interestingly, as a per cent of the total economy, it’s flat over the same period with China taking it away from Japan and Europe.
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When looking at valuations and how much of this is factored in, the U.S. accounted for 40 to 45 per cent of the global stock market capitalization back in 2006 but has now grown to approximately 65 per cent. So essentially, no change in GDP as a percentage of the global economy but a material change in its market capitalization as a share of the total.
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This begs the question: How much of this is dependent on the U.S. being able to take down China, its biggest competitor, who coincidentally is struggling post-COVID-19 to regain its footing? Many think this will be the case with president-elect Donald Trump implementing tariffs against them.
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I think this does ignore a lot of other risks, though, including a constrained Federal Reserve, which is now worried about re-surging inflation and is limited from implementing more easing, given the monstrous size of the U.S. deficit. Some of this is being reflected in the strong U.S. dollar that I think will continue to rise against other countries who are struggling economically.
From an investment perspective, this old timer chooses to take a different approach, minimizing drawdowns and seeking out asymmetric returns. This just so happens to fit the type of clients we service, focusing on what famous investor Howard Marks calls investment strategies that deliver “regular solid returns rather than erratic highs and lows.” Fortunately, this means not having to rely on the hot air rising from fartcoins, or BlackRock’s view that economies and markets will go up forever.
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Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.
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