Like many value investors, my skepticism of economic predictions and forecasts runs fairly high. There was a time when I rarely devoted any serious time to thinking about GDP growth, unemployment levels, or our government’s fiscal policies. Not because such things aren’t important, but because they are so difficult to accurately predict. Successful investing is much more about solid bottoms”up analysis than accurate top”down forecasting.
In recent months, however, my skepticism about the usefulness of macroeconomics has been dulled by my contrarian streak. When every headline seems to be cause for a sell”off on Wall Street, I find myself reflexively searching for silver linings. And I’m pleased to say that despite recent headlines, there are more reasons for optimism out there than you might think.
But first, let’s review the main drivers of the stock market’s behavior over the last three months. Sovereign debt fears ” in Europe of all places ” seeped into the market’s consciousness around the same time some of the biggest banks on Wall Street started getting sued and subpoenaed by the U.S. government. Meanwhile, the biggest financial reform legislation of seventy years was being debated in D.C.
Then, the biggest environmental disaster in our nation’s history tragically unfolded live on YouTube. It was ridiculous, infuriating and entirely preventable. Strangely, Goldman Sachs appeared to have nothing to do with it.
All this was going on, mind you, as the country tried to emerge from a recession that began more brutally than the Great Depression. Let the resulting anxiety about jobs, real estate prices, and unsustainable deficits continue to build. Add a thousand click”happy hedge fund traders using leverage like it was table salt. Withdraw a huge amount of government support in the markets. Throw in a few datacenters full of buggy computers causing inexplicable 1,000”point drops in the major indices. Finally, give everyone with an opinion about any of the above a microphone, blog, camera or column.
What we have ended up with is utter information chaos. It is historic, it is unsettling, and is completely irrelevant when it comes to long”term investing.
Fortunately, there is some signal in all that noise. Alas, it can take a bit of wading through some macroeconomics to isolate it. I’ve found that to be a bit more tolerable, though, if you keep three things in mind:
First, to paraphrase one wise economist, the point of tracking economic data isn’t to be able to answer all kinds of questions – it’s to learn how to tell when you’re being buffaloed by an economist.
Second, until proven otherwise, assume all economic predictions reflect a strong, covert political ideology of one stripe or another.
Finally, keep in mind that, as one of my veteran friends recently reminded me, the entire field of economics is BOGSAT. As in: a Bunch Of Guys Sitting Around a Table. They contribute so little to GDP. Step it up, fellas!
The long”term economic threats this country faces – from our federal deficit to inflation to the rise of China ” concern me both as an investor and an American. We unequivocally need to get thrifty again. High inflation should be avoided at all costs. And I find it unsettling that the Chinese government is run by driven engineers, while ours is run by bickering lawyers.
To be clear, I have nothing against lawyers. Just constant bickering. In any case, those threats are better discussed another day. If the markets aren’t concerned about them, then it seems more appropriate for me to stay focused on what is more immediately in front of us ” our portfolio.
I know. Some portfolio manager in Greece probably wrote the same thing to his investors six months ago. The difference, though, is that our country actually has time to solve these issues. I say that because right now the bond markets are not at all worried about U.S. deficits. The rates on U.S. bonds have dropped through the floor, meaning bond traders are remarkably unconcerned about our spending. The Greek government makes ours look Amish, I suppose. The spread between inflation protected Treasury bonds and regular bonds is currently low, too, implying that inflation is not a serious risk to be concerned about yet, either. Far be it from me to speak for bond traders ” do you all still eat onion cheeseburgers for breakfast? ” but my point is that the bond market is not telling me to figure out how to fix social security prior to buying more shares of Google.
The Downside
This next point in particular seems to be getting lost in all the noise.
Let’s assume for the sake of the argument that I am horribly wrong, and that the economy continues to dive right into a double dip recession. Let’s tack on other assumptions, too, including a double dip in Europe (which does seems likely, though no one is talking about it), persistently high unemployment and a bleak outlook for home prices. Let’s also assume our political leaders remain reasonably rational in their response to this scenario ” or at least that they fake it for a while.
Should a double dip occur, even under those circumstances, it’s hard to see it being anything other than a mild recession.
Housing is already near a bottom, banks have already been re”booting themselves with new capital, and big companies have already gone through rounds of deep layoffs – and they’re sitting on historically high piles of cash. And whether you’re a supply”sider or a Keynesian, that we’re coming up on election season means that a double dip will certainly not go unaddressed in D.C.
So even if I’m wrong, I believe the downside is limited ” at least in terms of investing. You are on your own if you quit your job to flip condos in Vegas again.
This, by the way, is also why you need a margin of safety in the companies you buy shares in, too – in case things go south for reasons you don’t originally contemplate.
Lastly, pundits calling for the end of America and/or a great depression are being, in the strictly academic sense of the word, asinine. You feelin’ me, Krugman? How about you, Elliott Wave guy? No more crazy talk outta either of you. We are America, dammit ” the land that brings you moments like in this video.
(Wait for it….wait for it… and watch the guy in the lower right.)
(This is part 1 of a series of posts from Cale Smith’s June 2010 letter to investors, entitled “Why We’re Buying in This Market.”)
Cale Smith
The original article was published on http://www.fwallstreet.com/
In recent months, however, my skepticism about the usefulness of macroeconomics has been dulled by my contrarian streak. When every headline seems to be cause for a sell”off on Wall Street, I find myself reflexively searching for silver linings. And I’m pleased to say that despite recent headlines, there are more reasons for optimism out there than you might think.
But first, let’s review the main drivers of the stock market’s behavior over the last three months. Sovereign debt fears ” in Europe of all places ” seeped into the market’s consciousness around the same time some of the biggest banks on Wall Street started getting sued and subpoenaed by the U.S. government. Meanwhile, the biggest financial reform legislation of seventy years was being debated in D.C.
Then, the biggest environmental disaster in our nation’s history tragically unfolded live on YouTube. It was ridiculous, infuriating and entirely preventable. Strangely, Goldman Sachs appeared to have nothing to do with it.
All this was going on, mind you, as the country tried to emerge from a recession that began more brutally than the Great Depression. Let the resulting anxiety about jobs, real estate prices, and unsustainable deficits continue to build. Add a thousand click”happy hedge fund traders using leverage like it was table salt. Withdraw a huge amount of government support in the markets. Throw in a few datacenters full of buggy computers causing inexplicable 1,000”point drops in the major indices. Finally, give everyone with an opinion about any of the above a microphone, blog, camera or column.
What we have ended up with is utter information chaos. It is historic, it is unsettling, and is completely irrelevant when it comes to long”term investing.
Fortunately, there is some signal in all that noise. Alas, it can take a bit of wading through some macroeconomics to isolate it. I’ve found that to be a bit more tolerable, though, if you keep three things in mind:
First, to paraphrase one wise economist, the point of tracking economic data isn’t to be able to answer all kinds of questions – it’s to learn how to tell when you’re being buffaloed by an economist.
Second, until proven otherwise, assume all economic predictions reflect a strong, covert political ideology of one stripe or another.
Finally, keep in mind that, as one of my veteran friends recently reminded me, the entire field of economics is BOGSAT. As in: a Bunch Of Guys Sitting Around a Table. They contribute so little to GDP. Step it up, fellas!
Five Crises At a Time, Please
The long”term economic threats this country faces – from our federal deficit to inflation to the rise of China ” concern me both as an investor and an American. We unequivocally need to get thrifty again. High inflation should be avoided at all costs. And I find it unsettling that the Chinese government is run by driven engineers, while ours is run by bickering lawyers.
To be clear, I have nothing against lawyers. Just constant bickering. In any case, those threats are better discussed another day. If the markets aren’t concerned about them, then it seems more appropriate for me to stay focused on what is more immediately in front of us ” our portfolio.
I know. Some portfolio manager in Greece probably wrote the same thing to his investors six months ago. The difference, though, is that our country actually has time to solve these issues. I say that because right now the bond markets are not at all worried about U.S. deficits. The rates on U.S. bonds have dropped through the floor, meaning bond traders are remarkably unconcerned about our spending. The Greek government makes ours look Amish, I suppose. The spread between inflation protected Treasury bonds and regular bonds is currently low, too, implying that inflation is not a serious risk to be concerned about yet, either. Far be it from me to speak for bond traders ” do you all still eat onion cheeseburgers for breakfast? ” but my point is that the bond market is not telling me to figure out how to fix social security prior to buying more shares of Google.
The Downside
This next point in particular seems to be getting lost in all the noise.
Let’s assume for the sake of the argument that I am horribly wrong, and that the economy continues to dive right into a double dip recession. Let’s tack on other assumptions, too, including a double dip in Europe (which does seems likely, though no one is talking about it), persistently high unemployment and a bleak outlook for home prices. Let’s also assume our political leaders remain reasonably rational in their response to this scenario ” or at least that they fake it for a while.
Should a double dip occur, even under those circumstances, it’s hard to see it being anything other than a mild recession.
Housing is already near a bottom, banks have already been re”booting themselves with new capital, and big companies have already gone through rounds of deep layoffs – and they’re sitting on historically high piles of cash. And whether you’re a supply”sider or a Keynesian, that we’re coming up on election season means that a double dip will certainly not go unaddressed in D.C.
So even if I’m wrong, I believe the downside is limited ” at least in terms of investing. You are on your own if you quit your job to flip condos in Vegas again.
This, by the way, is also why you need a margin of safety in the companies you buy shares in, too – in case things go south for reasons you don’t originally contemplate.
Lastly, pundits calling for the end of America and/or a great depression are being, in the strictly academic sense of the word, asinine. You feelin’ me, Krugman? How about you, Elliott Wave guy? No more crazy talk outta either of you. We are America, dammit ” the land that brings you moments like in this video.
(Wait for it….wait for it… and watch the guy in the lower right.)
(This is part 1 of a series of posts from Cale Smith’s June 2010 letter to investors, entitled “Why We’re Buying in This Market.”)
Cale Smith
The original article was published on http://www.fwallstreet.com/
