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.
For those interested in forecasting (particularly for political outcomes) as a field of study, Philip Tetlock is a name you should know. Here’s an insightful interview: http://edge.org/conversation/win-at-forecasting. A few of my favorite quotes:
“I naively thought that pundits were in the business of accurately making forecasts” but really they are “flattering the prejudices of their base audience” and routinely “insulate themselves on vague verbiage…cushion themselves with rhetoric”.
As I say in most all my writings about forecasting and economics: Market behavior is much more like a CEAS (Complex Emergent Adaptive System) than it is a neat and tidy math-based equilibrium model. Here’s a fun piece:
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?
I’ve always believed meteorology has been a good way to think about economic forecasting models. Simply, economists can, via statistical analysis, have some visibility on what might happen next, but the system (be it ecological or economical) is so vast and complex we just don’t have the models to know with precision what will happen, even in the immediate future. So, after the Irene panic over the weekend, we instead get headlines like ‘People assume we can predict everything’…; NYT: Experts Misjudged Structure and Next Move…; IRENE: A PERFECT STORM OF HYPE…, and so on. It’s not that the meteorologists did a bad job—they’re just limited in what they can do, and in a situation where lives are on the line they will err on the side of caution.
This is basically—almost precisely—how to think about economic forecasts. Are we headed for another recession? Maybe. My sense is probably not. But recent weak economic data don’t guarantee anything either way. Quarterly and monthly data especially is lumpy, and never moves in a straight line. So, you get a headline like this that surprised a lot of folks this week:
Statistical economic analysis in forecasting, even just a month ahead, is at this point a lot like meteorology—the system is too complex to predict with perfect accuracy.