If you are an investor, ignore the rest of this post.
Still here? You'll be sorry! I am about to toss out a stomach-churning mess of conflicting statements and data that, if you're not already out of the market might just chase you out.
How is one supposed to filter through all the noise out there right now? Are we going into a recession? Is inflation back? What is the Fed doing? Will they rescue us? Can they rescue us? Should they rescue us? Do we even need rescuing? Should we even care? I don't have answers, but here are some of the things I am hearing lately.
Yesterday we hear that Greenspan thinks the risks of a recession are growing, so he has upped the odds to 50%. I will simply respond by quoting Laurence Peter:
"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today."
Then I see an interview with Jack Bogle, venerable founder of Vanguard and index fund cheerleader. Very uncharacteristically, Jack said, with a glint of fear in his eye that if he were a speculator, he would be completely out of the market. This from a gentleman who has built his career on the premise that active management is a waste of time. Hmmmm.
A couple days ago Buffett was heard to exclaim that if employment slips a recession is certain. Probably true, but Buffett himself has said that:
"To the extent that we have any thoughts about macroeconomic factors, short-term market moves, etc., we do our best to ignore them."
Next there is inflation. The last two days have seen major jumps in PPI and CPI, especially the headline numbers. Even the so-called core numbers were hotter than expected. This brings up the core vs. headline debate. Core has energy and food prices stripped out, which makes it relevant when we all finally stop driving, heat our houses with firewood and go back to hunting and gathering (or grazing on our lawns) for sustenance. The reason food and energy are removed is because they are inherently volatile, so their volatility can mask trends in real inflation. Fine, but if food and energy prices continue to trend upward over time, (and they have been for a LONG time) we better start paying attention to the headline number. Our wallets certainly are, and so is just about every company I follow.
Inflation certainly seems like a concern, yet the media is rife with "Fed whiners" sobbing that Ben let us down on Tuesday (and then Wednesday) by not dropping the funds rate enough (which of course shouldn't be dropped at all if inflation is lurking). Further, no one really seems to know what to make of the Wednesday announcement regarding central bank auctions. He whose name shall not be spoken (ok- Cramer) was in full whine mode on Wednesday, going as far as to suggest that the Fed is clueless and isolated in their ivory tower, and that they probably believe it is "unseemly" for poor every day folks to make money in the stock market. This would be absolutely hysterical if so many folks didn't hang on what's-his-name's every word. He is no dummy, but his short-termism and insatiable thirst for immediate gratification and self aggrandizement frequently stymie his intellect.
Interest rates, as defined by the Fed funds rate and 10-yr are low. Period. But as some other Directors have posted here recently, the Fed seems to have little control over real interest rates and less over the so-called liquidity crisis. Libor, mortgage rates, and corporate debt rates could care less about the Fed it seems. I don't think there is a dearth of liquidity out there but there is clearly a paucity of trust. Dick Bove, a veteran bank analyst currently at Punk Ziegle, has a very interesting plot of M3 (no longer an official measure of the money supply because, according to him, it shows what is really happening) that indicates that liquidity is exploding. If the financial institutions can get past being afraid of their own shadows rates will drop and liquidity won't be an issue.
What the heck, as stock guys, are we supposed to do with all this information? Nothing. Ignore it. Invest in some good companies at good prices and fuggedaboudit. Take a trip to Mars and check it when you get back. All this noise and wrenching daily volatility are enough to drive anyone crazy.
Thing that look cheap keep getting cheaper. Let's not forget that this phenomenon is subject to a self-fulfilling effect for the rest of the year. Tax loss selling, and rampant shorting by myriad hedge funds unhindered by the uptick rule will probably ensure more pain to come in the short term. However, I would much rather be buying those stocks that are already pricing in a recession than those that are priced for perfection and keep going up. Recession or not, cheap stocks should ultimately outperform. Cyclical stocks priced as if this time it really is different and cyclicality is dead? Not so much.
James Montier, who recently released a seminal book on behavioral finance, said that "pursuing contrarian strategies is a little bit like having your arm broken on a regular basis." In the short term there is no discernible or quantifiable difference between being wrong and being a contrarian. But as Olstein said recently, if you are concerned about short term volatility, then you are speculating, plain and simple.
The daily performance plots on Vestopia are a double-edged sword for both the investment directors and those evaluating them. For many of us, it will be impossible for observers to tell if our strategies are sound for many months or even years. That's why it so important to focus on process instead of short-term outcomes. The only way to be successful in the market over time is to keep executing a strategy that has an edge, and avoid outcome bias. Instead, base your strategy on expectations.
In other words, if I keep doing this, what is likely to happen? If I keep buying good companies at cheap prices, over time, I should make money. Why does this strategy have an edge? Precisely because it is so darn psychologically hard to stick to. The only edges that persist are those that run counter to cognitive biases, because human nature will never change. That, at least, is one thing you can be certain of.