Flax Pond Capital Fall 2024 Commentary
"The angel swung his sickle on the earth, gathered its grapes and threw them into the great winepress of God's wrath". The Book of Revelation - Chapter 14 verses 17-20
“The Grapes of Wrath” by John Steinbeck was the assigned summer reading for my son Marshall, a high school junior this fall. Having read the book a few years ago, I decided not to reread it, but rather to read a different Steinbeck novel - Cannery Row - more on that later.
It may be fitting that he was assigned this Great Depression era novel. In economic history, the late 1920s and the “Great Depression” loomed large. As seen in the graph above, today’s stock market is valued by some metrics as fully as the market was back in 1929, a market that suffered a quick and bitter reversal. (higher number means a more expensive stock market, lower numbers means cheaper)
A Federal Reserve paper had this to say on the period:
“The Roaring Twenties roared loudest and longest on the New York Stock Exchange. Share prices rose to unprecedented heights. The Dow Jones Industrial Average increased six-fold from sixty-three in August 1921 to 381 in September 1929. After prices peaked, economist Irving Fisher proclaimed, “stock prices have reached ‘what looks like a permanently high plateau.’”
The epic boom ended in a cataclysmic bust. On Black Monday, October 28, 1929, the Dow declined nearly 13 percent. On the following day, Black Tuesday, the market dropped nearly 12 percent. By mid-November, the Dow had lost almost half of its value. The slide continued through the summer of 1932, when the Dow closed at 41.22, its lowest value of the twentieth century, 89 percent below its peak. The Dow did not return to its pre-crash heights until November 1954.” - link below
We have not experienced a sell off of any great magnitude since Covid. But, by many measures, we are due. Hence, we are preparing for something bad to happen while hoping for the best. In the meanwhile, while we wait for what is likely, but not definite, we are trying to eke out a respectable rate of return without taking on undue risk or engaging in speculation.
In investing, lots of things are knowable. The price of a stock, the date of company earnings, the quality of the company, the future earnings projections. But one thing remains elusive, despite all the quantitative tools at our fingertips: the psychology of the market.
We know psychology is important - in some ways it is almost everything - and we know that when it breaks - like it did with Biden - it can be swift and decisive. But the timing, this is something we don’t know with any precision.
In Cannery Row, there was one passage that stood out to me above the others:
“No one has studied the psychology of a dying party. It may be raging, howling, boiling, and then a fever sets in and a little silence and then quickly quickly it is gone, the guests go home or go to sleep or wander away to some other affair and they leave a dead body.” John Steinbeck, Cannery Row
September 2024 is here, summer has ended, school has started, a chill is now in the morning air. Winter is coming. Sometimes the calendar & central bank liquidity drive everything.
While the halcyon days of summer are gone, the realities of our time remain: high US stock valuations, a narrow market driven by AI fueled stocks, poor global demographics, an ever widening US budget deficit, dysfunctional politics & politicians, a likely recession https://on.ft.com/4dQdJmS (see FT piece) and a stock market supported for far too long by central banks - these constants are still with us.
We believe that inflation may become a defining feature of our time. Governments rarely go bankrupt in a formal sense; they prefer to debase their currency instead and print money - a stealth tax - both seen and unseen to the average citizen.
As always, our goal is to live to fight another day, to stay in good health & spirits and to remain above the fray. We are invested in the same securities as our clients. Compared to most market participants, our client portfolios are defensively positioned with about ⅓ of the portfolio in global value equities (each client has a custom allocation) and ⅔ in bonds and gold. We wish for the best, but we are prepared for trouble.
Link to Fed paper on Stock Market Crash of 1929 :
