Stray Reflections: From Mountain Man To Macro Man

Stray Reflections: From Mountain Man To Macro Man by Jawad S. Mian, Mauldin Economics

Just as there are risks in climbing, there are risks in investing, but there are also ways to manage the risks. If you eliminate the errors in judgment and manage the mistakes, you can make it relatively safe.

With Stray Reflections, I incorporate risk management into the investment process using 1) macro analysis to avoid economic turbulence by managing the portfolio’s risk exposure, 2) security-level analysis to maintain a value bias to the holdings within the portfolio, and 3) technical analysis for price trend discipline and to stay open-minded and flexible when challenged by the market.

If you’re trading macro, the biggest risk you need to manage is your self.

Each day, I listen to the market intently. All the information is right there, which helps me decide what to do. I strive to reduce the influence of emotions and ego on my trading. There is no resting. Just when you think you have it all figured out, you don’t.

There is always another cock-up.

How many times have you put off a painful investment decision, even when you knew you were making a mistake, only to see your capital lose a third of its value?

Yup. Been there.

It doesn’t matter how long you’ve been thinking about a trade, how much time and money you’ve spent, or how much research you’ve done. If the situation isn’t looking good, get out. The market’s always going to be there. You can always get back in.

Don’t be a hero.

Investment Observations

Ed Viesturs backed off Mount Everest, 300 feet below the summit. Should investors today also heed caution and withdraw from the stock market, even as it scales new celestial heights? Are investors’ preconceptions about safety and risk completely false? Have we given sufficient thought to our acceptable level of risk? Or are we just lemmings, swept up in the psychological feeling of safety? Are we making a mistake?

What are our instincts telling us?

I pay close attention to the embedded beliefs in financial markets and assess risks and opportunities in this context.

It is the changing views and behaviors of market participants that alter asset pricing, which is driven by both new information and shifting interpretations of existing information.

Right now, it appears market participants have lost faith in the long-term global growth outlook. Investors favor easy-to-understand narratives. Thus, one of the most popular tales has been that unprecedented stimulus from central banks is levitating stock prices globally without any “real” economic improvement. The belief is that this will all end badly.

Bill Gross also chimed in with his latest investment outlook:

A “sense of an ending” has been frequently mentioned in recent months when applied to asset markets and the great Bull Run that began in 1981. Then, long-term Treasury rates were at 14.50% and the Dow at 900. A “20 bagger” followed for stocks as Peter Lynch once described such moves, as well as a similar return for 30-year Treasuries after the extraordinary yields are factored into the equation: financial wealth was created as never before. Fully invested investors wound up with 20 times as much money as when they began. But as Julian Barnes expressed it with individual lives, so too does his metaphor seem to apply to financial markets: “Accumulation, responsibility, unrest… and then great unrest.”

Many prominent investment managers have been sounding similar alarms… successful, neither perma-bearish nor perma-bullish managers have spoken to a “sense of an ending” as well. Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others, warn investors that our 35-year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date. Savor this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping.

A Brave New World

Gross sees an Everest asset price peak that allows for little additional climbing. Although I’m sympathetic to his view, I find undue pessimism about the macro outlook.

Structural elements such as aging demographics, extremely high debt ratios, and technological displacement of labor are often cited to explain a stunted global growth model for the future. Many economists insist that the world faces years, if not decades, of “secular stagnation.” However, as Anatole Kaletsky points out, the “new normal” for the world economy since 2008 hasn’t been very different from the pre-crisis period. According to the IMF, during 1988-2007 (the 20 years before the crisis), the average annual growth of the world economy was 3.6%. The latest IMF forecast for 2015 is 3.5%, and 3.8% in 2016. According to Kaletsky, although this continuity seems hard to square with the slowdown in economic activity in all major economies since 2008, the reason that the world economy, as a whole, has not slowed is due to the shifting balance of economic activity from slower-growth advanced economies to faster-growing developing economies. In the advanced economies, the IMF expects 2.4% growth this year, compared with a 2.8% average during the two decades before the crisis. In the emerging economies, growth is projected at 4.3% this year, below the 4.9% average of the pre-crisis decades. However, the emerging economies now account for 51% of global economic activity, compared with 36% in 1994. So, even as they slow down, they contribute more than ever to global growth. The bottom line: there is no evidence of secular stagnation in global statistics.


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