The Greatest Problem of Investors

“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.

Just so. But Mr. Galbraith authored these words in 1990, some 30 years ago…

Before the internet came of age. Before social media. Before the Federal Reserve could clear the memory centers… compress the attention span… and addle the judgment.

The financial memory has shortened progressively — from decades to years — and years to months.

Memories Shorten

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

But following 1987’s Black Monday came the “Greenspan put.” Thereafter the Federal Reserve was in the business of holding up the stock market — and holding back memories.

Stocks made good their 2000-01 dot-com losses in perhaps six years… and their 2008 losses in four years.

Last March, the coronavirus blew on in. Stocks endured their most vicious trouncing 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 anguishings of financial hells past.

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


The harder the Federal Reserve clobbers, the more memory it knocks from heads.

Trillions and trillions of dollars came battening down upon them. 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 — and beyond.

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

In all, its balance sheet has swollen from a pre-crisis $4.1 trillion to a dizzying $7.5 trillion.

The M2 money supply has expanded a furious 26% within the space of one year:


New Dementias

One year after the terror, investors are delirious not with fear but with greed. Margin debt runs to record heights — nearly $800 billion.

Never before have investors borrowed so much money to purchase so many stocks. Overvalued stocks. Wildly overvalued stocks in many cases.

They have forgotten.

Forgotten are the dot-coms.  Forgotten are subprime mortgages. Forgotten — apparently — is the coronavirus.

Old dementias have yielded to new dementias.

A new generation has entered the scene… impressed by its own innovative genius. Its financial memories cannot extend one year.

It speculates in bitcoin. It joins Reddit and “short squeezes” Wall Street. It thrills to Initial Public Offerings… and fixates upon special purpose acquisition companies (SPACs).

The generations differ only in their memory spans and their peculiar dementias.

That is, the new generation is at heart the old generation. And the generation before.

The Good Life

The excesses parade daily before our eyes. Columnist Kevin Williamson:

The display cases of the nation’s Rolex boutiques are stripped as bare as a San Antonio supermarket after a polar vortex. It is difficult to think of another plague that has been accompanied by quite so much high-end conspicuous consumption…

High-end Jeeps, Toyota trucks, Range Rovers, Corvettes, the Mercedes S-Class, and other rolling emblems of mid-American ostentation are going as fast as they can unload them…

The wine shops are doing an astonishing trade in $750 bottles of Chateau Margaux, and if you want to buy a new Rolls-Royce or Lamborghini, you’ll be lucky to take delivery sometime toward the end of 2022 — and they’ll act like they’re doing you a favor.

We remind you, this spreeing has transpired during the gravest economic depravity since the Great Depression.

Plenty Amid Want

Millions languish, forlorn, thrown from their jobs. The lines are long at the food banks. Many confront eviction from their very homes.

Meantime, a recent survey reveals half of all small-business owners do not expect to survive through 2021 — barring bountiful government assistance.

Wall Street drummers insist a flood of pent-up demand will roll into the economy once the bug clears out.

That is because Main Street has been hoarding money — not spending it at eateries, travel vacations, et cetera.

Broad prosperity will be back on the jump when these savings pour into circulation.

But have another guess, says Mark Kiczalis of

More than half [of US consumers] say they only have $3,000 or less combined in their savings and checking accounts. 31% of American households say they or someone in their family has used all or most of their savings during the coronavirus crisis.

Where will “demand” originate? Not from these sad cases.

A Form of Welfare

Yet moneyed speculators roll around in Lamborghinis. They put Rolex timepieces on their wrists. They guzzle $750 wines.

Do we begrudge the man with his Lamborghini and his Rolex timepiece and his $750 wine?

We do not. If a man hazards his money in successful speculation, he has assumed the risk. He should therefore assume the reward.

He is merely seizing the outstretched hand.

Yet we must not forget what is in back of him — the Federal Reserve and its delirious policies that encourage the speculation.

Absent the Federal Reserve standing behind him, it is unlikely he would live so grandly.

He depends — in one sense — upon public assistance. That is, he depends upon a form of welfare.

“Don’t fight the Fed,” runs an old market saw. For this fellow, it has proven capital advice.

Financialization of the Economy

The financial industry represented 10% of GDP in 1970. By 2010, it ballooned to 20% of GDP, inflated by the helium of artificially low interest rates.

A financialized economy demands perpetually expanding credit — debt — to keep the show going.

Servicing that debt absorbs increasing amounts of society’s income. That, in turn, leaves less to save… and to invest in productive assets. Speculation goes amok.

Wages wallow — and the middling classes with them. The great chasm began to open in the mid-1980s:


Does this financialization benefit the United States economy in the overall?

Economists Gerald Epstein and Juan Antonio Montecino have slaved over the numbers. These numbers reveal that financialization is, in fact, destructive.

A $22.7 Trillion Drain

Since 1990… they conclude the financial sector has drained trillions and trillions from the United States economy:

What has this flawed financial system cost the U.S. economy?… We estimate these costs by analyzing three components: (1) rents, or excess profits; (2) misallocation costs, or the price of diverting resources away from non-financial activities and (3) crisis costs, meaning the cost of the 2008 financial crisis. Adding these together, we estimate that the financial system will impose an excess cost of as much as $22.7 trillion between 1990 and 2023, making finance in its current form a net drag on the American economy.

Yet, these gentlemen settled upon their $22.7 trillion figure before the pandemic. We have seen no update. But we hazard it would be an even greater enormity.

Meantime, the nation’s debt has jumped 400% in merely 12 years. How much has national income increased over the same space? 30%.

The economy presently requires nearly $4.50 in debt to squeeze out $1.00 of growth.

But the Federal Reserve must keep the show running with greater debt yet — else the curtain falls, and the lights go dark.

This Time Is Different

And so memories shorten, Lamborghinis roll from the showrooms, Rolexes wrap around wrists, $750 wines are sunk… and the food banks are packed to the doors.

Here things stand.

Today’s bubble will go alongside the South Sea Bubble… 1929… and 2000, argues legendary money man Jeremy Grantham:

The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases… and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

We hazard Mr. Grantham is correct. It is a bubble for the ages.

The wise man remembers. The fool forgets. As his memories fade his vanity grows… and his risks accumulate.

This time it is different, says this fool.

But it always is different… until it is not…


Brian Maher

Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning