It's
all about perspective
With the summer rally
in full swing, I'm hearing from clients about a duality in their mindset. On the one hand, they are grateful for my
navigation prowess and hopeful about a continuation of the market's good fortune. On the other, they are terrified about their
station in life (age, health, etc.); geopolitics; cross currents of
unpredictable exogenous events; raising cash and "sitting the rest of the
market out".
This classic imbalance
between wants and needs
is real, and must be respected.
What they, and I, see
is a market held hostage to daily tweets, global confrontation, and government
policies outside the span of their control, and which are oftentimes unrelated
to the strict rules of science and economics.
But it is not economic science that governs our everyday lives....it is,
instead, filling the gas tank, paying the mortgage, getting our children a
quality education. All these things are
more ethereal, less quantifiable, but significantly more important than
price-to-earnings ratios.
However, because of the
steady pace upwards of the financial markets it may be several months hence
that we look back and conclude when or what precipitated the end of the current
bull cycle. "What it is" and "what it feels like" might be two different phenomena right now,
but it definitely feels to me as if the tail is wagging the dog!!
Shield
from harm
One of the most
effective uses of my proprietary quantitative tools is to try and isolate
patterns of economic trends which, in the aggregate, create probabilities of
trend appreciation/depreciation. The
question, then, is not which "shiny investment model" we need to
invest in, but rather where the preponderance of the evidence might create the
right blend (for each client) of positive outcomes. Quite simply, rather than trying to find a new
good stock and bond picker, you need to keep the focus upon secular macro
trends and try to be correct about the balance
of risks associated with the
portfolio.
The problem with this
bull market (if you will indulge me your agreement that there is a problem) is
that so few industries and so few individuals are directly benefitting from its
largesse. Yes, some if not most profits
this cycle are rising. Some are rising
because of better corporate governance.
But some others are manufacturing profitability through layoffs or
stagnating wage growth. In truth, if a
corporation can give Wall Street the impression that they are controlling
costs, they may be accorded more favorable ratings than they deserve. Remember, demand
should be the primary driver of revenues, and to this observer demand is
the least influential factor in our current earnings cycle.
The
most noble form of profitability is to have the moral fortitude to produce
something beneficial to the global community at large, in addition to
maintaining your obligation of return for your shareholders.
One reason for that
moral vacuum is that we on Wall Street and you in the community don't demand
loudly enough for that kind of fealty.
At this point in the
economic cycle it appears that the next shoe to drop will be when our
psychological frustrations begin to play a stronger role in our investment
decision-making than does the simple expansion of "good news" and
economic fundamentals.
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