War, inflation, bull markets, bad marriages, eating binges, and benders — are all more fun at the beginning than at the end. And none goes on forever.
Yes, Dear Reader. The music is still playing. The dancers are still on the floor. And the barmen at the Federal Reserve are still refilling glasses as fast as they can.
But feet are getting sore…drunks are babbling…and the band is getting tired.
The recovery began in the first quarter of 2009. And the stock market bottomed out in March 2009. We’re now in the longest business expansion…and the longest bull market…ever.
And if the boom ends tomorrow, investors will have no cause for complaint. All they had to do was sit tight in an index fund and they would have more than tripled their money.
The recovery in the economy has added about $7 trillion to GDP, bringing it to nearly $21 trillion. So, it’s been a great party.
We know what the beginning was like. We saw that movie. But how about the end? That’s what’s coming up next…
Beginning of the end
At the beginning of a boom, manufacturing thrives. The furnaces are lit, employees are recalled, and output shoots up.
At the end, the lights go out. Houston Molnar reported from our research department:
‘The Institute for Supply Management (ISM) released December’s U.S. manufacturing data. And it didn’t look promising…
‘Manufacturing is contracting at a rate we haven’t seen since the global financial crisis. The index fell to 47.2% last month – its lowest reading since 2009. December’s reading marked the fifth consecutive month of contraction.’
When a boom begins, companies are lean…fast-growing…and have nice margins. When it ends, they are worn out, barely profitable, and overpriced. MarketWatch brings us up to date on what’s happening today:
‘The percentage of U.S.-listed companies losing money over the past 12 months has risen close to 40% – the highest level since the late 1990s outside of a post-recession period, The Wall Street Journal reported.
‘Shares in the two most valuable loss-making companies have soared in the past three months, with electric vehicle maker Tesla’s stock doubling and technology and financial services company General Electric up 44%.’
At the beginning of a boom, investors are sceptical. They part with their money reluctantly, almost grudgingly…carefully looking for value.
But after a few years and a few drinks, they forget all about value. They buy companies that are in the news. They want the movers and the shakers, and they don’t care how much they cost…so long as they go up.
Take Tesla, for example. It’s a company that wouldn’t last long in a normal stock market. But at the bubble-end of a long, Fed-fuelled boom, it’s a favourite. The more it loses…the more investors want a piece of the action.
The electric auto builder is now worth more than GM and Ford combined. Investors bid up Tesla more than 100% over the last three months, to a market capitalisation of $95 billion.
But Tesla sold only 368,000 vehicles last year. Ford alone sold 2.9 million in the US and another three million in China.
Of course, the bet investors are making is that Tesla will be the Amazon or Google of the electric car world — with such a big lead on the competition that the others won’t be able to catch up.
It’s a bad bet. Google and Amazon both benefit from the network effect. The larger they get, the more of an advantage they have. You are more likely to find what you want on Amazon, so why go elsewhere?
But Tesla is like WeWork, not Amazon. It gets no network effect or first-mover advantage. Because car buyers, like office-space renters, do their homework…and take the best deal they can find. They don’t care when you got in the business; they want the best car.
Tesla will never be a one-stop shop for electric autos. But it is providing a great service to more established automakers.
At huge cost, it is testing the market. The bigger players should have no trouble building electric cars and capturing market share when they see it is worth doing.
They will have more dealers…and more options. And they’ll be able to quickly copy…and surpass…any technological innovations Tesla makes. More importantly, they’ll make money on their cars.
Tesla, we suspect, will turn out to be an artefact of the Bubble Market of ’09–’20. Like the market itself, it depends on regular infusions of fake money. And like the whole stock market, it is financially fragile.
Since Tesla makes no profits, it relies on investors who are willing to keep losing money. That money masochism will come to an abrupt end when the market goes down.
And here’s our old friend, Chris Mayer of Woodlock Family Capital:
‘This is just getting crazier and crazier… How long can this continue?
‘Five stocks – Apple, Microsoft, Alphabet, Amazon and Facebook – make up 18% of the S&P.
‘Interesting to see the top contributors too… Apple was up 86% last year. Microsoft up 55%. Just those two accounted for nearly 15% of the S&P 500’s return last year.’
The big companies move, says Chris, because investors don’t bother with research. They just want to be ‘in the market’ with big-name stocks that go up. And the cheapest, easiest way to do that is to buy an index fund — which buys the most popular stocks, driving their prices up even higher.
Then, even the hard-bitten old value investors have to buy the big names, too — just to keep up with the indexes.
But then…finally…the bartender tightens the tops on the whisky bottles. The band unplugs its speakers. And the partygoers wish they had left earlier.