Percentages, Perspective and a “Flight to Crap”

I hate when people suggest that one can lie using statistics, but sometimes they really can be misleading.

Take for example the recent stellar-sounding rallies in a wide range of beaten-down securities.  We noted yesterday that the roughly 13% and 16% year-to-date jumps in Meta Platforms (META) and Amazon (AMZN) seem remarkable at face value but seem much less so when we remember that those stocks gave back about two-thirds and one-half of their respective values last year.  The returns are terrific if you were a very nimble trader poised for a January effect, much less so if you are a disgruntled long-term investor in one of those names.

But I wonder whether I was a bit too strident in my recent calls that we have been seeing what I have termed a “flight to crap.”  I said it on TV last Friday (on two different networks, no less) and on the radio on Tuesday morning.   It’s a catchy phrase, one I’ve used at various times on the trading desk over the years when things seemed frothy.  I became publicly attached to the verbiage when I used it in an interview with the Financial Times in 2020 and then was referenced (though not by name) in a Paul Krugman column in the New York Times.  While the term was quite descriptive for the rush into speculative assets that was occurring at the time, the speculative rally persisted for over a year afterwards. 

That was a different time, however.  Risk assets of all types were being inflated by precipitous rate cuts, massive fiscal stimulus, and an unprecedented expansion of the Federal Reserve’s balance sheet.  The stimuli lasted longer than many anticipated – and also in hindsight, much longer than they should have – so the initial flurry of speculation that prompted such commentary proved to be only the beginning of a tidal wave of excesses.

It is impossible to say now that circumstances haven’t changed dramatically.  The immediate concern regarding central bank policy is whether rate hikes will be slowing or stopping in the near future and there is little question about the path and pace of the Fed’s balance sheet reduction.  That is hardly a fertile climate for speculative assets.

Nonetheless, we have seen speculation return to the forefront.  As we started the day, bitcoin (BTC) was up about 13% year-to-date.  That’s a stellar return, but just like AMZN, BTC is about half the price it was a year ago.  Carvana (CVNA), a company whose debt is trading at highly distressed levels, is up over 50% so far in 2023.  That made a wonderful trade, but CVNA is trading about 95% lower than where it was a year ago.  I could go on and on with a long list of similar examples (like meme stocks), but I hope you get my point.  Somehow the bounces in a wide range of assets that became oversold as the result of year-end tax-loss selling morphed into a bit of a speculative frenzy.

The conflict between short- and long-term percentage changes is why I am not a fan of arbitrary declarations of bull and bear markets based strictly on percentage changes.  The Euro Stoxx 50 Index, a blue-chip European index that can hardly be considered a speculative bastion, has been on quite a tear recently.  It bottomed around 3,250 in late October and rallied steadily since.  Within a month, in late November, the index had risen 20% from its lows to about 3,900.  To some, that qualifies as a bull market.  Now that we are approaching the 4,200 level, that bull move is even more impressive.  But we remain over 5% below last year’s highs.  Can we call that a bull market yet?  Probably.  And we can almost certainly consider the UK in a bull market with the FTSE 100 at all-time highs.  We can debate the causes and the sustainability of those rallies amidst their own central bank tightening, but we can much more safely assert that we are seeing meaningful secular moves in key European benchmarks than we can assert for beaten-down US companies.