Research Affiliates posted an interesting article today titled, "The Profits Bubble. "
The gist was that outsized profits are controlled (or allowed) by government and when they get too big (there is a trade-off between profits and income), the resulting growing inequality leads to social unrest and political change. The article correctly argues that profits cannot grow at a faster rate than the economy for too long and established that they have been growing at a faster pace than the economy for the last 20-30 years.
I think this idea/notion is correct. The problem is one of timing. It is very hard to know when or what the last straw will be that has been added to the camel's back. Changing societal/cultural norms and rising living standards around the world (rising economic tide in developing world, falling cost of living in developed world) are likely to make this process alot longer than prior history examples (maybe).
Societies are just like markets inasmuch as they are tightly coupled complex systems prone to periodic crisis and unravelings.
Friday, January 17, 2014
Tuesday, January 14, 2014
I'm not bearish...I just don't trust it
I'm not bearish.
I really think the US economy is coming out of its slumber. Most of the signs are pretty good.
The problem is I don't trust the market.
After such a big run over the last year, I can see the market continuing higher. With a little bit of earnings growth (9% projected this year...which could be a stretch, but maybe it isn't) and a little more multiple expansion (say from 15.5x to 18x) the market could easily deliver another 26% return - and even then would not be overly valued. I find myself making these rationalizations. It is easy to do.
The problem is the higher it goes, the less margin for error there is and the more I don't trust it.
When you know you are playing a con(fidence) game, you are always looking to be the first to exit the party (which can make for some bad - kneejerk - decisions).
I really think the US economy is coming out of its slumber. Most of the signs are pretty good.
The problem is I don't trust the market.
After such a big run over the last year, I can see the market continuing higher. With a little bit of earnings growth (9% projected this year...which could be a stretch, but maybe it isn't) and a little more multiple expansion (say from 15.5x to 18x) the market could easily deliver another 26% return - and even then would not be overly valued. I find myself making these rationalizations. It is easy to do.
The problem is the higher it goes, the less margin for error there is and the more I don't trust it.
When you know you are playing a con(fidence) game, you are always looking to be the first to exit the party (which can make for some bad - kneejerk - decisions).
Time Perception
From Brain Pickings.
As disorienting as the concept might seem — after all, we’ve been nursed on the belief that time is one of those few utterly reliable and objective things in life — it is also strangely empowering to think that the very phenomenon depicted as the unforgiving dictator of life is something we might be able to shape and benefit from. Hammond writes:
"Time perception matters because it is the experience of time that roots us in our mental reality. Time is not only at the heart of the way we organize life, but the way we experience it."
As disorienting as the concept might seem — after all, we’ve been nursed on the belief that time is one of those few utterly reliable and objective things in life — it is also strangely empowering to think that the very phenomenon depicted as the unforgiving dictator of life is something we might be able to shape and benefit from. Hammond writes:
"Time perception matters because it is the experience of time that roots us in our mental reality. Time is not only at the heart of the way we organize life, but the way we experience it."
Sunday, January 12, 2014
Obvious Beforehand
It is obvious to me that the market will shortly (before July) have a 10%+ pullback in response to concerns about declining profit growth and mean reverting profit margins.
This conversation has been had over the last year but has yet to have effect.
Just saying!
P.S. I say this because I have a decent sized short position and it is getting hammered and I expect I'll be stopped out shortly - not long before the market loses its courage. It is also equally unlikely that I will reinitiate a short position in time to take advantage of the pullback - just the way things seem to work out.
P.P.S. This post points to the importance of behavioral issues, patience, courage, conviction and downside risk management/limitation.
This conversation has been had over the last year but has yet to have effect.
Just saying!
P.S. I say this because I have a decent sized short position and it is getting hammered and I expect I'll be stopped out shortly - not long before the market loses its courage. It is also equally unlikely that I will reinitiate a short position in time to take advantage of the pullback - just the way things seem to work out.
P.P.S. This post points to the importance of behavioral issues, patience, courage, conviction and downside risk management/limitation.
Tuesday, December 24, 2013
Tail Wagging The Dog
Not sure whether I have mentioned this previously but was thinking about it this morning and figured I'd put the thought down.
Funds flow has all been into indexing and ETF vehicles over the past 3 or 4 years. ETFs are now the primary vehicle for many financial advisor and trader playbooks. This begs the question is the tail wagging the dog.
With investors hitting the ETF vehicle (sector, country, or other) before they worry about the underlying, markets are being buffetted by dull signals. Arbitrage keeps things in place, but the weight of money is coming from the macro side and it seems in keeping with the adage "shoot them all and let God sort them out."
Funds flow has all been into indexing and ETF vehicles over the past 3 or 4 years. ETFs are now the primary vehicle for many financial advisor and trader playbooks. This begs the question is the tail wagging the dog.
With investors hitting the ETF vehicle (sector, country, or other) before they worry about the underlying, markets are being buffetted by dull signals. Arbitrage keeps things in place, but the weight of money is coming from the macro side and it seems in keeping with the adage "shoot them all and let God sort them out."
Monday, December 23, 2013
Declaring Failure and Moving On
This is a very rough note. I think it could be fleshed out into a very meaningful article, but for right now it is just some top of mind reflections.
My underlying framework post-GFC was one where the business/investment cycles going forward was going to be more compressed (timewise) and more volatile. I was also heavily influenced by the new normal meme and how the economy was going to be stagnant as it worked through a balance sheet recession.
If I were to attribute a reason to that belief I would ascribe it to my ideological bias toward market economics and the belief that the market had not been allowed to clear properly due to significant artificial interventions. It was also heavily influenced by the recent traumatic past and the idea that modern markets/economies were more integrated, interrelated, more complex than ever before, and were consequently prone to momentum and cascade effects.
Financial marketwise this has not played out and I must declare failure and move on. I think the reason why financial markets have not reflected those beliefs is due in large part to hindsight bias and the massive trauma effected upon the psyche of market participants who endured the brutality and existential angst of a market implosion that could have gone even further. Investors have been fighting the last war. They have been overly pessimistic. They have been unwilling to give the Fed (or the govt) credit for stimulus. The market has climbed a massive wall of worry the whole way.
We are now at a point where the market is coming around to the idea that the Fed may have steered us over the canyon and to other side. The economy may be gaining sufficient strength to be self-supporting and a new cycle of more normal growth is going to ensue (even as the stimulus disappears).
That is the hope. We shall see how things pan out in practice.
My underlying framework post-GFC was one where the business/investment cycles going forward was going to be more compressed (timewise) and more volatile. I was also heavily influenced by the new normal meme and how the economy was going to be stagnant as it worked through a balance sheet recession.
If I were to attribute a reason to that belief I would ascribe it to my ideological bias toward market economics and the belief that the market had not been allowed to clear properly due to significant artificial interventions. It was also heavily influenced by the recent traumatic past and the idea that modern markets/economies were more integrated, interrelated, more complex than ever before, and were consequently prone to momentum and cascade effects.
Financial marketwise this has not played out and I must declare failure and move on. I think the reason why financial markets have not reflected those beliefs is due in large part to hindsight bias and the massive trauma effected upon the psyche of market participants who endured the brutality and existential angst of a market implosion that could have gone even further. Investors have been fighting the last war. They have been overly pessimistic. They have been unwilling to give the Fed (or the govt) credit for stimulus. The market has climbed a massive wall of worry the whole way.
We are now at a point where the market is coming around to the idea that the Fed may have steered us over the canyon and to other side. The economy may be gaining sufficient strength to be self-supporting and a new cycle of more normal growth is going to ensue (even as the stimulus disappears).
That is the hope. We shall see how things pan out in practice.
Wednesday, December 18, 2013
More Than Just the Folly of Forecasting
"We have reached that time in the year where everyone is speculating about the prospects for equities in the year ahead. As usual the consensus is that the market will be up 10% in 2014. I have been an observer of strategists' estimates for half a century and I can tell you that as a group they always think the market will be up 10% in the following year whether stocks were up 20% or down 20% in the previous year."
- Byron Wien
There is something even more insidious here than just the folly of forecasting. The Mercenary Trader cuts to the chase in his breakdown of the mallady.
Think about the magnitude of what Byron Wien -- a guy who has been in markets longer than most traders have been alive -- is saying here. The collective Wall Street strategists who are bullish for the coming year are ALWAYS bullish. EVERY year. By an amount just enough to be respectable without getting them in trouble. So why should anyone care what they say or think? Their two cents isn't even worth two cents. It has negative value because it's a waste of time. They should be laughed out of town.
And why aren't consensus strategists laughed out of town? Why does the same crap get play year after year? Is there anything more irrational or lame than paying attention to utter bullshit, that has proven itself worthless, year in and year out, over and over again? Why do investors do it? Why do investors care about predictions that virtually never deviate from a standardized norm, and thus have almost zero information value?
A pet theory: It is in part because institutional investors are not the savvy, sharp group that biased product promoters and academic apologists would have us believe. To a large degree they are a group of underpaid (relative to the size of assets they manage) identikit MBAs in matching suits and ties, trying hard to avoid career risk while making decisions that don't get them fired. In the process of making those decisions, sticking close to the herd, or the established norm, is generally the safest thing -- and this "don't make waves" attitude is generally weak-minded, which leads to a weak-minded embrace of useless predictions as a pastime and a crutch. It's the same thing for establishment forecasters, by the way, which is why their predictions always cluster. The nail that sticks out gets hammered. Our general view is that, with a handful of notable and important exceptions, the supposedly high and mighty money management environs of Wall Street are actually closer to a bunch of drunks propping each other up via consensus embrace of mutually poor solutions and broadly irrational practices, not unlike the historically hidebound and sclerotic Japanese zaibatsu or Korean koretsu (big dumb corporate managements entrenching each other through cross-holdings of shares).
- Byron Wien
There is something even more insidious here than just the folly of forecasting. The Mercenary Trader cuts to the chase in his breakdown of the mallady.
Think about the magnitude of what Byron Wien -- a guy who has been in markets longer than most traders have been alive -- is saying here. The collective Wall Street strategists who are bullish for the coming year are ALWAYS bullish. EVERY year. By an amount just enough to be respectable without getting them in trouble. So why should anyone care what they say or think? Their two cents isn't even worth two cents. It has negative value because it's a waste of time. They should be laughed out of town.
And why aren't consensus strategists laughed out of town? Why does the same crap get play year after year? Is there anything more irrational or lame than paying attention to utter bullshit, that has proven itself worthless, year in and year out, over and over again? Why do investors do it? Why do investors care about predictions that virtually never deviate from a standardized norm, and thus have almost zero information value?
A pet theory: It is in part because institutional investors are not the savvy, sharp group that biased product promoters and academic apologists would have us believe. To a large degree they are a group of underpaid (relative to the size of assets they manage) identikit MBAs in matching suits and ties, trying hard to avoid career risk while making decisions that don't get them fired. In the process of making those decisions, sticking close to the herd, or the established norm, is generally the safest thing -- and this "don't make waves" attitude is generally weak-minded, which leads to a weak-minded embrace of useless predictions as a pastime and a crutch. It's the same thing for establishment forecasters, by the way, which is why their predictions always cluster. The nail that sticks out gets hammered. Our general view is that, with a handful of notable and important exceptions, the supposedly high and mighty money management environs of Wall Street are actually closer to a bunch of drunks propping each other up via consensus embrace of mutually poor solutions and broadly irrational practices, not unlike the historically hidebound and sclerotic Japanese zaibatsu or Korean koretsu (big dumb corporate managements entrenching each other through cross-holdings of shares).
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