‘In the face of a shock, investors may be surprised to find themselves jammed running for the exit.’ That quote is from Paul Tudor Jones, who was one of the pioneers of the modern hedge fund and is considered a brilliant investor and trader. He went on to say that things are ‘on the verge of a significant change’ and that the current market reminds him of 1999.
The current market reminds me of the demise of Pompeii, which was destroyed by the massive volcanic eruption of Mt Vesuvius in 79 AD. Pompeii was a prosperous city of the Roman Empire on the coast of southwest Italy. It sits at the base of Mt. Vesuvius, a volcano that had been dormant for a long time. Earthquakes and seismic activity, scientists believe, began to ‘warn’ the population of Pompeii roughly 17 years before the big eruption, when a massive earthquake largely leveled Pompeii. Shortly before the eruption more signs began occurring, hinting that something wasn’t right. Though some people evacuated the area, most of Pompeii’s populace was not worried. The rest is history.
Though there are many warning signs, similar to the citizens of Pompeii living at the base of an active volcano, the American public does not seem the least worried
about having their money in the stock market. Retail margin debt, at 100% of market capitalization, is at its highest ever. The percentage of U. S. household wealth (not including home equity) invested in stocks in some form is in its 94th percentile. This is the highest allocation to equities since just before the tech bubble popped in 2000. In other words, despite the numerous warnings for those paying attention, investors have piled most of their savings/wealth into the stock market with complete disregard to the growing probability of a down-side accident.
This post was published at Investment Research Dynamics on December 7, 2017.