Investors Are Extremely Bearish But Still Holding Stocks

In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Investors Are Extremely Bearish But Still Holding Stocks. Here’s an excerpt from the episode:

Tobias: Let’s just jump into that one really quickly, because it’s interesting since we’re talking about it. It’s from Callum Thomas. He runs Topdown Charts in Queenstown, New Zealand. Great chart. I subscribed to it.

Jake: All the charts are upside down though, that’s the problem.

Tobias: [laughs] It’d actually be helpful if they were.

Jake: Oh, okay.

Tobias: It’s either past performance or forward returns, that’s what it’s showing. He’s compared Michigan consumer sentiment. He’s charted it against the AAII, American Association of Independent Investors stock allocation. And so, he run it back to the 1990s and they track pretty closely together. So, how people feel is how they’re positioned for the most part. And it’s a pretty tight relationship. Other than at the bottom in 2000, people were much underallocated to how they felt. But these two lines track pretty closely. Except for now, there’s a wide, wide gap between them.

The sentiment line is through the floor in 2009, which is as low as it ever got in these 30 years of data that they’ve got. Whereas the allocation, it’s kind of close to a peak. It’s off the most recent peak, but it’s comparable to where it was in 2019, the very peak, and 2000 at the very peak. So, one of those two lines is going to join the other one. Either the people are going to get very happy or allocations are going to come way down.

Jake: Well, there could be a psychological bias at play here, where people will gamble to try to avoid a loss. So, let’s say that you have a known minus 9% real return on your cash. So, you can lock that in and take a known 9% hit or you can try to gamble and get away from that loss potentially with a TINA kind of an argument. And then, you get potentially bigger losses than that, but maybe you don’t. And so, people will definitely lean towards gambling if they have a shot at avoiding a loss.

Tobias: I like that analysis. I think that TINA has turned into TARA, hasn’t it though? There are reasonable alternatives.

Jake: [laughs] There always were. [crosstalk]

Tobias: They always were reasonable alternatives. One of them is another topic of ours. But you had a good chart. You shared a chart with us about TreasuryDirect and NFTs.

Jake: Yeah. Well, there’s a tweet going around that showed the– It was just website hits to the TreasuryDirect, which is where you can go get 9% bonds if you’re a US citizen or comparing that to the NFT hits. It’s currently 2x now. People go into the treasury, then to the NFT.

Bill: It makes me think fade inflation.

Jake: Mm. It could be. Well, how do you do that? By long-duration assets?

Bill: No, if all of a sudden, everybody’s googling, “how do I get inflation linked bonds?”, and the presumption is, people are chasing heat on average, it seems to me that that’s a pretty good indicator that the public is now concerned about inflation. I think that’s probably a later in the inflation story. But I have been wrong the entire time. So, I don’t know, why you– [crosstalk]

Tobias: Do you think– [crosstalk]

Bill: But I don’t think we’re going to persist in an 8% inflation environment. And if we are, I think the underlying economy is going to fucking chug and that’s good for earnings.

Tobias: There’s no inflation on that website though? They are paying 9%. I think that’s the attraction– [crosstalk]

Bill: Well, it’s an inflation-linked security. It’s one year and then it resets. You’re not getting 9% government bond for 10 years. I’d put all my money in that.

Tobias: How do they determine the single year interest rate? Last time, it was like 7% or something.

Bill: I think it’s looking backwards at the end of the year. They calculate what it was and then they chew up your account.

Jake: I thought it was CPI plus [crosstalk] one year or something like that.

Tobias: CPI plus the one year.

Jake: I could be wrong on that, but I’m sure someone will chime in with the correct answer.

Tobias: It could be right. It’s like 4.5%, I think one year or four, something like that.

Bill: Yeah, I don’t know. I don’t know the formula.

Tobias: In any case, it’s a– [crosstalk]

Bill: The presumption is when they were searching for NFTs when it was a bubble and now, they’re searching for inflation, I don’t see how a similar logic can’t follow that maybe this is the wrong time to be thinking about inflation.

Jake: It could be. Is it actually reflexive though where when you worry about inflation, you actually bring about more inflation, because you’re going to ask for wage increases? There’s a lot of knock-on effects there that might actually perpetuate it.

Bill: Maybe.

Jake: I don’t know. I’m not so sure that it isn’t just automatically fade whatever the popular– It doesn’t necessarily just go away just because everyone believes that it’s here, right?

Bill: No, I think it would go away, because China stops zero COVID policy, Europe hits a recession, supply chains normalize, the Fed raised rates to 4.5%, the housing market slows, and your year over year data slows considerably.

Tobias: I got a couple of good comments from the hivemind here. From Brad ActuallyFinance. “Resets every 6 months, looks back at CPI + a fixed rate.” But then Kyle– [crosstalk]

Jake: All right, that’s the ballpark.

Tobias: Kyle has “Bad sentiment from inflation, but you stay allocated during inflation.” It could be right.

Bill: Yeah. Well, I don’t know. I just don’t know what you do. What’s the average household going to do? They’re going to dance in and out of the market based on their feelings? How many people are good at dancing in and out of a market?

Tobias: Very few.

Bill: Right. I think it’s actually very rational. I guess if the big crash comes, and then we reset, and then we go back up, we’ll say, “Wasn’t that obvious in hindsight?” I don’t know.

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