The notion of risk-on/risk-off is so tempting to believe in. But it’s rote nonsense and always has been. There is no lever traders and fund managers pull each day where they all decide today is a “risk on” or “risk off” day.
There are millions of separate interests and views affecting the markets, all days, always. That correlations sometimes go up, and sometimes go down tells you nothing about how anything is likely to behave moving forward. Non-serial auto-correlation has been a fact of investing life basically forever no matter how volatility and correlation spikes or quells.
Also, what’s risky changes! What’s risk today is different than perceived risk a few years ago. Remember when the euro was the safest place to be? Now it’s a risk asset!
Don’t be fooled by this stuff—market cycles see changes in leadership and periodic corrections. Volatility and correlation will do the same.
Yes, Q1 GDP growth was revised down to 1.9% from 2.2%. But look at a basic breakout:
Personal Consumption: +2.7%
Private Domestic Investment: +6.3%
(Note: the traditional GDP calculation nets these two out, which then becomes a negative. But this blog has long held that savvy investors like to see big, heavy export and import growth.)
Government -3.9%! Essentially, the US economy is thundering along like a classic Detroit muscle car, while—and supply siders and fiscal hawks alike will love this—the government contracts big time.
Most folks will look only at the top line GDP number and perceive tepidness—looking just one level further reveals a very healthy US economic picture.
Forget about this part for a moment:
Wall Street Hubris Caused Facebook Mess – Zachary Karabell, Daily Beast
Unless you actually bought shares on day one (and didn’t heed Ken Fisher’s classic advice: “IPO means It’s Probably Overpriced”), there are more interesting things to note about the FB offering.
It’s the first ever (that I can find, that also isn’t something exceptional like coming out from under government ownership) IPO debuting bigger than the weighted average market cap of global markets. This is truly amazing—a big cap growth company IPO! It beats Google, it even beats zingers like EDS back in the go-go days.
This speaks volumes about the likely shift in market leadership from small value to big growth and quality, which in my view probably goes on for some time as the bull market enters later phases.
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.
My boss Ken Fisher has been a pioneer in a lot of things: behavioral finance, the investment advisory business, to name a few of the biggies. To me, his newest book is especially important: Markets Never Forget (But People Do): How Your Memory Is Costing You Money-and Why This Time Isn’t Different (Wiley, November 2011).
So much of the work in psychology and economics/investing talk about the mistakes people commonly make in abstract terms or with lab experiments. But Ken Fisher’s book does something different: it takes many important lessons about how our minds fail (particularly our memories), and puts them in the context of market history. In particular Ken Fisher focuses on how short our memories are, collectively—how so many things we think are unprecedented actually have ample and clear precedence in our past, we just fail to remember. Psychologists call it “myopia”, “biases”, “aversions”, and many sorts of other official-sounding technical definitions.
Forget the technical terms and focus on the reality. This is a key reason to study market history carefully—it prevents you from forming false idols and notions about things that didn’t really happen the way we (you, me) remember them. Ken Fisher’s book reminds us it’s not that we simply forget (we do), it’s that we misremember routinely—brains tend to remember details based on emotion, not rationality.
Here’s a bit from a recent interview with Ken Fisher on history and market forecasting:
Ken Fisher: History doesn’t repeat, not exactly. And the past cannot predict the future, but it is one good tool in determining if something is reasonable to expect. Investing is a probabilities game, not a certainties game. Nothing is certain in investing—all you can do is determine what a range of reasonable probabilities are.
In the same way, it’s not a possibilities game. It’s possible the world gets hit by an asteroid and destroys life as we know it, but the far greater probability is no such terrible thing happens.
You can’t develop a portfolio strategy around endless possibilities. You wouldn’t even get out of bed if you considered everything that could possibly happen. Instead, as I show in the book, you can use history as one tool for shaping reasonable probabilities. Then, you look at the world of economic, sentiment and political drivers to determine what’s most likely to happen—while always knowing you can be and will be wrong a lot.
For more information on Ken Fisher’s latest book, visit Wiley’s website.
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?
Eddie Van Halen recently turned 57. This is not important for investors to know. But in a way, it sort of is.
Eddie was/is a heretic—he was never taught music, he never went to a formal school. Instead, he loved it so much he taught himself. There are stories of him sitting on the edge of his bed in high school, when everyone else was out, playing the guitar the whole night through, for many nights in a row. He never followed anyone else’s path (though he did learn a lot of Clapton songs), and as a result his take on the instrument is so singular and unique, you can tell it’s him in just a few notes, and no one can truly mimic him to this day.
This is what investing is all about. If you follow some program, or some other set way of thinking about the world—all you’re doing is mimicking, and that almost never works in investments because known and accepted programs get priced in. You can’t be Warren Buffett or Ken Fisher, only they can be. You have to forge your own way, your own style of thinking. You have to be unique.
From Wikipedia: The All Music Guide has described Eddie Van Halen as “Second to only Jimi Hendrix…undoubtedly one of the most influential, original, and talented rock guitarists of the 20th century.” He is ranked 8th in Rolling Stone’s 2011 list of the Top 100 guitarists.
I wanted to be Eddie when I was a kid. I still do. I’ve logged so many thousands of hours trying to play like him, and spent so much money on his gear…at some point around age 22 I realized I would never be a great guitarist because I was trying to be somebody else. I took that lesson into my career at Fisher Investments, and I spend all my focused thought trying to forge my own way, and learn from it when I’m wrong.
Eddie doesn’t do many interviews or speak very much, but I remember him once saying, “You only get twelve notes, it’s what you do with them that counts.” In investing, we all pretty much have the same information now, all the same newspapers and so on, for the most part. It’s what you do with the information that counts—it’s the unique insight. No computer or algorithm or statistic can do it for you.
I couldn’t be more excited for Eddie, now 57 and on the eve of the new Van Halen album and tour. The VH sound has always been both distinct and consistent, even when singers changed. And yet Ed tends to reinvent himself every time—there will be something new he pioneers in this album, some sound we’ve never heard before. If only we could all do that in investing: consistent innovation, driving the whole system forward along with us.
As said on this blog previously, Europe will surely be weak economically this year, but probably not as weak as many fear. The reason: the rest of the world—which is stronger—will drag it forward.
A prevailing worldview among economists is that a weak region will “infect” the rest of the world. This can sometimes be true, but usually the opposite is true: a stronger rest of the world keeps the weak region afloat. Europe is big, sure, but the rest of the world is far bigger, and that features the US and Emerging Markets—two relatively strong areas.
Recent data is confirming this notion:
January Eurozone Flash Composite PMI Points to Growth, Beats Estimates
Actual: Manufacturing: 48.7, Services: 50.5, Composite: 50.4
Andy Kessler’s Op-Ed in Tuesday’s WSJ is a must-read tied to the trends in overall standards of living and availability of products. He touches on income disparity—I’m not going there but you can make your own conclusions. Kessler’s perspective is most useful for putting into context capitalism and the boons it brings to wide swaths of the population over time. My favorite part:
“Just about every product or service that makes our lives better requires a mass market or it’s not economic to bother offering. Those who invent and produce for the mass market get rich. And the more these innovators better the rest of our lives, the richer they get but the less they can differentiate themselves from the masses whose wants they serve. It’s the Pages and Bransons and Zuckerbergs who have made the unequal equal: So, sure, income equality may widen, but consumption equality will become more the norm.” The Rise of Consumption Equality – Andy Kessler
And, check out the website to my class at Cal Berkeley here: http://www.fisherinvestments.org
According to Fisher Investments analyst Brad Pyles (read more of his work here):
The European Union (27 countries including the UK ) represents roughly 26% of global GDP. This is similar to Asia at the end of 1997. As Asia went through its own solvency crisis (better known as the Asian Contagion), its GDP fell -0.6% in 1998 (see table below). While this caused Asia to underperform, it did not cause a global bear market. Furthermore, when you exclude China (whose GDP dropped near a two decade low but remained above 7% y/y), Asia’s GDP dropped -1.9% in 1998 while composing a slightly smaller percentage of global GDP than the current EU, but still a larger portion of global GDP than the current EMU.
This appears to show that a large portion of the global economy can modestly go negative for an extended period of time without causing a bear market, provided the global financial system remains intact and the rest of the world continues to grow. Consider that even the large 1998 correction did not occur until the Asian Contagion’s secondary effects took down Long Term Capital Management and threatened the global financial system.