The Mushy Middle – The Reformed Broker

This is the difficult part. The shock of being in a bear market fades quickly. Some things explode and the losses are not evenly distributed. Some things look ok – defensive actions, utilities, etc. Down but not down. Some things look awful – declines in the hardest hit sectors (tech, this time) have been ongoing for quite some time by the time the bear market is really set for the broader averages. Check. The ex-tech megacaps began their decline in February 2021, although it didn’t really become apparent until February 2022. And now they’ve come to the megacaps as well. Amazon is cut in half. Facebook too. You’re here. Nothing is safe. There are stores of energy in bulk withdrawals. We do the repricing work and it’s not fun.

The good news is that we are already well advanced in this process. The bad news is that we are not quite there, despite the damage already done. Barry expresses it as “Too late to sell, too early to buy”. Of course, with a twenty-year horizon, it’s never too early to buy, but we’re talking about the present, not the future.

In the present, the news is getting worse. Data too.

People cut back on spending they had for a variety of reasons, all of which seem to feed off each other. We have passed the last stimulus checks of March 2021. It has been over a year. The Federal Reserve is aggressively raising the cost of capital, which throws a prudent blanket over the spending decisions of business owners. A few notable speculative bubbles have burst. A lot of money was lost. About $11 trillion if you add the US market cap and the $1 trillion or so that comes from crypto. There are billions of losses you haven’t even heard of yet. Especially in bonds, where the money is not supposed to have been lost. The housing market is slowing down. There were over 100,000 tech/media layoffs and phantom layoffs in the form of rescinded job postings. There is a land war in Europe. Prices of basic necessities have risen significantly, despite the recent drop in prices for many basic commodities. Rents are stubbornly high and stay high.

These are dominoes. They haven’t finished falling. We are still in the middle of it.

We can’t know for sure how far we’ll have to go before it ends. Or how much deeper the declines can be. This is the uncertainty part. Things are always uncertain, of course, but there are times when the uncertainty feels magnified. This is one of those times. You can hear it in every conversation, you can see it in every television news segment. It is impossible not to be affected by it. The investor class is also the business class. Owners, managers, shareholders, employees, consultants. The obstacles and challenges in their careers don’t go away when the encounter is over. They seep into consciousness and affect every decision they make throughout the day – spending decisions, asset allocation decisions. “Maybe we should slow down a bit…”

And that’s where we live now. PE ratios are irrelevant. Only on a spreadsheet.

One day things will start to look up. Some of today’s cautious or panicky behaviors will end up looking silly through the perfect lens of hindsight. “I could have bought Starbucks at 70! I could have bought Home Depot with a 40% levy!” It will happen. But you have to find a way to get from here to there. here be the soft middle, where decision-making is difficult and abstinence from taking more risks seems right.

Identifying and accepting this as our current location is a big part of the battle. Congratulations if you have already done so. It’s not nothing.

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