Of Good Booms, Bad Booms, and Busts

The vast army of permabears – mainly my friends in the Austrian School – wander around for decades, wallowing in the hopeless state of the world. One chance to say, “I told you so!” comes about every ten or fifteen years. And they positively relish in it.

After years of abject misery – and missing out on double-digit returns – I decided to change my outlook. To go with the flow.

No, this isn’t some New Age kumbaya. It’s King Canute admitting the truth. “I cannot stop the tide.” So I may as well swim with it.

In this second part of my Welcome Series, I’m going to discuss how we can see the markets and swim with the tide – actually appreciating it – while keeping a weather eye out for the inevitable reckoning.

Even the Rich Borrow Obscene Amounts of Money

After a 9-year hiatus, I returned to banking as a VP in Talent Development. One of my jobs was to work with the private banking team to help them get more business in. As I was from the sales and trading side, some discoveries blew me away.

Most Private Bankers Have No Clients

It’s worse than the Pareto 80/20 rule. Our CEO put up a slide showing 10% of our relationship managers brought in 90% of the business. Scary.

That means there are a lot of people getting paid on potential. Unfortunately, when analysts value private banks, the bigger the RM count, the higher the value, as they average the performance. It’s idiotic.

If you decide to give part of your wallet to a private banker, make sure you grill them on their other clients and how she or he has protected their wealth.

Huge Revenue Comes From Loaning to the Rich

As you know, I grew up in New Jersey. My father is a retired truck driver, and my mother is a former receptionist. It was the middle of the middle class. But I was a spoiled only child, so I didn’t feel that I was missing anything at all.

I always thought the ultimate goal was “Free and Clear.” That is, if you owned your house outright and your kids’ obscenely expensive college educations were paid for, you were at Everest’s Summit.

Thirty years later, the question high net worth individuals (HWNIs) ask is, “How much leverage can you give me?”

This is especially true in Asia, where much of the money is nouveau riche, entrepreneurship-driven wealth rather than old money.

(Old Europe isn’t nearly as keen on leverage and is much more concerned with wealth preservation. After all, if that money goes, how could they possibly regenerate it without the requisite skill set?)

So what, you ask? Most Western banks have a significant presence in Asia and are increasingly deriving more and more of their revenue from there. Check out this list below. It’s the Asia 2019 Assets Under Management (AUM) League Table. Notice most of the big banks there are Western.

IMG 1

That means Western banks are loaning vast amounts to Asian HNWIs – and ultra-highs – to risk in the stock market.

(Ultra-highs are clients with $50 million or more in investable assets. The minimum asset threshold for regular HNWIs varies from bank to bank, as you can see from the penultimate column in the table.)

Watch Your Margin!

This leads me to my next point. Dr. Ed Yardeni put together this chart showing the margin debt yearly change in billions of dollars.

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Boy, oh boy, that looks like it needs to revert to the mean. But when will it? I don’t know, but what I do know is that this level of debt is unsustainable. It’s essential to keep our eye on the turn. Because when it turns, it may turn fast and furious.

Who’s the Greater Fool?

When investors take their eyes off revenue, profit, cash flow and only look for outsized capital gains, that’s when things get outlandish.

IMG 3

A single-pixel NFT (non-fungible token) just sold for $1.7 million. And the hope is the value only goes up. For one pixel.

Beeple sold this at Christie’s for $69 million this past March. Really.

IMG 4

I don’t pretend to be an expert on NFTs, but I do know this was fueled with a truckload of leverage. The question is this: Who buys this stuff next? It all relies on The Greater Fool. And that Greater Fool has to be a lot richer than he used to be.

Granted, this is the most outrageous example of money going into digital assets, but it’s far from the only example. NFTs have taken the world by storm. Or at least the crypto world.

How has this happened?

Let’s look at the usual suspect.

IMG 5

Now before you say, “Them, again…,” have a look at this:

IMG 6

Go ahead, hug a conspiracy theorist. They were right.

The Fed has printed an asinine amount of money to buy the debt the US Treasury issues. And every time it does, the money supply roofs it.

Interestingly, note how in 2018, Jay Powell tried to curtail this policy. Remember how the stock market did at the end of that year? Not pretty.

So Jay and his buddies on the FOMC aren’t raising rates anytime soon. And that means this madness will continue.

So you’re going to have to decide. Do you sit this out, waiting for a crash? Or do you get involved and make sure you grab returns while you can?

You don’t have to make that decision right now. Over the next few days and weeks, I’ll give you as much information as possible to help you make an informed decision. But this stuff is hard. If it weren’t, everyone would be loaded, not just the 1%.

Let’s wish ourselves luck.

All the best,

Sean Ring

Sean Ring
Editor, Rude Awakening

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