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Summer Highland Falls

I usually sit down to write these missives on Tuesday nights.  It’s pretty much the same routine every time… head upstairs, sit down at the computer, do a little research, and find something that interests me to write about.  As you can probably tell, my goal is usually to take something that is unrelated to finance, explore it a little bit, and then find a way to connect it back.  I’ve written about my kidshockeydrug kingpins… pretty much whatever strikes my interest on any given night. When I can’t find anything interesting to write about, I usually just listen to music.

That’s when inspiration struck this week. 

I heard these lyrics and felt like it pretty much summed up where we are right now…

“They say that these are not the best of times
But they’re the only times I’ve ever known
And I believe there is a time for meditation in cathedrals of our own
Now I have seen that sad surrender in my lover’s eyes
But I can only stand apart and sympathize
For we are always what our situations hand us
It’s either sadness or euphoria”
 

"Summer Highland Falls" is my favorite Billy Joel song ever. More than "Piano Man", "Movin’ Out", or "New York State of Mind", he captured something in the imagination with the tune. Add to it the fact that no one can quite figure out what the hell the title means and you really have something interesting to hum along to…

Here’s how the man himself described the meaning behind the song:

 "It was more about manic depression than depression. That song was about a relationship that wasn't really working out. It was very disappointing - you want everything to work out and when it doesn't, how do you deal with that?"

If you listen closely, you can hear his two hands playing two very different piano pieces, the left hand moving slowly up and down the keys representing depression and the right hand representing mania by furiously pounding along to a completely different cadence. There’s actually a pretty cool camera shot of it in this performance.

The economy and the stock market have been playing quite different tunes of late as well. As we enter the third month of the crisis, the labor market is about to cross the 40 million jobs lost mark, consumer confidence has fallen off a cliff, and governors continue to issue warnings about the dire state of municipal finance.

The equity markets, on the other hand, have brushed this off with little more than a temporary dip in late March.

In fact, the Nasdaq is actually up on the year.

Up??

40 million people just became unemployed.

Up??

This is the worst economy since the Great Depression.

Up??

Yea… up.

Morgan Housel wrote a great piece about this recently but it’s hard to wrap your head around the fact that two seemingly contradictory things can both be true at once.

It’s either sadness or euphoria.
 
“So we’ll argue and we’ll compromise
And realize that nothing’s ever changed
For all our mutual experience,
Our separate conclusions are the same”


I can’t remember a time in my career when the differences of opinion over what the future might look like were as wide as they are right now; I guess that’s what happens when you’re navigating a far-left tail outcome in real time.

Will the Fed’s firing of a monetary policy bazooka fix things? Or was that just a band-aid on what is a much deeper wound?

Will the PPP keep people employed longer term? Or are we just fooling ourselves to think that eight weeks worth of paychecks will fix the average small business’s problems?

Will all of the best pharmaceutical companies in the world working on finding the same vaccine mean they’ll actually find one soon? Or are we bamboozling ourselves into thinking that we can condense what is normally a 10 or 12-year process down to 18 months?

Like most things, I would say no one knows.  But more broadly, I would say I’m not sure it’s even possible for anyone to know. We’ve never been through something like this before and so our conclusions can’t be based on any sort of prior experience. We have nothing to go on.

I can tell you one thing with certainty though… what we’re seeing in markets these last couple of months is just normal human nature playing out.

It’s fear and greed.

It’s animal spirits.

It’s either sadness or euphoria.
 
“Now we are forced to recognize our inhumanity
A reason coexists with our insanity
Though we choose between reality and madness
It's either sadness or euphoria

How thoughtlessly we dissipate our energies
Perhaps we'll help fulfill each other's fantasies
And as we stand upon the ledges of our lives with our respective similarities
It's either sadness or euphoria”


We’ve gotten to the point with the virus where the battle lines have been drawn according to political beliefs. We had national unity for a hot minute but that devolved into finger pointing rather quickly.

Based on my conversations of late with friends on both sides of the aisle, you are given a choice to believe one of two things:

1. The virus is really dangerous and we need to do everything in our power to protect ourselves.

2. The government-mandated shutdown is an overreaction and we’re going to be just fine.

What if it’s both though?

It’s either sadness or euphoria.
Planet Money had a great piece featuring Josh Brown this past week that talked about this insane dichotomy that currently exists between the real economy and the equity markets. As they explained, it just so happens that the companies that dominated the equity indices coming into the crisis (i.e. tech stocks like Amazon, Facebook, etc.) are the ones that have actually benefitted from the crisis, only making them bigger. The rest of the market, meanwhile, struggles to keep up.

This “winner takes all” explanation for equity market strength is probably a reasonable one given that the big tech names have held in so much better than most everything everything else. That would obviously beg the question then… should we just continue to buy big tech and be done with it? I wish it was that simple. Like everything else we’re facing right now, there are two sides to that coin…

On the one hand, it isn’t hard to understand how companies like Amazon and Zoom will continue to grow through this. People are either forced to use their platforms (in the case of Zoom with remote working) or desire to use their platforms for the convenience factor (like in the case of Amazon which can have pretty much anything in the world delivered to your front door with the click of a button).

On the other hand, there is no free lunch so that kind of growth potential doesn’t come cheap. The ten largest names in the Nasdaq (think names like Amazon, Apple, Netflix, Microsoft, Facebook, etc.) trade on average around 47 times earnings, rather high by both historical standards and when compared to the average stock in a broader index like the S&P 500.

So are the valuations justified by the ongoing digitization of our lives? Or are we just living through another growth bubble?
 

It’s either sadness or euphoria.