It’s likely escaped your attention, but the Wall Street dad bro is having an existential crisis.
You’ll see it at conferences in between bites of muffins, and it’s on financial TV for as long as anyone can stand talking about it without changing the subject. But the darkest takes on this crisis are really on the internet.
That’s where morose money managers share their concerns that, in an era of quant funds, passive investing, and giant central bank balance sheets, their very existence is obsolete.
Here’s an exhibit for your review from Ben Hunt, the chief investment strategist at Salient Partners. He writes a site and newsletter called Epsilon Theory
“that examines markets through the lenses of game theory and history.”
And he’s a perfect example of someone who isn’t sure what the role of a stock picker is in 2017. Other dad bros who are feeling the same way have been passing around one post in particular called “Tell My Horse“ because he’s done a marvellous job of articulating what’s going on.
“I’m having a hard time with this market, because I can see what a powerfully stable social equilibrium is being established around this transformation of capital markets into a political utility. I’m having a hard time with it because, like any powerfully stable social equilibrium, to be truly successful in that world you must give yourself over to that world. You must embrace that world in your heart of hearts. As Winston finally learned, to be happy you must love Big Brother. Or in our case, lever long, sell volatility, and love the Fed.”
You’d think think that with stocks moving higher and a potential tax cut on the way, the state of the dad bro would be strong, but it’s not. This seemingly unending upward grind of stock prices is upsetting the balance of markets. The point of investing, is, yes, to make money. But it’s also supposed to be a game of assigning value. It’s a game of finding worth.
Hunt went on to compare the current state of finance, where big “ideas” like artificial intelligence or central banks propping up asset prices dominate, to a “voodoo wasp,” a creature that lays its eggs inside caterpillars. Those eggs then hatch, with the wasp babies then either eating their way out of the caterpillar or taking over its body like something out of a zombie movie.
Hug your nearest dad bro
Right now the job of value assignment doesn’t matter. Active money managers are losing ground to robots who slosh around in markets based on algorithms. The Federal Reserve’s low rates and massive asset purchases have ensured stocks move higher and volatility is nil.
Passive and quant (robot) players now make up 60% of equity markets, according to JP Morgan. Humans are barely picking stocks right now. It’s becoming a robot job. All of these are acting as a bludgeoning force pushing stocks ever higher, no matter what we would expect from those stocks’ underlying value.
And when value ceases to matter, the value hunters cease to matter. They have no purpose.
Nineteenth century sociologist Emile Durkheim described what happens when people lose their sense of purpose in his book “Suicide” in 1897, and it remains one of the most in-depth examinations of the human mind in despair.
In the book he describes a form of suicide called “anomic suicide.” It’s closely associated with the breakdown of a society and norms, making people question who they are. It’s also closely associated with a person’s expectations for themselves in modern society. Durkheim observed that when those things disappear, people fall into a deep despair.
Anomic despair is a helpful framework for understanding many of the crises of middle- and working-class life that have dominated headlines in the last few years. And now it’s come for fund managers.
The Wall Street dad bro — the one who still goes to his lacrosse reunion at Dartmouth and gets a new set of irons whenever he pleases — is facing a fate that has taken the livelihoods of many working men across the country over the last 30 years.
So all the dad bro can think is: What if the machines make me obsolete?
Even worse, he’s thinking that if he wants to make money he has to ignore everything he’s learned and every market instinct he’s developed. All the logic gathered over years about the way money works, about what people buy, about how much they spend, about debt and accounting, about how governments work, about what’s going to last.
In the land of ETFs and algorithms, he’s afraid he has to let go of that and just buy.
Get numb and dumb
Another exhibit, from Michael Batnick of Ritholtz Wealth Management. For a second there, he — a father and a responsible market participant — started kicking himself for not submitting to Bitcoin and the cryptocurrency craze.
“If you asked me what I thought about bitcoin a year ago, I would have said it’s ridiculous. Today I have no opinion. My knowledge of cryptocurrencies is unchanged over the last year, but bitcoin is up 240%,” he wrote in his blog The Irrelevant Investor.
In other words, Batnick, like so many others, has thrown up his hands. He’s a value hunter and every single bit of his training looks at Bitcoin and says it’s absurd. But, somehow, the cryptocurrency just keeps going up.
“The thing about bubbles, and for the record, I’m not brave or dumb enough to declare this one, is that they wear you down,” he wrote. “They make you feel irresponsible for not getting involved. Today I found myself at this juncture. What if Bitcoin legitimately is the future of currency? What if this is how 30% of online transactions take place in ten years? Why wouldn’t I buy on this pullback?”
Bitcoin, unicorns, flying cars, self driving cars, cars that know your favourite song — it’s all the same. None of it makes sense within the context of the normal dad bro business of figuring out which investment strategies make sense and should pay off.
Now, this problem has been plaguing investors since about the end of 2015, but it’s really getting ugly now. Hedge funds and mutual funds, the active managers of the world, have been posting anemic returns for several quarters.
Last year, legendary trader Steve Cohen admitted that February 2016 was his nightmare scenario. With all the money managers of the world chasing the same trades, the moment flashed before his eyes when everyone would be on one side — the wrong side — and everything would collapse.
“One of my biggest worries is that there are so many players out there trying to do the same strategies … if one big one goes down, will we take collateral damage?” Cohen said at the Milken Institute Global Conference in Los Angeles. “We were down 8% in February and for us that’s a lot … my worst fears were realised.”
“It happened in four days,” Cohen added later, “and the markets were going up at that time.”
When not even Cohen can wield the markets, you know there’s a problem. And instead of paying high “master of the universe” fees to guys like Cohen, investors are putting their money in lower-cost passive investing — the robots and the index or exchange-traded funds.
Even the deal guys are starting to worry. With stocks looking expensive compared to their value, people don’t want to do mergers and acquisitions or buy stakes in over-valued companies.
Paul J. Taubman, chief executive officer of investment bank PJT Partners, recently admitted that he’s scared too, according to Bloomberg.
“Right now there seems to be an unease about committing large sums of capital at these valuation levels, and yet the market continues to grind higher,” Taubman said Thursday at a conference hosted by JMP Securities. “It’s made it more complicated everywhere you look.”
Perhaps this is why money managers around the world smell something dangerous, but they can’t put their finger on what it is. Hard economic data and soft data economic are dancing around each other without meeting. The market seems too trusting. When there is no volatility and every index looks like it can only go up — while at the same time commodities prices are in the sewer and there are sabers rattling all around the world — there’s something moving in the water out there that the dad bros don’t fully understand, and it’s making the market unrecognizable.
Something has to give.
Or maybe it doesn’t. Years ago, when I first started reporting about Wall Street, I heard something that stuck in my head. In between bagel and coffee breaks at a Bloomberg conference near Union Square, one speaker said succinctly: “In 20 years the worst job on Wall Street will be untangling the true value of stocks from the indices they have been lumped into.”
The dad bros are afraid of the markets becoming a massive Gordian knot. In the meantime they’re afraid they either have to submit to what they see as an irrational regime or be killed.
Funds are closing left and right. Guys like legendary investor Eric Mindich at the now defunct fund Eton Park — they weren’t supposed to go anywhere. They were supposed to grow old like Carl Icahn and call into CNBC when they got a belly ache to troll their enemies and complain about taxes and regulation.
They weren’t supposed to be winnowed out.
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