gold.com
It was pretty
much assured at the end of the 1990’s that if you affixed the suffix “.dot com” to the end of a company’s
name, you were going to make money owning the equity. The mania surrounding the internet almost
guaranteed a flow of speculative capital into new entrepreneurial
ventures. Indeed, the markets exploded
in valuation during that time particularly in technology shares, so one might
have expected that at some point there was potential for reversal. Unfortunately, the .dot com enthusiasts never
expected their new paradigm to recede by 90%.
It seems there
was an absence of rational evaluation.
Today’s fixation upon gold is a newer version of the same theme.
Science tells
us that for a rule to be proven it must contain objective, repeatable
hypotheses. Irrespective of changes in
demand, location, supply or intention, investor’s fixation upon gold defies
investment rules, investment logic and investment science. One can certainly understand the
obsession. In times of economic and
psychological distress people turn to safe havens. Gold,
however, is an inert base metal. Except
for the value which we ascribe to it, it has no inherent monetary value. Imagine, for example, if historically we
ascribed such reverence to pigs. We might
be worshipping pigs 2.0 or pigs.com.
Contrast the
mania generated by gold today with the dot.com mania a decade ago and you have
the makings of another calamitous market capitulation.
Markets.
A fixation with
tangible metals is both forward looking as well as reflective melancholy. Because the price of commodities had risen in
the past, people might expect that it is likely to do so again under similar
circumstances. In the case of
commodities, gold in particular, trends lose their appeal when everyone already
knows that the valuations have become inflated.
In today’s case, for example, we have been in a twelve year commodities
price expansion. While some might try to
eke out the last few cycles of profit within that trend, others (like me) wonder
how much greedier can the trend enthusiasts be.
There are no linear cycles that last forever and no free lunches.
The difference
between the speculators and the “tortoises” is that the speculators always
believe “it’s different this time.” That
is not good portfolio modeling, it is gambling.
Changes in
valuation come about because one side of a bet believes the other side is
wrong. Prices move contemporaneously to
the psychology of the day. If it were
otherwise, then every bet would always be a winner.
Quantitative
strategists, like myself, worry about probabilities of performance, not
absolute guarantees. Thus, asset allocation plays a greater role
in the potential for a portfolio’s capital gains than do any of the individual
constituents within that portfolio.
The science is imprecise. The
market does not always ebb and flow to a particular schedule, calendar, or
theme. I worry that any singular sector obsession is usually a recipe for
portfolio deterioration, not growth. Once again, our erstwhile dot.gold enthusiasts
believe otherwise.
Let’s put the
market today in perspective. We have
just experienced the longest, and magnitudinally largest, bull market in
history. That was followed by a series
of capitulations that nearly eroded any price gains of the last decade. We are presently within the second
intermediate downleg within that capitulation (bear) waiting for the downcycles
to disappear. Superimposed upon this
circadian rhythm are fiscal, monetary, and psychological factors which require
remediation before the markets can resume an all-inclusive bull phase. We are not there yet. A
fixation upon gold, in my view, is a distraction from the fear and uneasiness
we feel, not a secular trend or market norm.
My
contemporaries are quick to jump in and say “Who cares why the price of gold goes up.
Let’s simply make money off it.”
Well, my concern is that an inordinate amount of capital allocated to
one security is both a potential pitfall as well as a moral hazard to
investors. Capital which might otherwise
be resourced to doing something good is being siphoned off to make a quick
profit. If that’s the way of the
markets, it’s misplaced.
The scope of
the distraction is not uniquely American.
All global baskets are affected today by decades of credit, excess, and
leverage. While there may not be a
coordinated, syncopated element to these events, they do, nevertheless, overlay
the landscape in a similar manner. All
governments must live within their means.
Some geographies are “richer” than others. For the most part, austerity is the byword of
the day.
Our problem in
the markets today, though, is that linkage between global economies has never
been stronger. The old axiom that “if China
sneezes, America
Since financial
markets are also linked electronically, there also exists an international
horizontal relationship between psychology and finance. Investors who seek to reduce risk might find
global solutions as palatable as domestic ideas. The landscape of risk/reward algorithms is
widening as never before. As solutions
widen, correlation of data becomes more efficient. While there is no standardization of data
analysis, I’m finding my own database to be more inclusive of capitalization
parameters, sectors, geographies, and technology.
Strategy.
So, amidst the
confusion about where we go from here, how should investors play the current
secular cycle?
I am a
believer, corroborated by my research and track record, that one needs to widen
the aperture of perception in order to capture trends as they initiate upside
momentum. In other words, invest in your
own morality and observations about enduring need. If, in fact, capitalism is a problem-solving
machine, then divert your attention from fad, and focus, rather, upon demand
and need. Currently those themes are
embodied by biopharmaceuticals and
biotech; technology; agriculture including, water access and availability; and
brick and mortar infrastructure. This
is not to suggest that other sectors might not generate capital gains,
too. I am simply reflecting the
probabilities of long-term portfolio appreciation as depicted within my global
universe of financial data.
We also need,
somehow, to clear up the angst and despair associated with investing.
Our financial
institutions have been besmirched by individuals and collectives who used the
mechanism for their own gain. Policies
and measures must be implemented so that oversight is expanded and confidence
is returned. That is not a political
statement. I don’t care whether such
measures are self-imposed (well, maybe I do
care) or mandated by government.
What we do know is that
neither body was previously able to police the market sufficiently to abrogate
the effects of human nature: greed,
avarice, and self aggrandizement. I have always advocated for moral capitalism,
by which investment returns and psychological ardor are supported by what is
“right.” Who’s “right,” of course,
is the question.
Can the markets
bring stability and confidence back? I
hope so, but fear that structural inequalities have become part of the
system. Trading has become
technology. Technology processes bits of
information faster than one person can comprehend. Systems can talk to each other, and effect
transactions, automatically. Old–fashioned due diligence, research, even
hunch, is being supplanted by opportunistic algorithms that compute
probabilities.
Wait a
minute!! “Aren’t you a quantitative
analyst, Mr. George?” Indeed, I am. With a brain, heart, and a pause for
subjective reflection. My track record
is not simply a black-box solution, but a customized solution for individual’s
needs and risk/reward tolerances. That’s
something no computer can do. We don’t need
to hit home runs in order to keep investors in the game. We simply need to be attuned to their needs
and provide a logical, systematic discipline which reflects their values.
There is no
hedging that responsibility. The erosion
of investor confidence has done more to erode capital valuations than all the
remediations Wall Street has tried to pawn on them. A useful response to the .dot.com syndrome is
to stop trying to replace fundamentals with fad.
Asset
Allocation:
Equity 25%/Fixed
Income 40%/Cash 35%
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