We’re in a particularly
vulnerable time in world financial markets.
Having just completed a significant 2 year market response (upwards) to
the global credit crisis, the question of whether or not we can sustain similar
economic magnitude has everyone’s attention.
Although financial data seems more or less in line with a nascent
recovery, investor confidence and activity are still less than robust.
The absence of empirical consumer spending and
corporate capital expenditures becomes the basis of a self fulfilling prophecy.
By no means am I suggesting
that all economic activity has come to a grinding halt. Aggressive deal-making has benefited from low
cost of cash, and currency revaluation has boosted foreign trade. Indeed, some emerging markets have raised
prospects for growth due to accommodative monetary policy and concentrations of
natural resources. While these isolated
portfolios have raised their probabilities of outperformance, outright global
bullishness remains an unattainable afterthought for now.
Thus, the name of the game is
still “risk management.” More dangerous,
though, are the players who fail to heed these data, choosing instead to
speculate, without science, on half-truths or rumors. Wise
decisions derive from a strict adherence to methodology and discipline. Our thesis begins by worrying about
consequences now, not later.
For these reasons alone, I am
worried about bond speculators, gold speculators, oil speculators, investment
banking and merger transactions, or any other financial transaction that smells
of “fad” or “immediacy.”
Take, for instance, the sudden
and recent rise in commodity prices.
While I have written for several years about burgeoning inflation forces
within the economic landscape, it has only been in the last 6 months that
investing and relative strength activity in commodities has taken off. What had been in hibernation for years
suddenly became the “sector-du-jour.” As if by accident, investors (speculators)
stumbled into the world of fundamental analytics and made a mockery out of it
by riding a trend, then looking to cash out.
It may sound like it, but I do
not begrudge these “faddists” their
profits. What I do object to are the
latecomers who accelerate fundamental demographic economic shifts by injecting
speculative capital, then leave as if the party might migrate elsewhere. As a youngster, I was taught to leave my
“play area” exactly as it was when I arrived.
The vigilantes who abuse the
markets for avarice and quick gain have failed to do the same, thus
exacerbating the feelings, by some, that the markets are unfair and that true
economic cycles of recovery don’t really relate to their lives.
Finding confidence.
Much to the dismay of many, a
consensus still exists that the financial markets are not “real” for them,
other than the occasional winner they might uncover in their portfolio. The hubris exhibited by the dot.com legions,
the credit mavens, and the commodities speculators serves to lay the groundwork
for investors to abandon their curiosity and withdraw from the game,
altogether.
I don’t share that
negativity. First and foremost,
confidence comes from process. Acting in
good faith and with prudent scientific methodology is a start. Regaining, or building, trust is a solemn
duty and begins with self awareness. If
one’s motives and methodology are legitimate, then control and results are
likely to follow. It is not sufficient to be part of a manic herd that follows rumor or
mania. Instead, we might try
substituting scientific observation and common sense for hyperbole.
Today’s global marketplace,
while hampered by negative fundamentals that we all acknowledge, is fertile
ground for discovery in biosciences, agriculture, healthcare, infrastructure,
technology, telecommunications, alternative energy, and consumer product
innovation.
No amount of speculation can change the lifecycle of human ingenuity.
