Legendary investor Sir John Templeton has a famous quote that still rings true:
“Bull markets are born in pessimism, grow on skepticism, mature on optimism, and die of euphoria.”
I have a new wrinkle. For today’s hyper-media-inundate-you-with-data-all-day-every-day era, somewhere between skepticism and optimism comes fatigue. And it’s bullish.
Stories have recently asked why CNBC’s ratings have tanked. In my view, you watch CNBC for two reasons:
1. You’re terrified of seeing what bad thing will happen to your investments next, but you can’t look away. Like a train wreck. (Hello, Financial crisis and Eurozone meltdown.)
2. You’re euphoric, and want to see how much your account will rise today. (Hello, tech boom, housing boom, etc.)
Investors aren’t any of these things right now. I think they’re just…fatigued. Fatigued of Middle East fears, Fed QE fears, of US debt/deficit fears, of Eurozone ills, of all of it. These things have been around for years now, and have lost much of their bluster power. Many aren’t so bullish, they’re just tired of spending so much energy worrying.
In my opinion, fatigue in this environment is bullish. It means there’s plenty of room for markets to rise and most still haven’t appreciated record earnings, and other meaningful positives out there.
Looking at history and the long waves of demographics is a great and fine thing. It can tell you a heck of a lot. It’s frequently the case that history is driven by large, abstract, impersonal forces rather than singular decisive events. But…
…to start forecasting equity markets using these metrics is a perilous thing. And it’s becoming all the rage lately.
The problem with demographics as equity market forecasters is that, first, in order for you to be right, you might have to wait, you know, a generation or more. Also, even if you can shoehorn a theory to explain all, at best you only have a few good data points to support the correlation tied to equity markets. That’s not much to stake a +20 year forecast on.
It’s an old adage: Investors have short memories. Another: the market discounts the future.
Here’s some interesting psychological research as to one reason that may be: Yesterday came suddenly
“Because future events are associated with diminishing distance, while those in the past are thought of as receding, something happening in one month feels psychologically closer than something that happened a month ago.”
There are few on the planet who’ve studied Star Wars as closely as me. Not sure if I should be proud of it, but it’s true.
But to understand Star Wars is also to have spent a lot of time on the Flanneled Prophet himself, George Lucas.
I think he’s been planning his sale to Disney for a long time. Lucasfilm would wither and slowly wane if they tried to remain independent: Disney is the only true logical buyer and can use its resources to grow the franchise. Plus, Lucas monetizes and better than doubles his wealth in the process.
This is a savvy move to see a legacy perpetuated long after Lucas is gone. Which is what Star Wars deserves.
As for the stories themselves…it’s my view these are timeless, archetypal, universal tales—which means, if I’m right, they should survive and thrive with new authors and new directions with new generations at the helm. Just like 10,000 writers and artists re-imagined Batman, Superman, Spider-man, Achilles, Thor, Rama, and so on, the Star Wars universe deserves such a fate too.
And anyway…there will be NEW STAR WARS FILMS. Which is awesome. My currently 4 year old nephew will be 8 when the first new one comes out, and I don’t know which of us will have more fun when it does; seeing his reaction alone will be worth the while.
By now, folks have gleaned the Sandy storm won’t have as much economic impact as feared. On the Monday of the storm I saw figures speculating upward of $75 billion in damages. By Wednesday’s end it was knocked down to ~$15 billion, depending who you ask. But it’s clear widespread consensus overestimated by multiples.
Acts of God are often a case study in bad economics. Though, it’s probably not the calculations so much as the psychology of the matter: it’s far better in most folks’ minds to overestimate than underestimate. If you worry too much, no one will blame you. But if you worry too little, fingers will wag in your direction. (In my view, most economists could use a crash course in Bastiat and Broken Window Fallacies before publishing their guesstimates, too.)
Natural disasters have rarely or ever had lasting deleterious effects on capital markets. It’s quite a statement about the durability and plasticity of global capital markets that the NYSE along with US markets generally can be closed for two days and one could barely tell come Wednesday’s trading action. And yet people worry over and over about this stuff.
“Tail risk” is all the rage today. There are products and prophesies galore on this supposed new topic.
To my mind, most don’t understand what tail risk is. The point of tail risk is that you can’t predict it, and so you then hedge nebulously to guard against the seemingly improbable. So let’s be clear: euro dissolution is not tail risk, though many believe it is. If you, and the rest of the civilized earth believe the euro will die, and that’s widely discussed in all corners of the galaxy, then that’s not a tail risk. Tail risk has an ineffable/unpredictable feature to it. Otherwise, it’s just fear-sodden doom and gloom that you can buy insurance against, often chopping expected returns and raising portfolio costs.
I guess you could sort of define Lehman Brothers as a tail risk. Except that banks fail pretty darn often through history—investment bank failures are not “8 standard deviation events.” Sorry. I’ve seen a lot of banks fail and I’m relatively young.
Folks are chasing their tails all over the place tied to risk these days. Even if you do recognize tail risk as a real category, no event in the modern era has kept equity markets down for very long. Even 2008. Perpetually hedging against the ineffable has never been a great pathway to wealth, and still isn’t.
Myopia is the mood of the era. (If myopia isn’t an official “mood” yet, let’s make it one. Like melancholy, amour, and that depressive vacancy we all feel in February when football is over.)
What’s the fate of the EU? Spanish yields at new euro-era highs? Is China only going to grow (gulp) 8% this year? And what about cotton prices! Oh cripes…the supreme court decision!
These are all questions for prop traders—people with a daily, monthly, quarterly, even yearly, focus. My bet is, if you’re an average investor, all this stuff feels uber important but has little or no real importance on building long-term wealth. And yet some investors occasionally get so caught up in the myopia they forget all about goals and the discipline of wealth building.
Learn to put stuff of the moment into perspective. A longer view, above the noise, shows a world of great opportunity with cheap stocks. If you think euro problems will sink the world for all-time, or middle east unrest will unravel all wealth, you simply have never studied history. Even if the euro capsizes wholesale, capital markets have withstood far tougher and rougher, and equities over the long-term have delivered. It’s the path to get there that’s often ineffable.
Myopia is generally depressing, isolating, feverish. I don’t like any of those things and neither should you. Shake the mood. Read a book like Peter Diamandis’ Abundance.
The folks at MarketMinder.com have offered a great and pithy piece analyzing the latest in financial innovation:
What Does VIX^2 Equal? — By Fisher Investments Editorial Staff, 03/15/2012
Except the history of the VIX tells us it’s not a reliable buy (or sell) indicator. First, if you plot the VIX against volatile periods of the S&P 500, there can be a strong negative relationship—meaning low-VIX points did signal good times to buy and the reverse. However, the relationship is coincidental and relative. Meaning VIX peaks and troughs happen at different index levels, and you have no idea an inflection point happened until after the fact. Then, too, you’d have to know ahead of time you were entering a period of heightened volatility. Often, strong stock returns happen against a backdrop of a fairly low and stable VIX. So for all the times the VIX may work nicely (and you have a crystal ball and can know a peak or trough has formed), there are likely as many situations in which it doesn’t tell investors much that’s very useful.
Now, the VVIX will measure the market’s expectations of the market’s expectations of 30-day S&P 500 volatility. (And everyone knows you can’t triple stamp a double stamp!) So if you are watching the VVIX, what is it you’re trying to time the purchase of? The VIX itself? Keep in mind, the VIX doesn’t appreciate. It generally fluctuates around a mean (and the VVIX will, too). It’s not a buy-and-hold game. Volatility isn’t an asset class—it’s the description of the movement of an asset class. And the VVIX is, evidently, the square root of the description of the movement of an asset class.
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One of the new, and more amusing, fears about the modern economy is that productivity gains in robotics and other technological marvels will make humans obsolete and the structural level of unemployment is headed higher. My fine friends at MarketMinder recently put out a nice piece on the subject:
By Fisher Investments Editorial Staff, 02/01/2012
As unemployment numbers have remained (predictably, as we’ve said) elevated in the recession’s wake, some have sought scapegoats. Seemingly popular is some version of “it’s technology’s fault,” which goes something like: Because of improved technology in [fill-in-the-blank] field, fewer workers are necessary to produce the same output, thereby displacing workers and actually contributing to an unemployment dilemma.” The other common strain is to blame cheap, foreign labor that can perform similar tasks to US laborers for significantly lower wages.
Both views, though, express a similar basic fear of societal progress and ignore the widespread benefits such progress redounds on all Americans regardless of income or profession. After all, consider just a few short years ago, only the very wealthy could afford computers at all, let alone tablets, smart phones, etc. with Internet connections. Now, they’re ubiquitous. Over time, productivity is a powerful force pushing prices down.
In our view, there’s little to fear from American manufacturing (and other industries) becoming increasingly productive over time. Making technology more broadly available at cheaper prices benefits not only Americans but the world. Hardly seems something to bemoan—rather, something to cheer amid continuing efforts to fight the scourge of global poverty.
Mark Mills and Julio Ottino’s Op-Ed in the WSJ on Monday, Jan 30, “The Coming Tech-led Boom,” is a must-read for anyone needing a good dose of optimism to combat persistent media hypochondri-nomics.
A couple teaser paragraphs:
First, demographics. By 2020, America will be younger than both China and the euro zone, if the latter still exists. Youth brings more than a base of workers and taxpayers; it brings the ineluctable energy that propels everything. Amplified and leavened by the experience of their elders, youth and economic scale (the U.S. is still the world’s largest economy) are not to be underestimated, especially in the context of the other two great forces: our culture and educational system.
The American culture is particularly suited to times of tumult and challenge. Culture cannot be changed or copied overnight; it is a feature of a people that has, to use a physics term, high inertia. Ours is distinguished by incontrovertibly powerful features, namely open-mindedness, risk-taking, hard work, playfulness, and, critical for nascent new ideas, a healthy dose of anti-establishment thinking. Where else could an Apple or a Steve Jobs have emerged?