Market Commentary for the week of February 18, 2020

All economics is local

In the throes of a Presidential election here in the US, many of us are familiar with the phrase "all politics is local".  But did you also know that many municipalities have their own unofficial market basket/economic monitor that tracks the rise and fall of local businesses or stocks located within their domain?  These informal indices serve as important mileposts/talking points about not only the vibrancy of the local community and the health of the stock market overall but also the psychological and emotional well-being of the citizens.  Semiconductors in Silicon Valley, travel and tourism in the Southeast, agriculture in the Midwest, coal mining in Appalachia, oil production in the Southwest are industries obviously not uniquely confined to those regions, but which have a kind of self-evident connection to these communities and territories in the country.

From these examples, and others, one also might reasonably say that "all economics is local".  Of course, no axiomatic phrase is meant to apply in all cases.  They are simply for instructive purposes.  To the contrary, I argue that globalism and technology have made all economics universal.   This local versus global  conversation has broader meaning because a case can be made that the stock market's rally is really a mirage of sorts, a deception which belies the hardships of those who are falling behind versus those who are thriving.

Yes, I understand that if you are an investor in the stock market there is no denying that you are doing well...it's kind of hard not to!!  However, not everyone is invested nor has the means to do so.  That means that in spite of superior numbers being posted by the Dow Jones, a local index of stocks...shops on main street, the neighborhood mall, or environs....might be in deep distress.  This kind of dichotomy between the market (and the daily profusion of business news) and your local economy is what I have frequently called "a parallel disconnect".

Again, no one is disputing the market's fantastic performance recently nor the abundance of wonderfully positive economic news.  Consider, though, how one justifies medical pandemics, homelessness, hunger, climate catastrophes, and regional warfare in the face of such incredibly strong global economic data?  Wouldn't a truly universal economic boom eradicate or address some of the inattentiveness or disregard that many have towards the disaffected in our communities?

Is it all about you?

Thus, "all economics is local" becomes a figure of speech for "I'm fine, you're not...and that's no concern of mine".   When you are comfortable in your personal life and enjoying modest good fortune in your pocketbook, you become too skeptical about taking on many other issues outside your four  walls. Scores of governments and provincial politicians are starting to adopt cultural purity.  One's well being, it appears, has become a condition of their location of birth and financial circumstance more so than any empathy or compassion that the well-to-do feel towards the unfortunate.  I strongly believe that geopolitical issues and a diminishing interest in "how the other guy is doing" is the trend that has the potential to eviscerate the valuation gains the markets have made in the last decade.

Last week's activity in stocks was a continuation of more of the same..."Coronavirus" volatility; low interest rates leading to "default" stock purchasing; high consumer confidence causing sales figures to increase; better than expected earnings affecting the energy and tech sector;  and moderate GDP, which is "just fine" according to Federal Reserve Chairman Powell.  It is almost as if the laws of physics, gravity, mathematics, and economics themselves have been suspended for a moment to placate the fervent equity shoppers of the world.  Money makes money when no other alternatives are presented.

Sector-specific analysis and micro managing one's portfolio daily gains have become a fixation for some. Every little detail has become compartmentalized.  Tech stocks are a proxy for technological innovation and computerization; travel and leisure stocks are a proxy for discretionary spending and savings; oil stocks are a proxy for industrial capacity (and vehicular manufacturing); defense stocks are a proxy for conflict and warfare.  Be aware for the future that automation and artificial intelligence are forming the underpinning for an economic configuration in which medicine, transportation, agriculture, and engineering derive from a whole new global nexus and regional identity...yet to be determined.

Every industry, every category has its "homeland" of origin.  The next time you hear that the Dow Jones Average has made a new high, do two things: (1) walk into your local town center and observe whether or not there are shuttered storefronts, and (2) thank your lucky stars that you are one of the "local" beneficiaries of the market's current largesse.

Finally, I would strongly urge you to open your aperture of awareness and take the long view about investing.

Market Commentary for the week of February 10, 2020

Fed...what Fed?

Several anticipated secular employment data were released last week, without much fanfare, particularly indicating that traditional brick and mortar retailers were suffering from decreased sales, limited foot traffic (most notably at shopping malls), and that tens of thousands of employees will be  laid off in the coming months.  Yet, the overall employment statistics were quite good because the amount of jobs created in other more technological fields has been increasing and offsetting whatever losses elsewhere might have occurred.  Make no mistake, the preponderance of employment and overall economic activity is good.  So investors had to focus on other news to justify the enormous bounce back stocks experienced for the week.  Besides looking at the resolution of the Presidential impeachment process and the reduction of Chinese tariffs, I think there is one specific area they should be studying....

If, indeed, low interest rates  are the engine behind the stock market's last decade of success, perhaps we need to focus more upon the locomotion effect they created than upon the shiny vehicle that sits atop.

For the last century every recovery has been ushered in by lower rates... a clear attempt to make borrowing money to cultivate new enterprise more affordable.  (Conversely, every recession has been preceded by higher rates as central banks sought to rein in spending and inflation).  But with global rates at, near, or below zero those central bankers have lost their monetary and psychological advantage over the direction, magnitude, and duration of the business cycle.

We might want to prepare for an economy...at least in the near term....which is wholly governed by fiscal and moral doctrines more so than by traditional supply/demand monetary-style economics.  The tail will, for certain, wag the dog in that instance.  Traditional guideposts and norms of our past might only minimally apply going forward.

The new normal is lower inflation and lower rates.  However, another offshoot of that "new normal" is lower growth rates, as well.  Strategies for incentivizing commercial and personal spending must now fall into the domain, brain power, and idealism of scientists, entrepreneurs, educators, social theorists, and, of course, politicians.

Taxes, spending initiatives, war, immigration displacement, healthcare, and infrastructure are now the new engines driving the global economy especially in an era where cultural/geopolitical differences are exacerbating and bank's monetary influences are receding.

Since this is a relatively new economic phenomenon there are doubts that the outcomes prescribed by these new "influencers" are a necessary and sufficient predicate for the development of effective policies.

New tapestries

Before the Federal Reserve or ECB (European Central Bank) ever existed, causes for economic booms and busts were numerous.  Capricious passion, agriculture, weather, territorial conflict, industrialization, and geography were the prosecutors of the economic landscape.  For all intents and purposes there was no monetary policy.  Spending and taxation were local matters handled by powerful despots, kingdoms, and fiefs.  Don't forget also that the currency of those times was based in commodities, textiles, gold, and other precious minerals.

Macroeconomics is a relatively new study.  It represents the global economy as a whole, not just individuals and firms.  When we act responsibly, morally, together there is a much more powerful economic engine to be had.  Unemployment is lower when the common good is the desired outcome.  Demand is better when the common good is the desired outcome.  Growth is sustainable when the common good is the desired outcome.

Fear, volatility, recession, marginalizing one's neighbors is the outcome when "every man" is in it for their own benefit.

Our politics is a harbinger of a new social paradigm led by nationalism, proprietary interest, and cultural survival.  Despite a new sense of social and economic imperatives brought about by synthetic monetary manipulation (low interest rates), we sometimes need a reminder that the Dow Jones Industrial Average is not always the best barometer by which to measure our outcomes. 

Market Commentary for the week of February 3, 2020

Despite all fears...

Many would have you believe that last week's intense volatility was prompted by the global effects of viruses, impeachment, and market valuations, symptomatic of an urgency to ascribe blame where none really exists.  Unfortunately, sensationalist business programming on television works that way but real economics doesn't.

Nevertheless, I am grudgingly coming to the conclusion that it is "different this time."  No, not the kind of banality that caused investors in the 1990's to stampede into stocks, believing that the market had nowhere to go but up, defying probabilities, math and logic.  What I am gradually coming to realize is that the processes  are changing.  Immediate access to information...all the time...is changing the way we interact with others, view investments, create values by which we live.  The advent of 24 hour constant contact has given us no time to breathe, digest, or evaluate things.

And it is hurting traditional portfolio methodology by making the uninitiated feel empowered and opinionated like never before.

What is the old saying?  A doctor should never operate on himself.

I am fearful that information overload is leading the investment community closer to "Fast Disaster" than to "Fast Money".  I think it is time to redefine what it means to be rich and whether our quality of life is actually a function of how much money is in our portfolios.  Wealth enables the capacity for empathy, not just the acquisition of toys.

Naysayers will call me old-fashioned.  They might say that algorithms and models function much better today than in the past.  They point to the fact that the market has quadrupled since the Great Recession (2009).

In response, I will acknowledge that, in fact, I am old-fashioned.  I believe in serving my clients diligently and comprehensively, by identifying their specific needs and risk tolerances.  Quadrupling one's money in the last decade hasn't really happened for many anyway.  Why is that?

As for algorithms, many of you know that I have identified myself as "quantitative scientist" for over four decades, creating proprietary stochastic data (ArlingtonEconometrics) for portfolio allocation, securities selection, and risk management for clients.  It is not having  the tools that matters, it is how they are used.  Instantaneous trading systems can both expand potential returns as well as destroy them.  How do major banks equipped with this technology, for example, wind up with the occasional billion dollar trading loss?  And who amongst you, my readers, wants the headache and responsibility of tracking the market minute-by-minute?

Not to mention...

But this query goes far beyond "old versus new".  The major change that I am witnessing is how we "feel"  about things: markets, politics, facts, each other.  We seem to be holding on to a trepidation about things that has taken some of the joy out of those experiences.

Statistics tells us that after we reach absolute "bottom" (zero) the only way is up.  But today's investors seem stuck on zero emotionally, perhaps wounded by the injuries suffered during the dot.com catastrophe or the Great Recession.  Yet still they hope against hope for their accounts, too, to quadruple. These are the bizarre and troubling conversations and expectations that any money manager in today's world is faced with.  Bear in mind that I am not comparing the valuations of those times, simply the attitudes, norms, and extremes of how we evaluate them.

What used to be unchallenged is now challengeable...in a matter of minutes on one's I-phone.  The levers that used to attach to decision-making are no longer applicable.  People feel as if they are one bad decision away from disaster, rather than being on a long journey towards success.  Given two or three minutes we know that all "particulars" can be refuted or abandoned altogether.  But is two or three minutes really enough time to intermediate between ideas that might have far reaching consequences....who to marry, what home to buy, what financial instruments we own?  What algorithm can possibly describe how we feel about life's decisions?

I suppose that we/I have to get used to a world in which cycles rise and fall much more quickly, and where the precariousness of bad versus good intensifies audaciously.