If you watch our “Market Message” videos, you know I’m a huge fan of graphs and charts. Below are five charts previously cited in a “Message” whose changes warrant an updated look.
The market appears to be rolling over. That’s typically a bad sign for the very-short-term (next couple of weeks), but in and of itself, it means nothing for the intermediate-term. It’s too late to do much about it, unless fundamentals start to deteriorate and it appears to be a more protracted event.
Gold and Silver continue to fall. That was a bad trade that I hope I kept you out of. When’s the last time you’ve heard the term Hyperinflation?
The US dollar continues to hold its own. When’s the last time you’ve heard the term Hyperinflation? (Oh sorry, I mentioned that already. Same point: dollar strong/metals weak = no hyperinflation).
Considering that I spotlighted the rising yields on the Ten Year Treasury Note in March, as evidence of a pickup in economic activity and appetite for risk with investors, the reversal invalidates my prior point. For now.
For all the concern about Spain this week and last, you’d think its debt was imploding. More objectively, for the few that take the time to look, things aren’t materially worse than were a few weeks ago, or for that matter, last November.
I’ve grown to love the tradition and ritual of analyzing and betting on the Triple Crown. For professional investors, events like the Kentucky Derby and the Belmont can be a great analog to investing.
The Commerce Department released its first estimate of First Quarter 2012 economic output (GDP), and folks are reading it as a sign of a slowing economy. That’s silly. GDP will be revised two more times and the final number will could be plus or minus 100% from the 2.2% estimated today.
A more interesting picture is the one developing in the money supply measures. Since bottoming in early 2010, MZM and M2 are reflecting a nice pickup in economic activity. The best part? Few believe us when we say they economy’s doing well—perception will reconcile with reality to the benefit of growth market (stocks, real estate, commodities) prices.
The latest market worry is Spain. Specifically, investors are concerned about the amount, and performance, of debt – from the sovereign, top-down level and that held on the books of its banks. Spain’s been an economically weak outlier—in an economically weak region—for some time. The cost of insuring their debt, as well as the yields demanded by investors, has been notably rising of late.
So will this portend a meltdown that starts in the EU and engulfs the rest of the world? Or would Greece’s uneventful default be more like what will happen in Spain? Who knows? I do know this—in a classic pattern, investors seem to be making too big a deal of it. Let me put it into perspective for you…
James Joyce said, “Mistakes are the portals of discovery.” That couldn’t be more true of a trading experience early in my career that helped define me as an investor.
At no time over the last century has the American working public faced a bleaker retirement situation. Workers today have been beset by a “perfect storm” of conditions that will either prevent them from being able to truly retire, or likely delay that day long past when they’d hope to retire.
There are several explanations for how this Retirement Crisis came to be:
But it’s not too late for today’s workers to begin to fix the problem, starting with their retirement plan offering at work. And while the Qualified Defined Contribution Plan (410[k]) was set up to assist employees in achieving their financial goals—most notably a secure retirement—the vast majority of employees have not been able to fully utilize these beneficial, employer-provided savings vehicles.
THE PROBLEMS
THE SOLUTIONS
- Performance-chasing – Employees routinely sell their laggard funds (which are usually just out of phase, as all styles of investment exhibit cyclical behavior) for “better performing” funds…only to see them go out of phase, and thus repeat the process to their continued detriment.
- Market-timing – One of the great mysteries of investing is that people think they can get in and out of the markets opportunistically, when the opposite is always the case.
- Defaulting to the Cash fund option – Many participants, overwhelmed with deciding among their investment options, will default to the Cash/Money Market/Short-term Fixed Income option. This results in a negative-real-return overtime.
The key, then, is again, education. Investors can be trained away from these self defeating patters of behavior, but most employers don’t know how to begin the attack the problem.
Many of today’s workers are already resigning themselves to a future that has them working into their 70s, 80s, or beyond. It needn’t be that way. The key is turning on employees and empowering them with the resources they need to chart a different path.
We put far too much stake in what economists say. Even economists will tell you that.
Too often, we treat their forecasts like precise predictions. They’re not accurate enough to rise to what could be called predictive. A decent economist can make a reasonably accurate statement about the economic affairs right now, but go out just a few months and the confidence level goes to near-zero.
Economic prediction is nearly impossible because of the dynamic nature of what the economy is. Like the weather, its unpredictability is owed to the non-linear, hugely-variable nature of the inputs. Most people that take economic predictions at face value have never gone back and looked at the accuracy of what was said, when it was said, versus what happened.
Let’s do just that…
Dr. Sung Won Sohn is an economist of much esteem. He was a senior economist on the President’s Council of Economic Advisors and formerly the Chief Economist at Wells Fargo (among other laudable accomplishments). This year, the Wall Street Journal ranked him the third best economic forecaster in the country. That’s pretty remarkable.
Two other remarkable things to note.
For a time (2007-2008), he kept an updated spreadsheet of his predictions on his website. (The sheet’s still there, and he still updates his forecasts, but you can’t see what they were since 2008.). Economists, Analysts, and Portfolio Managers rarely leave their own bread crumb trail — lest we hold it against them.
The other thing to note is, as you’ll see, his predictions are pretty damn inaccurate. And I say this with all due respect. Dr. Sohn is as good as they get, and I’m interested in what he has to say. But if he can’t do it well, think about the rest of the stuff you hear from others out there.
Let’s look at an example from the spreadsheet: his prediction for Fourth Quarter 2007 GDP, starting at the beginning of that year, January 2007, and every month thereafter.
|
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
|
3.2 |
3.0 |
3.3 |
3.0 |
3.5 |
2.9 |
2.8 |
2.8 |
2.2 |
2.6 |
2.0 |
1.0 |
Fourth Quarter 2007 GDP ended up being 0.6. Whoops. Even during the quarter he was way off.
Let’s do the same thing for 2008—monthly estimates of Fourth Quarter 2008 GDP.
|
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
|
2.2 |
n/a |
1.9 |
1.8 |
2.2 |
1.9 |
0.0 |
-0.5 |
-0.5 |
-2.0 |
-3.6 |
n/a |
Fourth Quarter 2008 GDP ended up being -6.3. Way off.
Granted, 2007 and 2008 were years during which the economy deteriorated quickly. But the forecasts were useless—even during the quarter itself.
So what’s the point? Take any economic forecast—by an individual or group consensus—with a grain of salt. Better yet, a whole shaker of salt. If you really want to know where we are, and where we’re likely headed in the short-run, the data is online. I like the report from the Regional Fed offices in New York and Richmond. You don’t have to have a degree in Economics if you know how to read a chart.
And here’s a gem that will serve you very well in business and investment: base your decision making more on fact and less on somebody else’s predictions.
The yield on the 10-year Treasury note validates the thesis that the economy is stealthily improving, the market’s rally is justified, and expectations have been too low.
Higher yields this week are attributable to Bernanke’s comments and the continued flow of improved economic measures.
Investors in Treasuries are selling them in deference to the expectation of higher yields down the road (from improved economic prospects). Additionally, it reflects an increase in risk tolerance.
To this point, it’s been the missing piece to the improved-fundamentals picture.
We’re eating lamb gyros at Valentine Ventures on the news that Greek debt holders have agreed to swap their old debt for new debt at 31.5 cents on the dollar. Since recording this Market Message, it has triggered a “credit event”, but more importantly, it removes a short-term obstacle from the European quagmire. Our market is up nicely since the Greek riots in 2010.
As postulated in my December 19 Market Message, the combination of too-much pessimism coupled with a stealthy improving economy continues to push risk assets higher. Expect more of the same in the intermediate term.
For all the investment advice that’s indiscriminately given out in print, over the airwaves, and on cable, you’d think you should be altering your investment course daily. Nonsense!
A portfolio of investments ought to be first driven by the long-term, strategic objectives of the investor as manifest in a reasonably static Asset Allocation. Save your tactical tweaks for those few inflection points when consensus is formed around greed (bubbles) or fear (crashes).
Otherwise, leave your mix alone. Most people do far too much, not far too little.
Valentine Ventures, LLC 550 SW Industrial Way Building Two, Suite 201 Bend, OR 97702
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