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Mammas don’t let your babies grow up to time markets. It’s a tough way to earn a living. Now more so than ever.

It has never been harder to know what to do than it is right now. You wouldn’t want anyone you love and care about to be in a situation where they had to get it right. Like, their career depends on it. Never before, at least during my career, has the stock market’s price action so unequivocally defied the economic situation we face.

I’m going to see Willie Nelson play at Jones Beach for the tenth anniversary of his traveling Outlaw Music Festival this August. Willie is the same age as the recently retired Warren Buffett. He’s bringing out Bob Dylan and Wilco at our stop - two of my faves - and I can’t imagine this not being one of the most epic shows I’ll ever see. Has to be, right?

The song Mamma’s Don’t Let Your Babies Grow Up To Be Cowboys was originally written and recorded by Ed Bruce in 1975. Three years later, Willie and Waylon Jennings released it on their joint album and made it their own. It’s now a staple in the Willie Nelson catalog and you’ll hear it pretty much anytime he plays a show. In 1979, a year later, Nelson released a cover of a Sharon Vaughn song, My Heroes Have Always Been Cowboys, and that became a number one hit on the country charts. There’s a little bit of cognitive dissonance there - don’t raise a cowboy but the world does need heroes so somebody’s got to do it.

For most of us, market-timing heroics are unnecessary in the context of directing our retirement assets. Leave that to the cowboys.

In my first career on The Street, as a retail stockbroker, I was trained to cowboy up. I was expected to have a strong view on the market’s near-term direction paired with a highly informed idea about what types of stocks should work given that view. It was nonsense on stilts of course, but when you’re in your early twenties and a mentee of slightly older cowboys, you do what they tell you and convince yourself to believe what you must in order to carry on. So I told clients what I thought was about to happen, with all the conviction I could muster, and then I told them which trades in the stock market would make sense under the scenario I laid out.

Unfortunately for anyone in my orbit during those days, I was really good at it. Not only was I able to convince my own clients and prospects that tech stocks should rally or oil stocks were due for a run, the brokers around me would hear the conviction in my voice and begin writing down what I was saying. Before long, there was an entire boardroom full of brokers, frothing at the mouth, pounding my market opinions into the ears of their clients through the telephone. The senior brokers at the firm handed me the morning meetings. In my early twenties, I would stand in the front of the room, motivating the troops and educating them on my pitch. Chief Cowboy. In that position, there was no room for even the slightest hint of doubt. I convinced myself and then set the direction for everyone around me.

The weirdest thing, as I think on it now, is how easily the other salesmen would just start rowing in the direction I had set. “Josh likes Jabil Circuit and Flextronics, so do I.” There were guys in that room who had been at it ten years longer than I had. Surely they had read and seen enough to have known that I couldn’t possibly be a reliable shot-caller on the stock market. I guess not. If I wrote up the pitch on Natus Medical or Imax or Six Flags or Focus Media, they’d gladly deliver that pitch to anyone they could get to listen. It turns out, salespeople sometimes just want to sell something that people are willing to buy. A well-executed script with a convincing story was good enough.

My cowboy days ended in the aftermath of the 2008 crash. As I’ve written in my books, that stretch of time between the end of 2007 and 2010 was the moment I realized that I wasn’t any good at market timing and that no one else was consistently good enough at it either. It wasn’t long before I dropped my Series 7 license and hung up my spurs. This epiphany forced a career change on me. I wasn’t going to be the guy who sold his ability to call the next twist and turn in the markets anymore. I was 31 years old when I learned the truth about how impossible cowboying was in the real world. It’s embarrassing that it took me that long. But I know 51 year old men who still haven’t figured this out.

Thankfully, around that time the ideas of Barry Ritholtz and Nick Murray and Jack Bogle entered my life and the rest is history. I have tons of ideas about stocks, market fluctuations and investing themes. I always did. And nothing delights me more than sharing them with readers and viewers while debating them with my peers in the industry. What’s different now versus then is I have a process. Here’s what happens if I’m wrong.

More importantly, now I have humility. I think such and such could happen but I know I don’t know for sure. Deep down, everybody understands this. Lots of people - especially professionals - have to bury this obviously rational way of thinking for the purpose of getting through the day or earning their living.

The portfolios my firm manages are not predicated on the idea that there is one highly likely outcome and all we have to do is invest as though it’s going to come true. Durability under a range of potential outcomes is the goal. Not making predictions and praying they come true. We take assets from the cowboys when those cowboys inevitably fall from the horse. We dust their clients off and pull them up onto the wagon. We teach people to allocate assets as though there’s an entire range of possible futures and that, come what may, we’d better be prepared for it.

Shotgun Willie would approve of this idea of durability under an array of potential circumstances. How many cowboys has he seen come and go during a seventy year career as a touring musician? Safe to say, he’s seen all of them. Willie’s still riding.

Here are this summer’s Outlaw Music Festival dates, in case you want to catch one of America’s greatest living institutions while he’s still at it.

Moodys vs Stocks

It has never been harder to be a stock market cowboy. We’ve just witnessed one of the greatest one-month stock market rallies in history. This past week, the S&P 500 went up five days in a row, rallying right into the Friday close. And then, a half hour later, the nation’s largest credit ratings agency, Moodys, delivered a downgrade of the US Treasury. For anyone who is unsure about the importance of the Treasury bond market on a global basis, I’ll phrase it thusly: The US Treasury bond is like the sun. Every other asset class is like a planet orbiting that sun, deriving light and heat from it and maintaining its own place in the firmament accordingly. Every risk is priced relative to the risk-free rate of return emanating from what one could earn simply parking money in a Treasury instrument - be it a bill, a bond or a note. The Treasury is the center of the galaxy. The price and relative attractiveness of anything you could put money into (stocks, real estate, corporate or municipal debt, venture capital, private equity, Bitcoin, gold, collectibles, etc) keys off of what one could earn by taking no risk at all via holding cash in US dollars or Treasury bonds.

As such, having the ratings agency of record call into question the creditworthiness of the US Treasury as a bond issuer is like a lightning bolt of uncertainty striking the ground right in front of you. S&P futures immediately lost one percent in the aftermarket yesterday, but the real tell will be the how international stocks react overnight on Sunday and then our own market open on Monday. Maybe this will be yet another negative the market decides to “look through” as it charges back toward the February highs. And maybe it won’t.

As my colleague Callie Cox points out, rival ratings agency Fitch downgraded the US Treasury in 2023 and it was greeted with a yawn. In 2011, Standard & Poor’s downgraded the US Treasury and it mattered a lot, contributing to generational volatility across all asset classes until the moment passed.

Here’s how the New York Times explains what just happened:

Here’s the FT with an illustration of these three consecutive downgrades over the last fifteen years:

The Trump White House wasted no time in repudiated the decision by Moodys to downgrade. Steve Cheung is the President’s Communications Director:

The usual combative, personalized attack. Fine. Expected.

Now what? Because the stock market has been acting as though none of the issues around debt, deficits or the effects of the trade war are going to matter going forward.

This downgrade comes after a 25% rally in the Nasdaq 100 and an 18% run for the S&P 500. Not just an ordinary rally, but an explosive one. With mass participation from virtually every corner of the stock market save for healthcare.

Here’s Chart Kid Matt, who shared this with our research team:

His chart below:

Remember, nothing you read here is to be considered financial advice, all standard disclaimers apply. Matt’s stuff is available to advisors who want to spruce up their own client communications via Exhibit A, learn more here.

So now you have a stock market that’s gained back nearly everything its lost this spring in convincing fashion versus a fresh downgrade of the US Treasury from the ratings agency triumvirate. Whom do you listen to? Which matters more, price action or economic realities? I can’t remember a time where it’s been harder to know.

Hence, the necessity of having a process rather than a forecast. It’s not sexy and it won’t land you on the cover of a magazine, but the process will keep you from forcing a guess, the results of which could be catastrophic. Sell all your stocks as the market potentially reprices a world in which the status of our solar system’s anchor has been called into question? Or ignore it because everyone seems to be ignoring everything else?

The “I don’t know” framework allows you stay invested in such a way that you can survive either outcome. The “here’s what’s going to happen…” framework is a coin toss at best, and every coin toss forces you into a future decision point - Okay, I sold, do I buy back in now or stay out?

The Cowboy acts on instinct. The former Cowboy who’s learned himself some lessons doesn’t. Market timing was never easy, but it’s probably never been harder either.

The End of Magical Thinking

This week Michael was away so I handled the hosting duties at The Compound and Friends solo. But I wasn’t alone - I had two incredible market watchers with me for the new episode: Chris Davis of Davis Advisors (and a current board director at Berkshire Hathaway who was in the room when Warren Buffett announced his retirement) and John Authers, who writes one of the finest columns on Wall Street for Bloomberg Opinion.

Chris and John bring decades of market experience to the conversation. We talked about the whole waterfront of issues facing investors today and I really enjoyed it. I hope you will too.

You can watch it below or listen on your favorite podcast app here.

Markets In Turmoil!

I should mention the official Markets In Turmoil shirt is now available in the Compound store in three colors, cobalt, purple and navy. You’re not going to want to trade your way through the next correction without it. Visit idontshop.com to get yours!

Lastly, we’ve got 231 tickets accounted for at the Chicago live taping of The Compound and Friends on June 3rd. There are a handful left if you want to grab yours.

We’re also booking slots for potential clients who would like to meet with the team in our new Chicago headquarters at the Salt Shed. To get on the calendar, send an email to [email protected] with the subject line CHICAGO. We’re getting these appointments set up right now. Can’t wait to see you there.

That’s it from me this week, have a great weekend! - JB