RBS recently published a dramatic and very bearish research note that described equity investors as “the world’s worst cult”. While I thought the note was a bit over the top it did raise some interesting and thought provoking topics. More specifically, they said:
“The big turnover in the US economy will lead to dramatic turns down in valuations we suspect – and may finally destroy the world’s worst cult: the cult of the equity, which has no basis in fact, or history, but yet seems universally accepted.”
The credit crisis is a reflection of our excesses and this is best reflected in the markets. We have become a society that values those who get rich quick over those who create sustainable and productive businesses. This is nowhere more apparent than it is in the financial sector which has become the epicentre of the crisis. Our bloated financial sector steals our best minds and puts them to work doing little of real value while rewarding them excessively. The excess growth of this industry has coincided with Main Street’s obsession with Wall Street. While the buy side reaps the rewards of 2 & 20 or 2% funds fees for what is effectively an index fund (sorry mutual fund managers) the sell side reels the small investor in with the myth of becoming the next Warren Buffett. The result? What RBS would call the worst cult in history – an economy that has become transfixed with making money by effectively doing nothing.
We have spent more than we have and lived well beyond our means. We buy every new Apple product, houses because we believe it is a right and not a privilege, and think of debt as a way to keep up with the way of life that God bestowed upon us. It is not sustainable and this is becoming clear to us all as the economy appears to be in a perpetual stall. The worst part in all of this is that we have tried with all our might to prop up a sector that has failed us all. While Main Street struggles Wall Street is back to their old tricks.
As a nation I sometimes wonder if a depression wouldn’t set us straight. I have often cited the “greatest generation” in this regard. They were not great because they believed they were owed a way of life. They were great because they were raised by a nation of hardened Americans. A generation that fought in a world war, struggled through a depression and was rewarded with another world war. Their children were a product of that environment and a general “toughness”.
Many graybeards have proclaimed that the equity markets likely won’t bottom until we see excessively low valuations. The kinds of valuations that coincide with window jumping and vomiting (usually on ones self). This would likely coincide with a truly breath taking equity decline – a true death of the “equity cult”. In a recent letter John Hussman proclaimed that bear markets generally crush Wall Street to powder:
“quite honestly, it’s difficult to envision a return to long-term saving, productive investment, and thoughtful allocation of capital until – as happens every two or three decades – the speculative elements of Wall Street are crushed to powder.”
Is this time truly different? For the good of the country, let’s hope not….