Wolf Richter: “It’s Not a Bubble,” Retail Investors Are Told As The Smart Money Bails Out

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Testosterone Pit.

“Biotech Stocks’ Rout Perplexes Analysts” is how the Wall Street Journal headlined the phenomenon. The Nasdaq Biotech Index had plunged 21% from its intraday high six weeks ago, to which it had ascended in an ever steepening curve that culminated in a beautiful spike. I wrote about that craziness at the time [NASDAQ 10,000 – Or Something]. The Biotech bubble had become so glaring that even I could see it. So what’s perplexing is that analysts would now be perplexed.

To add some color, the WSJ quoted ISI Group analyst Mark Schoenebaum: “Horrible day in #biotech. I’m frankly at a loss for an explanation. And it’s my job to at least know why. Humbling day.”

He has been a stock analyst following the Biotech sector since 2000. If he’d started three years earlier, he would have seen the bubble build, pick up momentum, go crazy, and pop in early 2000. He would have seen Biogen dive so fast so far it would have knotted up his stomach. He would have experienced the implosion viscerally. And he might not have forgotten – though many analysts have. But not having been through this before, he was “at a loss.”

And Something Is Cracking.

Of the 14 IPOs planned for this week – the busiest since 2007 at the eve of the last implosion – five were postponed, pending better weather. But Farmland Partners started trading on Friday, and got plowed under. An hour before the close, it was down over 10% from its offering price of $14 a share. A last-minute rally brought it up to $12.98, for a loss of 7.3%.

“People are pretty nervous,” explained CEO Paul Pittman. “This is about building long-term value in an asset class that for all kinds of macro reasons we believe is certainly going to keep appreciating.”

That endlessly appreciating asset class is farmland. The company, which expects to get taxed as a REIT, doesn’t own or do much yet. But it’s gonna “acquire high-quality primary row crop farmland … throughout North America … upon completion of a series of formation transactions.” It’ll own 38 farms with 7,300 total acres, mostly in Illinois.

Farmland Has Been Hot for a Long Time

Over the last 10 years, farmland prices in Iowa soared 282%, in Nebraska and South Dakota 326%. Over the last 6 months, prices still rose 7.2% in South Dakota, but in Nebraska they stalled, and in Iowa they started to fall, now down 2.8%.

Farmland has been through this before: in the 1980s, the bubble burst, and farmers who’d borrowed against their land at nosebleed valuations ran into trouble because crop prices couldn’t make the equation work, and they couldn’t service their debts and had to sell, which triggered more bouts of forced selling which drove prices down further and took rural lenders down with them. The scenario of any bubble that is unwinding. It wreaked havoc on rural America.

That Wall Street finally pushed a farmland REIT, willing to buy farmland at peak valuations, into the hands of retail investors, after a huge multi-year run-up in stocks and farmland, should send people scurrying out of the way.

“But It’s Not a Bubble”

That’s what Savita Subramanian, Head of US Equity and Quantitative Strategy BofA Merrill Lynch Global Research, wrote on March 21. Then she went on to describe what exactly it was, namely a bubble:

We have witnessed a recent surge in media attention on the topic of equity bubbles, citing various signs of evidence: Biotech stocks have risen 300% over the past five years, and Internet stocks have returned more than 400% over the same period. And most IPOs this year have been for unprofitable companies trading at high valuations…. The recent sell-off in high-fliers has investors worried that the deflation of this “bubble” could take down the overall market, similar to what occurred in 2000.

But no. “We think not,” she wrote. BofA Merrill Lynch makes lots of moolah pushing overpriced stocks to exuberant retail investors who’ve been driven by the Fed’s interest rate repression into the razor-like claws of risk. And besides, “the frothy spots appear well contained,” she added in central-banker lingo. And then the old saw: “Equity bubbles rarely happen when everybody is talking about bubbles.”

In late 1999 and early 2000, just before the bubble imploded spectacularly, “bubble” was the only thing everyone was talking about. Everybody tried to ride it up all the way and then get out. With predictable results. Repeat in 2007 and 2008.

That’s what analysts are doing. They see the bubble, and they benchmark it against the bubbles that blew up in 2000 and 2007, and they pull rationalizations out of thin air why this time it’s d…. Oops, they’re not using the d-word, which would make them the laughingstock of TP readers. They’re using logical-sounding arguments that border on superstitions – “Equity bubbles rarely happen when everybody is talking about bubbles” – to explain why it’s different. Exuberant retail investors are expected to swallow it hook, line, and sinker.

Meanwhile, the Smart Money is Selling

This week, it was once again private-equity mastodon Blackstone Group which dumped one of its LBOs, hotel chain La Quinta, into the lap of mutual funds and retail investors via an IPO. Blackstone has been busy dumping its LBOs. Other PE firms have been busy too. Valuations are enormous, and PE firms need months, sometimes years, to get out from under their priced possessions. So they plan ahead. And they’ve been selling everything that isn’t nailed down for over a year.

And hedge funds are bailing out of equities. Still in an orderly manner.

“We saw net exposure come way down,” explained Jon Kinderlerer, managing director at Credit Suisse’s prime brokerage business that deals with hedge funds. Hedge fund exposure to stocks in the US is “actually at the lowest level since August 2012,” during the euro turmoil before ECB President Mario Draghi saved the day with his whatever-it-takes pledge. “Funds have trimmed exposure, and they’ve added hedges.” The sharpest cuts occurred over the past month, he said. Hedge funds are “battening down the hatches to weather the storm.”

Buried in the IMF’s Global Financial Stability Report is a doozie of a chart. It depicts the bubble in covenant-lite and second-lien loans, the same that helped blow up the banks in 2008. Only this time, they’re even worse. Read….. Biggest Credit Bubble in History Flashes Warning: ‘Seek Cover, Implosion In Sight’

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Jim

    As a question to the fine author, if I may (and I don’t wish to distract from the excellent posting, and, by the way, on this posting: HA HA HA)…anyhoo…speaking of real estate, what do you think is the time frame for the next housing implosion, namely in two areas, the big city run-up in high-end urban housing, and the suburban residential housing rental run-up? And per this article, has a lot of smart money already bailed in these areas? Thank you for the indulgence.

    And why is it that some people, i.e., the “retail investor”, always seem to have more money than sense?

      1. Larry

        I don’t think the run up in real estate is over. I only speak as an observer of the Boston market, but it’s not over. Rates are still low and spring is hitting. We don’t have much of a suburban rental market, but houses are moving fast and prices on homes and condos in the city and closer desirable hubs are quite high.

        1. Aaron Layman

          The run-up in real estate may be over in many areas, but Texas may still have some air to inject into the bubble yet. Homes in the Houston area continue to fetch nose bleed prices, on what can only be described as ridiculously low inventory.
          Sales volumes are finally getting hit as affordable inventory has virtually evaporated. Now it’s just a chicken race for those fortunate few who have the cash (or heaven forbid) the ability to qualify for one of those things where you finance a home purchase. (I think it’s called a mortgage or something)
          Certainly not a friendly environment for those unfortunate families tasked with buying their first home on a middle class salary. As is usually the case, if you want to gauge the timing for when to buy a home (or stocks), don’t ask a sell-side analyst for their opinion.


        2. diptherio

          Guess I’m thinking of the Blackrock hedgie types who bought up a ton of properties, turned them into rental securities and have now, I think, off-loaded most of them (or are trying to). I’m just a house painter, though, so don’t take anything I say without a good helping of sodium-chloride.

        3. Lord Koos

          The prices (and the number of foreclosures) are very dependent on location. In my case, a semi-rural county just east of Seattle, prices are holding well so far. A lot of money spills over from the coast — rentals are everywhere (it’s a college town) and software millionaires keep second homes or hobby ranches in the area. But go a little further east or south and prices quickly take a dive.

    1. Jim

      Thanks for the replies…here in Cincinnati, the rental market is hurting, with lots of vacancies. On the purchasing side, based on some recent experience within the family, there is still a semi-robust market, but only in certain prestige areas, with prices well off the highs (maybe 40%). Houses stay on the market for weeks, not months or years, as in other areas. Other, now formerly middle class areas, are seeing 50-70% drops in prices, off the pre-crash highs. It’s cash only too, I haven’t heard of a mortgage origination in months.

      In short, the existing market is consisting this spring of affluent families trading houses amongst themselves, for cash, due to family circumstances, deaths, jobs, convenience, move-ins, etc. But, it’s not a super-big market, as these areas have always seen houses stay in families for generations, and now, that’s truer than ever.

  2. Christopher Dale Rogers

    Are equities in bubble territory?

    Its pretty simple to answer, yes, and they have been for a considerable amount of time as punters/investors search for yield in an era of ZIRP.

    What amazes me though is two fold: First the lack of investment funds available for SME’s in “real economy” businesses – I should know as have found it all but impossible to raise investor capital for my own dealings; Secondly, given all that we know and “flashing red” all over the show, why do investors continue to invest in stocks that are clearly way over valued.

    Anyone with any an IQ higher than 20 would actually undertake some serious web-based research before buying stock, particularly over priced IPO stock – not only does this seem like exactly the same conditions which existed prior to the 1929 crash, its got all the hallmarks of the 2007/2008 crash – when will fools ever learn!

    1. TheCatSaid

      Lots of recent posts on NC show that pension fund managers are under constant pressure to find places to invest their funds. Maybe CalPERS invest in these things.

  3. allcoppedout

    I don’t know why we talk of bubbles these days. They burst and life goes on. We have our stocks of inedible, diseased tulip bulbs, set aside for the seven lean years. The Devil, after all, is still pissing Dutchmen. The sun never sets on the British Empire, or wouldn’t if Talleyrand hadn’t sold Louisiana to the USA for $13 million plus. It’s all a game of chance folks, get used to it. We can rely on those righteous bookmakers to look after us.

    The question is why we let bookmakers run our society as the planet burns. There must, presumably, be something other than the bubble-blowers. Who and what are they? Parasites on the bubbles?

    Ponzi schemes don’t make any money, yet people get rich through them. Others end up with a garage full of useless crap or life savings gone. Today’s Ponzis have been stealing our wages, pensions and savings, taking money for bets we never made. This has been possible because the parasite has captured our minds. This doesn’t have to be clever in the inflated way humans think of cleverness. This happens in ordinary biology void of human cunning.

    Have a quick think about this experiment with mice. You give some a gastric band. They , stay thin in a fat food environment. Other mice get fat. No genius so far, though remember most humans are bright enough to watch Game of Thrones and far too unsophisticated to establish control experiments (but smart enough to say they are obvious after the event). Now transfer the gut milieu (bacteria etc.) from the mice who had the gastric surgery to the stomachs of mice who don’t get the gastric band. Keep a control group stupid! You’ll find the mice who had the bacteria transfer stay as thin as those who had the gastric band (more or less).

    We might think here, about taking the tits out of Game of Thrones and see who keeps watching (remember, you’d need a tit-fed control group). We might also get rid of the happy, shiny F-factor and small talk from our newsrooms and see who is left watching the non-libidinal, non-comforting remainder. We do do experiments a bit like this. Blokes taking anti-depressants of a certain kind become immune to ‘pretty face influence’ by women (agency question – who or what is doing what to whom?).

    Back to the mice, we think the bacteria transferred from gastric ban guts affect the mice brains. I’m pretty sure we can be outsmarted by bacteria.

    There is more or less no thinking on these bubbles worth science’s spit. The reasons for a lack of analysis on what stuff like bubbles actually are?
    ‘Drawing on the work of Pierre Bourdieu, the paper details the field’s methodology (habitus), which includes the assumptions of the rational and separable individual, and the belief system (doxa), consisting of the metaphors of the invisible hand and rational free choice, that supports the habitus. The culture of economics is firmly held in place by symbolic violence directed at those who question the prevailing culture. The paper further highlights the role of business and financial interests in supporting the prevailing culture of economics. In conclusion, a strong group culture, supported by powerful business and financial organizations, discourages economists from recognizing this group culture or the powerful organizations that support it.’

    Bubbles can be about worthless dross, but that’s not the point. You have to sell stock you got cheap to mug punters who buy high and end up with no stock yourself when everyone sees the con. No doubt all of us in here could write 5000 words of wally-whistle on the GOT cracker-barrel. What we lack (though someone spotted this yesterday) is the cry of naked. In GOT this was spotting the absence of who fed and (partially) clothed the creeps playing the game. And that’s where we should start on the bubbles.

    1. Nico

      Talleyrand was French. It is France that sold Louisiana, which back then actually represented half of North America

  4. nothing but the truth

    the system loves and survives on “capital gains” where in many cases wealth is created out of nothing (and then returns to nothing too, but that is not to be mentioned).

    debt can only be created if there is equity, as debt is a leverage on equity. bubbles create “equity” and provide the means to further lever the system.

    this is a feature and not a bug of the financial system.

    techs and dot coms esp social media fit the bill the best because they are exempt from the P/E calculation (because), and create an emotional reaction in the users. emotional reactions shut down the thinking brain and can be used to “create equity”.

  5. TheCatSaid

    “they pull rationalizations out of thin air why this time it’s d…. Oops, they’re not using the d-word, which would make them the laughingstock of TP readers. ”

    What’s the d-word describing the supposed wonders of this non-bubble investment opportunity? (definite? diamond? double-your money?) I’m sure it’s something obvious to most NC and TP readers but so far I can’t figure this out. (Presumably they’re not proposing to call them dogpoo, dummy, dead-in-the-water or demented, which might be too close to the truth.)

    While doing my homework trying to find a positive investment word starting with “d”, I went looking on the internetz and found a web site claiming that “Sure Thing” investments exist! Oh Happy Day!

    “These investments eliminate fear and allow even the most risk-averse investors to enjoy higher returns.” –Alexander Green

    They (Oxford Club) are offering an email report that claims to reveal “little-known ways to make a fortune while enjoying the kind of safety the most wealthy and successful investors are accustomed to”.

    It all sounds in the “too good to be true category” but they keep claiming these products have no risk to principal. Have any NC readers cast their eyes on the report they were selling: Millionaires’ Secrets: The Best “Zero-Downside” Investments For 2011-2012″, electronic copy for $49, or hard copy for $49 + $4.95 shipping. I’d love to know how their miracle products did so we can all have a laugh.

    After slide after slide claiming guaranteed return of principal, near the end a slide said, Of course there are no “absolute guarantees”. Huh? Some of the 5 hot tips say there is no minimum investment, another says there are no fees, another says “every cent” of principal is returned, another says that for this particular tip, the returned principal is in “cash” and says this is unusual. What are they doing, drug-running?

    They make everything sound so convincing I can imagine people getting duped.

    1. RepubAnon

      Any time someone claims a high rate of return with zero risk to capital, I’m reminded about how the Titanic was “unsinkable.”

  6. shinola

    A sure sign of a (whatever) bubble is when sell siders begin to pontificate about why there is no bubble.

    1. NotTimothyGeithner

      I like the ads for books with promises of how you can make money too as the point when the bubble has burst. This also applies to books describing the next great foreign threat. Does anyone remember how we were going to be in Japanese labor camps by 1996?

  7. TedWa

    Are you saying that this is like the roaring 20’s after the great recession of 1920? From a distance, I’d say yeah. I’m in real estate and I’m getting the same bad feelings about valuations that I did in 2006. Of course nobody listened then or will listen now. My guess is 2 years or less. My only hope is that Obama is still in office when it does happen so that the full weight of it will bear on the choices he made since 2008 all the while posturing loud, far and wide, about the greatest Wall St reform since the Great Depression. Reform written by bank lobbyists. Of course this is just speculation and since I have no investments in Wall St, I can heheeh.
    Good luck !

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