This week’s video is inspired by Mr. Know It All, Jack Dorsey’s, news making headlines around his ill-informed views on inflation which Jake helps debunk. And in a tandem piece, Tim writes on where markets and the economy really stand, and shares an old-favorite piece that covers the not-so-hidden agenda of the industry and press to manipulate investors.
FIVE THINGS YOU SHOULD KNOW
Equity Markets – were mixed this week with U.S. stocks (S&P 500) up 1.36% while international stocks (EAFE) fell slightly by -0.02%
Fixed Income Markets – saw gains this week with investment grade bonds (AGG) up 0.51% while high yield bonds (JNK) gained 0.13%
Yellen Holds Firm – Treasury Secretary Janet Yellen reiterated her belief this week that recent spikes in inflation are transitory and that oil prices should moderate in the coming months, a belief that markets are losing confidence in. The issue of inflation isn’t just a domestic discussion either with data out of Europe showing core inflation hit 2.1% in October, a level that hasn’t been seen in almost 20 years.
Congress Stalls – President Biden’s latest framework on his economic agenda was met with apathy this week as congressional democrats chose to work over the weekend and hope to have a bill signed by early next week. While the bulk of the President’s plan will leave the 2017 tax reductions unchanged, the plan did include a provision that would place a new minimum of 15% tax on corporate earnings. Many of the discussions ongoing center around how the administration expects to raise funds for the nearly $2 trillion bill.
Key Insight – [VIDEO & ARTICLE] This week’s video is inspired by Mr. Know It All, Jack Dorsey’s, news making headlines around his ill-informed views on inflation which Jake helps debunk. And in a tandem piece, Tim writes on where markets and the economy really stand, and shares an old-favorite piece that covers the not-so-hidden agenda of the industry and press to manipulate investors.
INSIGHTS for INVESTORS
I hope you take a few minutes to watch Jake’s video above, where he addresses the most recent doomsday hyperbole, this time from Jack Dorsey (CEO of Twitter) pontificating on inflation. Why a person who designed an app for spouting 280-character nonsense fancies himself an economist is beyond me, but it’s not uncommon.
We see, and sometimes deal with, successful people who think their success or money somehow makes them an expert on anything and everything.
Beyond that is a media and industry fixated on soundbites, “all or nothing” analysis and even manipulation to scare you into counterproductive decisions that benefit only them.
Did you let the hype around a crash get to you in September? Will you when the next time the markets and/or data weakens?
Beyond hyperbole, oversimplification and/or outright attempts at manipulation, one of “pundits” biggest issues is focusing on the past instead of looking to the future, which is why they are spinning up stories of stagflation (see chart and caption from Goldman Sachs below). Current high-frequency data employed by top analysts looks at, and cares about, what lies ahead – and to that end the economy is already reaccelerating which is why you see stocks surging and yields rising.
From GS – “Stagflation may be in the newspaper, but evidence is sparse in the data. We estimate global and US growth to moderate to 4.8% and 4.0% for 2022, but the trajectory remains above trend. Meanwhile, inflation has outlasted expectations, but we expect easing labor tightness, smoothing supply chains, and normalizing demand to bring costs back to trend by 2022YE.”
Given current levels and dislocations in the economy it only makes sense that we’ll get episodic periods of volatility but such volatility or even flash crashes (e.g. December of 2018 or March of 2020) are not fatal.
Sure, inflation needs to be watched, we’ve said this for some time, but what’s so interesting is how many people let their “fear” around it drive them into cash or cause them to freeze while invested in an allocation ill-prepared for what lies ahead … higher interest rates. This cocktail of elevated inflation, not hyper-inflation, and higher interest rates are the biggest threat to cash, traditional bonds and tech stocks – which just so happens to be three areas investors are over-exposed to because of past performance.
In summary, listen to people who avoid hyperbole, and even better have a vested interest in your success, and shut off the talking heads and celebs that pontificate with lots of ego and no accountability.
Included below is a Commentary I wrote that first appeared in February of 2016 during a time when the market had quickly fallen over 6% and the doomsayers were out in force. Of course, the market would go on to rally over 18% to finish up over 10% for the year. While the data may be dated, the principles are timeless. In it I cover some reasons to be skeptical of much of what you read and discuss how that info is designed to get you act in ways that are not in your best interest.
Have a wonderful weekend,
Tim and the team at TEN Capital
Patsies, Prophets and Processes
by Tim Mitrovich
(Article from February 2016)
I am neither a patsy nor a prophet, just a guy with a process. Unfortunately, markets frequently tempt investors to be one and/or the other. In fact, much of the investment industry is built around it. As for the financial media, they are obsessed with pretending to be prophets, while unfortunately turning many investors into “patsies.”
Nobody wants to be a patsy of course, but like many temptations that mask the true end result, the actions that make patsies of investors are the ones they often take in an effort to be a “hero” by making a big market call.
I don’t mean to be negative, but I don’t like seeing good people being taken advantage of, and the reality is that much of the investment and media industries are only looking out for themselves and their commissions/ratings. Like my colleagues, I got into this business to help people and if helping protect investors means calling some people/things out I guess that’s what I’ll do.
The Media and Brokerage Houses Want to Play You: Their Reasons for A New Narrative
There are certainly times when the economy struggles, and markets can and should decline in response. However, the number of times that should/does occur is nowhere close to how many times investors are told to freak out by the Brokerage Houses and Media. As the old investing joke goes, “the stock market has predicted 19 of the last 5 recessions.”
Why do they do this? As Deep Throat said in the movie All the President’s Men, “follow the money.”
Ratings and Trades: Without a new narrative to “sell you” they know you won’t trade your account or tune in to their inane discussions. And if you don’t do that they don’t get paid!
So while history clearly shows that not trying to time the market is the wisest course of action, they try to turn investors into patsies with no regard for the panic they create in investors today nor the damage they do to their financial well-being in the future.
Recent headlines show that the major brokerage houses had an awful 4th quarter due to reduced trading, forgive me if I am not convinced the sudden dialogue to start the year around needing to “sell this/buy that” is completely unrelated to that reality.
Front-Running: Furthermore, the big boys can profit by front-running these new narratives (e.g. make their move and then chat up their trade after the fact), but more on this another time.
Are their Attempts to Create A New Narrative Working? Unfortunately.
Investors are freaked out to historic levels. Below are a few different analytic firms’ measurements of the panic gripping markets.
(A) The Panic: The first shows the twin light blue bars/lines representing traditional levels of panic and euphoria, and darker blue line showing current levels. As you can see, we are currently far below the panic line.
(B) Investors Outlook: Three takeaways from the next two charts (source: Bespoke): 1) investors optimism/bullishness has hit lows rarely seen since the bottom on the last recession, 2) Bearish sentiment has sky-rocketed year-to-date, 3) trading against these sentiment indicators has historically made more sense than following it.
(C) The Result: At one point this week investors had bailed from equity markets into safe havens like Treasuries to such a degree that the 30-year Treasury yielded more than the S&P 500 dividend yield.
That has only happened one other time in the last 40 years, and that was November of 2008 until March of 2009 (the market bottom after the recession).
What does that mean? It means investors are theoretically willing to accept less income for the next thirty years, and no upside if the position is held, rather than buy the S&P 500. It also means that investors are panicking and making trades that are likely to look foolish over the longer run.
Ten Capital: How We Are Different and Our Outlook Given the Current Market
At Ten Capital our success is directly tied to our clients.
Unlike brokers/brokerage houses and the media, we don’t get paid to trade or have any proprietary products with added commissions, and our complimentary Weekly Commentary comes ad free. We are solely compensated based on a set percentage of the client’s assets we manage. That means we are compensated more as clients’ accounts go up and less as they go down. This structure aligns our interests and sympathies with our clients’.
As we covered above, we are now getting close to levels in sentiment and the market that would cause us adjust to take advantage of the opportunities that are opening up. Extreme levels are becoming more common in a number of sentiment indicators, and we are getting closer to hitting them from a market technical perspective as well.
We will re-allocate to take advantage of sell-offs, but it usually takes extreme metrics coupled with exhausted market technicals before we do so. We don’t believe it is too useful to get hung up on arbitrary bull and bear market definitions. That said, we certainly maintain a high level of awareness of the economic, technical and monetary back-drop of the markets and how it could impact our allocations. Trading off of more modest market moves, headlines and panic is the sure path to becoming the type of “patsy” Buffet warned about.
Unfortunately, regulations do not allow for specific trade ideas in a newsletter because each investor needs are different, but you are always welcome to reach out to discuss specific ideas and questions.
Albert Einstein once said, “You have to learn the rules of the game. And then you have to play better than anyone else.” To “play” better than anyone else doesn’t mean one needs to be able to predict the future or be the smartest person in the world. However, it does mean you have to be among the most thoughtful and disciplined.
Let’s refuse to be made patsies, resist trying to be prophets and instead focus together on being the most process-oriented investors we can be.