The Bright Side for Investors

“A man with money meets a man with experience,” begins an old Wall Street chestnut, concluding that:

“The man with the experience leaves with the money, while the man with money leaves with experience.”

We hazard that many moneyed men — flush with stock market winnings and faith in the Federal Reserve’s backstopping — have met experienced men recently.

The experienced men are presently walking away with the formerly moneyeds’ money.

Yesterday’s deliriums accelerated the transfers of money and experience, as the Dow Jones plummeted 1,164 points.

The transfers, the zero-sum transfers, continued today.

Another Step Toward a Bear Market

The Dow Jones shed another 237 money-losing, experience-gaining points. The S&P 500 lost an additional 23 points; the Nasdaq 30.

We hazard a great deal more experience will be acquired in the days ahead… and a great deal of money will switch hands.

We believe the stock market will sink much deeper before the Federal Reserve at last halts its present tightening.

We have no doubt it will announce an about-face eventually. But not before a great deal of costly and bountiful transfers.

Furthermore, we are not at all convinced the Federal Reserve can rework its wizardry.

The Financial Memory

Following the dot-com craterings some 20 years past, investors have grown accustomed to the so-called Fed put.

That is, investors have tied themselves up to the belief that the Federal Reserve will sally to their rescue should the market tumble sufficiently hard.

The 20-year timeframe may hold high significance. As we have noted before…

“The financial memory,” argued John Kenneth Galbraith, “should be assumed to last, at a maximum, no more than 20 years.”

Why 20 years?

This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius.

The Fed Has Been Investors’ “Innovative Genius”

Has a generation ever been more impressed with its innovative genius than the current crop?

We allow the possibility. Yet we would demand hard evidence, chapter, line, verse.

This generation of investors blindfolds itself and heaves a dart at the colored cardboard circle on the wall. It strikes dead center. The thrower believes his own supernal financial genius guided it home.

He does not detect the formidable magnet the Federal Reserve has placed at board’s center.

The magnetism largely explains his “innovative genius.”

Mr. Galbraith authored his 20-year theory in 1990, some 32 years ago…

Before the internet spread its net. Before asocial media. Before the Federal Reserve could clear out the memory centers… compress the attention span… and addle the judgment.

We might argue that the financial memory has since shortened — from years to months.

Memories Shorten

Face backward to history. The Great Depression etched deep, horrible grooves into investors’ memories.

Stocks recovered their 1929 highs only in 1954… 25 years later.

But following 1987’s Black Monday, the Federal Reserve was in the business of holding up the stock market — and holding down memories.

Yet the lesson stuck after 2000. Stocks made good their 2000–01 dot-com losses in perhaps six years — and their 2008 losses in four years.

Three Marches ago, the coronavirus blew on in. Stocks endured their most vicious harpooning since 1929.

The financial press was frantic with dismal warnings of Dow 10,000 — or lower. The pangs of painful memories began to bubble, the reverberations of financial hells past.

But Mr. Powell reached for his billy club… set to work… and bludgeoned investors into a gorgeous state of amnesia.

The harder the Federal Reserve clobbered, the more memory it knocked from skulls.


Trillions and trillions of dollars came battening down upon investors’ heads.

The Federal Reserve’s balance sheet ballooned from a pre-crisis $4.1 trillion to a dizzying $9 trillion.

The M2 money supply expanded a furious $5 trillion within the narrow space of 18 months.

The result?

Within months of the greatest economic discombobulation since the Great Depression, the stock market recaptured all its losses.

Within a few additional months it scaled the record heights, the impossible heights — Dow 30,000 — ultimately past Dow 36,000.

From decades to years to months… the financial memory was thus reduced.

New Deliriums, Old Deliriums, Same Deliriums

Eighteen months after the terror, investors trembled not from fear but with greed. Margin debt ran to record heights — nearly $850 billion.

Never before had investors borrowed so much money to purchase so many stocks. In many cases, wildly overvalued stocks.

They had forgotten.

They had forgotten the dot-coms. They had forgotten subprime mortgages. They had forgotten the coronavirus and its many variants.

A new generation of speculators entered the stage. As all others before it, it was taken with its own innovative genius.

This bunch speculated in Bitcoin. It joined Reddit and “short squeezed” Wall Street. It thrilled to initial public offerings… and fixated upon special purpose acquisition companies (SPACs).

That is, old deliriums gave way to new deliriums.

Knocked from its wits by the Federal Reserve, this new breed’s financial memories did not extend even one year.

The Bleak 20-Year Outlook

But the generations differ only in their memory spans and their peculiar dizzyings.

The new generation is at heart the old generation. And the generation prior. And the generation prior to that.

But now they are acquiring experience… as they are hemorrhaging money.

And as we have proposed recently, their recent experience may serve them well for the following 20 years.

That is, the stock market may be in for a 20-year wallow. As we explained recently:

Stock market valuations presently float at historic heights — even with the latest pulling back.

And when stock valuations are excessive… you can expect hard sledding in the coming years. Mr. Lance Roberts of Real Investment Advice, in reminder:

The return has everything [to do] with valuations and whether multiples are expanding or contracting… real rates of return rise when valuations expand from low to high levels. But real rates of return fall sharply when valuations have historically exceeded 23X trailing earnings and revert to their long-term mean…

At 35X CAPE, such suggests that returns over the next 10–20 years could be disappointing.

The Next Reworking of the Financial Memory

Are you prepared for a two-decade stock market malaise?

As we are fond to say, climate is what you can expect — but weather is what you actually get.

Perhaps the following two decades will feature more sun than rain. Yet perhaps not. Perhaps the gloom will hide the sun.

Assume that stocks will become bargains in 20 years.

If Mr. Galbraith is correct that the financial memory endures 20 years, investors will spend the following 20 years fearful of rain.

And when the sun pokes from the clouds in 20 years…

It will take investors another 20 years to stow their umbrellas… and trust the sunshine…

Missing out on the next great bull market.


Brian Maher

Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning