Forty years is an awfully long time. Yet that’s how much time has passed since we have had an abomination like this first half of the year. Almost everything went down. Your stocks went down. Your bonds went down. Your house went down. Your crypto went down. The only thing that didn’t go down were the prices you paid for things, especially oil. This disaster didn’t happen in an instant. While even the Federal Reserve admitted it was slow in starting the now legendary tightening, the pivot to even talking tough in November mattered greatly. It’s amusing that so many critics talked about how Fed Chair Jay Powell was so late — too late even. To which I say, really? Has he really been a failure? Things have fallen so far so fast that if he keep tightening another 100 basis points — something I want — he might be done with this battle. And I only want another 100 because I have seen too many series where it looks like the villain is dead, but it was a premature declaration. The wipeout has been pretty substantial and all-encompassing. The latest, the decline in your home’s value, is important because the Fed has had it with home price appreciation. We thought that because of a home shortage this decline couldn’t happen. But home price affordability is an ineluctable concept. You take rates up enough and you make homes too expensive to buy. We got fooled on this one because we spent too much time thinking about new home sales. It was existing home sales that mattered. They are tailing off fast because, as Zillow will show you — don’t look if you can avoid it — your home has gone down in value. And just like you don’t like to sell a stock when it is down, you don’t want to sell a home when it is down. I suspect that the Fed won’t stop until homes have given back all of the 20% gain for the year that ended in March, as it is the most egregious of the costs it can control. Bonds were totally a product of a big rate hikes which caused the curve to go up a lot, but not as much on the long end as you would expect if the Fed were selling bonds as aggressively as we thought. This bond rout most likely continues because rates have to go up more to cool housing but to also stop the formation of business and make people with capital less certain of expanding to hire people. Remember there are two ways to tamp wage demand. You have a bigger pool of labor, which comes from an easier immigration policy. Or you crush job growth. We are going for the latter because the former is not possible in this country. I don’t know if you have noticed but it has gotten a lot harder to get a job, particularly in Silicon Valley. It will only get worse as work-from-home engineers want to work where it is less expensive. But if they do that they are less likely to be able to job hop. I don’t like long-term bonds because they give you about the same yield as the 3-year Treasury. I have been buying the 3-year with excess personal cash but that’s at the behest of my wife. We are partners and she wants 50% cash to offset the portion of my salary that is Comcast (CMCSA) stock. I like the 3-year because if the Fed does have to raise to 3%, I am still not sure the long end will go up that much. But if it does, the 3-year roll-off will allow us to go longer out. You may think it is funny that a stock guy would ever recommend bonds but I did one other time — in 2000. And it is instructive to think about that period. I turned negative March 15 because it was about that time you realized that unless you owned shares in a company that made things or did stuff that sold at a profit, and returned capital while selling at a reasonable price, you pretty much lost everything. Last time around it was the secondaries that got to us. There were too many and not enough money to buy them. This time it was a combination of the losses of the new companies and the Fed. But I think it is important to understand the contrast. Many of us thought that this time would be different from 2000 because, unlike back then, most of the 600 companies that came public this time — either through an initial public offering or a special purpose acquisition company (SPAC) — had a chance to make money. That was wrong. Now there were about 350 companies that came public during the 1998-2000 period and only a handful made it through to the next half decade. Most went through the money quickly and their ideas needed higher speed internet to succeed or a more buoyant or stupid consumer. However, many did get to do secondaries. The combination of the two wiped out a generation of investors who chose to stay in cash for the rest of their lives. This time around we had companies that came public that had actual business plans and real sales, a big edge from 2000. We also had SPACs, which turned out to be, in many ways, worse than 2000 because they are an ongoing train wreck. And we had lots of companies that were meant to mimic the best of the best or work with them: electronic vehicles and parts that went into Tesla-types, companies that helped serve existing internet companies, or high-speed computing centers and fin tech. Let’s lump them all into the categories of unnecessarily public companies that ended up really being cash-ins on fads or styles. In other words not that different from 2000. The SPACs? What can I say? I feel pretty confident that they will be exactly like 2000. They all have a lot of money but they have to put it to work and they have or will do so in companies that aren’t worth what they are paying for. It’s a travesty that in many ways was caused by the authorities allowing anything goes if you went the SPAC route, as opposed to the IPO route; not that IPOs were so much better. As someone who has to do a lightning round five days a week, I can tell you that most of the companies I get are now from these last two years. I have studied a great deal of these companies and, like 2000, they should never have gone public. Many used the public process as branding effort. They are now running out of money quickly without any hope of raising more because the window is shut. Too much money being lost. The tech IPOs were done in the same fashion of 2000. I guess enough time had passed that people had forgotten. I brought TheStreet.com public during this period, so I am the rare person who both lived through it on the issuer and the buy side. We started with a company worth $5 million. The venture capitalists then did a round at $25 million and then at $125 million — even as we were losing money hand over fist and didn’t have all that much revenue growth. I went with the program because we had first-mover advantage. The company came public at about $200 million and immediately went to $1 billion on opening day and then didn’t go one penny above that. It stopped going down when it ran through cash and I started a buyback that stabilized it. We survived because of pride. I didn’t care what it cost even as the toll was way too high in retrospect. But I think I will save that for the next book. So many defended this current era because the companies did seem better. They weren’t. We just got caught up and decided they were because they seemed so much better than their internal combustion or brick-and-mortar rivals. I don’t know how much has to be said about SPACs here other than the concept allowed people to get away with projections that were insanely optimistic. It’s not worth spending too much time on them other than to say that they will have had a hand in wiping out another generation of investors just like in 2000. I say a hand in because when the book is really written about this era it is going to be about the losses in crypto, not bonds or stocks or homes. So many people got involved in crypto so high that they are now experiencing dramatic losses. People got in to crypto for two reasons: rank speculation about something that would go higher and a gigantic interest rate on your holdings. Now the speculators have been ravaged and the high rates are proving to be illusory. People want to pull out their cryptocurrencies and put in in a regular bank but no bank will take it. So they just cash out. But there aren’t enough buyers and the crypto repositories — I hesitate to call them banks — are blowing up. Other than Sam Bankman-Fried, founder of crypto exchange FTX, there don’t seem to be any buyers of these either. (Bankman-Fried signed deals recently to bail out two firms: BlockFi, a quasi-bank, and Voyager Digital, a digital asset brokerage.) In fact, this era is filled with securities that, no matter how low they go, no one wants them. That’s what tells you we are not done with the pain. There are still no buyers AND the Justice Department might not even let them be bought. The crypto-issuers and their doppelganger NFTs (non-fungible tokens) are shameless because with the exception of bitcoin and Ethereum, there is often no other side of the trade. That’s incredible and not talked about enough. Sometimes I think that by the time we get through this all of these excesses will have to go, all of the IPOs, all of the SPACs, all of the cryptos and even all of the crypto banks and their stable coins. If that’s the case — and I think it very well might be — then we really must revert to the 2000 playbook. What happened then was simple, you bought the part of the S & P 500 that made money and had made money for a very long time. The criteria for success back then was to ask: Could it survive a severe recession? It turned out that there was no severe recession. I don’t think there will be a severe recession this time either. Remember the SPACs and the IPOs and even the crypto world generated a huge number of jobs. They are all blowing up now and I think in three months we will see a dramatic decline in employment that will begin with kids coming out of college who can’t find a job. As it is, the workers at the companies that did well in the pandemic are rapidly being laid off. The fear among most business people who could start new entities or expand has just now reached levels we haven’t seen since 2007. Many more people feel the country is more off-track than it has been in years. Maybe like forty years ago. Which brings us to the present. We are starting to wrench all the excesses out of the system. I think it will take a few months and a recession may not even be necessary to have the kind of slowdown I am expecting. During this period a great many companies will need money and many will close. I say that might take place in six months. We have to hope that the Fed doesn’t go overboard and say that companies have to die and stay dead. If the war in Ukraine continues, we will still have oil inflation. But even that will slow down as it is obvious that China and India will take all that Russia has to offer eventually, thus lowering the price as Russia can pump far more if it wants to. The pessimism will only get worse before it gets better. We will presume that the market will be down the next day and the next until we get to minus 6 on the S & P Oscillator and then we will snap back (for more on the Oscillator, read about my favorite market indicator and how we use it). Technology will not stabilize until many companies that are currently valued in the billions are valued in the millions. Then, and only then, will we be able to make money. But it is fair to say if you are not in companies that make things and do stuff at a profit, and sell at a reasonable price while they return capital, you may lose almost everything you have. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Forty years is an awfully long time. Yet that’s how much time has passed since we have had an abomination like this first half of the year.
Almost everything went down. Your stocks went down. Your bonds went down. Your house went down. Your crypto went down.
The only thing that didn’t go down were the prices you paid for things, especially oil.
