18 Oct America’s Love Affair with TINA
I first fell in love with TINA in 2009. It was early Spring and I’d been hurt, pretty badly, in 2008. That had followed the break-up of a serious relationship with Value that had topped out in October 2007. My personal affair with TINA began in March and the more I came to understand her, the more my passion grew, increasing progressively month-after-month and year-after-year. Although we had issues – doesn’t everyone? –, specifically from early 2018 through the middle of 2019, I remained hopelessly in love. TINA has no substitutes … because TINA is the one and only. How could it be otherwise? There Is No Alternative. What choice does an investor have?
TINA, as most readers readily know, means that since March 2009 investors have had no better alternative than owning equities. As a consequence, they have been pouring their Dollars into the stock market because other investment opportunities offer poorer returns. Although having an investment portfolio composed entirely of stocks is a theoretically unattractive portfolio allocation – it’s contrary to widely-accepted Modern Portfolio Theory –, the reality is that There Is No Alternative. Although the term “TINA” also has been used in politics – it was a slogan of Margaret Thatcher in the 1980s –, it has been most-used over the past decade to explain the stock market’s meteoric rise and continuing strength.
The science art of investing is allocating money to create a future financial benefit. A key to doing so, particularly for professional money managers, is diversification. Diversification spreads investment Dollars among a range of assets and asset classes in order to balance risk against return. It relies on the concept that owning different kinds of financial assets is less risky than owning only one type and therefore requires the accumulation of assets with varying correlations, thereby minimizing the negative effect any one asset or asset class might have on portfolio performance. In short, diversification is a means of preserving and enhancing wealth while minimizing risk. Its key insight is that an asset’s risk and return should not be assessed in isolation, but by how it contributes to a portfolio’s overall risk and return. Diversifiers structure their portfolios to perform well in a variety of market conditions. In so doing, they enhance performance in both up and down markets.
The traditionally-recommended portfolio mix consists of stocks, government securities and corporate bonds. A diversified holding of stocks and fixed income instruments results in less risk than owning only one. Careful mathematical analysis of historical data has demonstrated that, over time, doing so has offered the best risk-adjusted return on investment. And, yet, over the past decade the value of equities, and especially of technology stocks, has soared. They’ve been by far the best investment. With government bond prices now well below the expected rate of inflation, allocations to safe and secure sovereign debt is clearly inferior. Although corporate bonds offer higher yields than government bonds, they too come with drawbacks that include the risk of default and the potential of rising interest rates. In comparison, dividends paid on equities provide what today is a competitive rate-of-return in the form of dividends … as well as a preferred rate of taxation when compared to the interest income earned on bonds. Where stocks are currently viewed as a long-term “sure thing,” potential alternatives like gold, energy, currencies and cryptocurrencies are viewed as gambles. Moreover, truly illiquid assets, such as real estate and private equity, are unavailable to the vast majority of investors and therefore are omitted from a diversified “financial” asset mix.
Those who eschew diversification in favor of concentrated bets are sometimes referred to as Concentrators. They believe that Diversification dilutes returns and is an over-used and inefficient method of wealth maximization. Concentrators believe that Diversifiers dilute their returns by spreading their investments too broadly. They believe in a narrower asset focus and accordingly concentrate their investments in a specific sector. Today’s successful Concentrators focus on those few equities that have momentum behind them, often pointing to Tesla and Apple and Facebook and the QQQ and the FANG+, etc. Concentrators accordingly believe in the obverse of Modern Portfolio Theory. If they are correct in their projections of the future, their investments will outperform a diversified portfolio and they will get rich(er) quick(er). Because of the greater risk inherent in a concentrated portfolio, however, if they’re wrong – if the markets or their selections hit a wall –, they may lose a substantial portion of their investment capital … and get poor(er) quick(er).
Unlike Diversifiers, in order for Concentrators to be successful they not only must select assets that outperform, they also must correctly time both the initiation and liquidation of their investments. A successful Concentrator accordingly has to be prescient in discerning an outperforming investment opportunity, capable of determining how and when to make the investment (as well as when and whether to increase the investment), and opportune in timing a propitious exit. Extremely few investors are can be that smart.
Because of the extreme outperformance of equities – over the past 10+ years the QQQ, for example, has climbed from $31 to $290 and Tesla from $4 to $440 –, more and more investors have reached the conclusion that There Is No Alternative. TINA-thinking therefore has dominated, and 21st Century technology has added a retail tail-wind. Robinhood.com, a zero-cost app-based trading platform, has exploded in use. It employs design features intended to bullishly influence the behavior of targeted users. Among other things, those users can buy fractional shares of stock with no transaction fee (which breaks down investing into a penny-stock arcade). Robinhood uses enticing smartphone buttons for purchase orders and more difficult ones to cancel trades. It offers a free trial with free stock and encourages repeat usage based on other users’ purchases and on pattern recognition – encouraging repeat behavior –, creating momentum in stock price moves, a defining feature of today’s market. Robinhood therefore operates much like other online gaming sites. Such “games” create spiraling iterations of decision-making based on the beliefs of others, which divorce choice from value. History is replete with momentum-induced financial bubbles, as well as with the carnage they leave behind. With fewer entertainment alternatives during Covid-19, users of Robinhood have rapidly multiplied. Robinhood users delight in experimenting and in the positive reinforcement their experimentation has brought them. TINA has made it clear that “this time is different” (see https://blog.thelonelyrealist.com/this-time-is-different-a-redux/) and that their experimentation is working wonderfully, at least for the present, as they power the stock market ever higher and higher. Estimates are that in 2020, gamblers retail users are responsible for 20% of equity market turnover, a doubling over the past decade.
Retail investors therefore have climbed aboard TINA to drive the market higher. That drive will continue until momentum – group-think – changes. With valuations at or near their 2000 peaks, whether compared with P/E ratios, market capitalization to GDP, or other metrics, this is a classic mania. The question is, when will it end? When will there be an alternative to equities … and when will Americans fall out-of-love with TINA?
Bubbles continue inflating until an event occurs that causes sentiment to change. It is wise to invest in bubbles and to stay invested …, until there are signs of such a change. Is a bursting imminent?
Some say that the forthcoming tumultuous Presidential election will be the sharply-pointed object that pricks the bubble. That’s unlikely. No matter the election outcome, there will continue to be no better alternative to equities. Moreover, we’ve been living through a tumultuous Presidency, soon to be a tumultuous post-election Presidency that the President has promised will become even more tumultuous if he is not re-elected. The markets have shrugged it all off, concluding that the election result at worst will cause a temporary market hiccup. Investors remain wedded to There Is No Alternative to equities.
The Federal Reserve holds a sharp pin that it could use to deflate the stock market bubble …, which it will not use. It will not stop its annual injections of trillions of Dollars into the U.S. economy. To the contrary, it will do whatever it takes to avoid economic calamity. It therefore will continue to fuel asset inflation. Furthermore, after the election the Federal government will step in with further stimulus, adding yet more fuel to the stock market’s fire.
How about the ongoing effects of the Covid-19 pandemic and recession? That recession is not over. Could its effects prick the bubble? Second quarter GDP set a horrific record, declining by 34%. Although third and fourth quarter GDP are expected to be robust, America nevertheless will record a substantially negative 2020 GDP growth rate. The reality is that America is not experiencing a V-shaped recovery. The fourth quarter will be rough and America’s fiscal 2020 deficit will set a record of >$3 TRILLION. That is in addition to the Federal Reserve’s 2020 stimulus of >$3 TRILLION. U.S. deficits stretch to and beyond the horizon. It’s worth noting that, historically, after a country’s debt-to-GDP ratio reaches 130%, that country eventually defaults. The U.S. is now at 136%. Add to these facts the accelerating trend of anti-globalization/isolationism that will cause economic contraction as well as inflationary pressures. The consequence is that economic pain will continue well into 2021. Yet that will not change stock market perceptions. TINA will remain topmost in investors’ minds. Once again, the market may take a temporary hit, but There Is No Alternative to equities.
What of international tensions? History teaches that war invariably follows economic calamity. Should there be international hostilities, U.S. Treasuries at any price, as well as gold, would become preferable to equities. In that vein, when countries suffer from internal disorder – as the U.S. today is suffering –, enemies see an opportunity to aggressively exploit vulnerabilities. When there are leadership transitions at the same time, the risk of enemies taking offensive action is elevated (see https://blog.thelonelyrealist.com/axis-of-the-sanctioned-part-2/). Should the potent combination of Federal stimulus, Federal Reserve injection of Dollars and suppression of interest rates, and international stability that have led to TINA change, so will group-think. If so, America’s love affair with TINA will end … and the stock market bubble will burst.
Finally (from a good friend)
The plural of “beef” is … beeves! This is true only for “beef” in the sense of “cow”; If you’re talking about arguments between whiny celebrities on Twitter, then those are beefs.
The plural of “opus” is … opera. (So, an opera is more than one opus!)
The plural of “sphinx” is … sphinges! (Though “sphinxes” is an acceptable secondary option.)
The plural of “biceps” is … bicepses! That’s right: “biceps” is a singular word, literally translated from the Latin for “two-headed” (each of your biceps connects to the upper arm via two heads, one short and one long).
The plural of “cul-de-sac” is … culs-de-sac. In French, cul-de-sac translates to “bottom of a sack.” So, weirdly, the plural culs-de-sac becomes “bottoms of a sack.” (That sack’s got back!)
The plural of “nieces and nephews,” gender neutral, is … niblings! Yes, it was only coined in 1951 – all the more reason to make sure it doesn’t disappear!
The plural of “attorney general” is … attorneys general. Similarly, postmastersgeneral, mothers-in-law, and coups d’etat.
The plural of “octopus” is … octopuses! No—NOT octopi. Here’s the deal: “Octopi” is how you would make the word plural in Latin; however, “octopus” is not a Latin word — it’s Greek. The Greek way to make octopus plural is “Octopodes.” So, why don’t we say that? Because, linguists say, when you add a word to the English lexicon, you give all forms of the word an English inflection. So, octopus becomes octopuses.
The plural of “lasagna” is … lasagne! It refers to the large, flat pasta as well as the dish itself; technically, you should be ordering the lasagne from your favorite Italian bistro.
The plural of “Prius” is … Prii! Toyota officially announced this new word after a 2011 vote of more than 1.8 million people. Prii trounced runners-up (another weird plural) including Priuses, Prium, and Prien.
The SINGULAR form of “spaghetti” I s… spaghetto! Similarly (awesomely), the singular form of confetti is confetto, and the singular of graffiti is graffito. Language … it’s greato!