We have many experts working in their own ‘silos’. They only see the details of their own area of expertise without being aware of important connections to the broader economy. This results in a “Tower of Babel” for us as investors. The advice to which we are exposed is so often at cross purposes that trying to comprehend it is all but impossible. This is especially so when the expert is earnest even if wrong.
Only the very few have the better economic/market perceptions. This means that the majority is always wrong! This is precisely why being a contrarian works best over time and why trading carries few long term success stories.
Worm Capital July 2020 Performance Update: Up 152% YTD
Worm Capital performance update for the month ended July 31, 2020. Q2 2020 hedge fund letters, conferences and more Long/Short Equity Growth Strategy Net Performance Long-Only Equity Growth Strategy Net Performance
The ‘better advice’ comes to light over the period of an economic cycle which can take as little as 6yrs and as long as 12yrs based on recent history. ‘Better advice’ is extremely difficult to visualize if one has not delved into the details of previous cycles. One needs to correlate the daily reports and recommendations of hundreds of experts with what actually transpires longer term economically and in the markets. By doing this one can separate the important trends to which investors respond over time and ignore the noise. There is an enormous amount of noise and developing a means of separating the ‘wheat from the chaff’ takes time.
While economics are fundamental and provide very good historical correlations, market prices (SPDR S&P 500 ETF Trust (NYSEARCA:SPY)) are based on immediate human perception. Markets have always responded to economic fundamentals over the long term, but often do not respond as expected in the short term. To many, markets seem illogical on a daily basis! With the emergence of Hedge Funds in 1995 as a significant influence in daily market activity, we often witness markets rising and falling seemingly illogically in response to news which clearly should drive markets in a logical direction. The reasons for this rest in the perceptions and the leveraged positions Hedge Funds take in short term bets on anticipated news. If they have made an overly bullish bet on the release of economic information, we can see a selloff if the news while positive was not as positive as the particular Hedge Fund anticipated. Trading activity by pools of funds of $10bil+ can have substantial market impact if concentrated over a few minutes. Later in the day what was traded down earlier could be decently higher or vice versa as other investors with longer time frames interpret the economic news in the context of their own investment outlooks. The media in presenting themselves as well sourced to market information often present both market responses to the economic release as having definitive guidance for viewers. What can be discussed as bearish in the morning can very easily be bullish in the afternoon. The media which presents each guest as an ‘expert’ actually makes a concerted effort to cover both bullish and bearish arguments equally which leaves those seeking advice having to sort through conflicting opinion to their own devices. Shows like CNBC are designed more for entertainment than being market directional and tend to reflect at any moment in time the average market perception. Although CNBC is an information source for many, it should not be a factor for the long term investor.
Although CNBC is an information source for many, it should not be a factor for the long term investor.
Looking long term and connecting the ‘silos’ reveals a fairly simple economic and market picture. While vehicle sales reveal a mostly improved economy, it is the housing and construction sectors which remain laggards and responsible for much or our remaining unemployment and stagnant income growth many continue to discuss. The Fed in preaching to the bleachers has made it its mantra to keep mortgage rates low to supposedly stimulate bank lending. However, this hurts credit spreads and makes mortgage lending difficult as regulators demand that lenders build higher reserves than in previous recoveries. The net/net is that mortgage lending remains tight with one arm of the Fed trying to keep rates low while the other demands higher reserves. The Fed itself is ‘silo-ed’ and the actions of the ‘right hand’ are not coordinated with those of the ‘left hand’ in my opinion.
Nonetheless, history again shows that it is generally not the Fed, but the market which controls the direction of interest rates. Over time, investors seeking higher returns as confidence returns sell Treasury positions in favor of investing in mortgages and equities. This is why we have a history of higher credit spreads resulting in broadening bank lending and economic expansion. This type of lending results in expanded construction related employment and has always boosted “Middle Class” income as construction employment with its specialization carries very good salaries. The Fed seems to have looked at employment as a gross indicator when in fact it carries multiple sub-categories which each subject to specific economic inputs. The concerns about the demise of the “Middle Class” will disappear once mortgage rates rise enough to spur bank lending in the current regulatory climate and construction employment rises. I expect we will see this fairly quickly in the next 6mos.
By the way, vehicle sales for March 2014 are estimated at 15.8mil SAAR(Seasonally Adj Ann Rate) vs. 15.2mil reported during the rough winter weather Jan & Feb 2014 reported levels near 15.2mi. Sales are indeed weather related!!