A Market Full of Unexamined Assumptions
As the arc of summer crosses the sky, I consider an investing atmosphere continuing in a market awash with facts without much value and a market of values which have no basis in fact.
Since the dog days of summer began in mid-July, equity and bond markets have been wobbling sideways, accompanied by a dispirited fan base straining for return! And, as the remaining days of summer slowly drip away so does our market; quenching that desperate thirst for yield as investors slowly yet mechanically flee from safety stocks into both growth and cyclical issues.
How has it come about that, in our present investment culture, there is a contradiction of sorts between what professes to be factual knowledge, communal truth which everyone is expected to assume and the world of beliefs and values about which we say that everyone is free to have their own? For an investor it’s an imperative yet nearly impossible paradox to address, because doing so we are then questioning the basis of our own assumptions.
Present-day examples of this include a tale of two U.S. economies – one where robust employment numbers are quickly arrested by fumbling growth reports, a very pedestrian calling-out that “the coast must be clear” with regards to the second quarter earnings season, that the post-referendum (Brexit) disruption doesn’t appear to be fabricating material shockwaves outside the rocky shores of the U.K., or both the Chinese currency fears and current dropping petroleum price are now blasé – set far below the crease of the daily newspaper.
Yet the facts appear crystal clear. Presently, we have a U.S. Treasury yield curve (i.e. the difference between the 2-year vs. 10-year Treasury yield) that is trading half of its historic average, a seemingly indiscriminate grab for any equity providing any sort of yield, a persistently dour U.S. GDP, a world marketplace where over $10 trillion worth of government bonds now bear negative interest rates, a growing mistrust of GAAP versus non-GAAP earnings reporting, a wholesale resistance from the private sector to multiply money, ever-so-slightly rising wages, no productivity growth to speak of and yet a “new normal” where equity valuations are exclusively viewed through a “relative” lens.
All of this and the markets continue to dither near nominal all-time highs?
Investors like to rationalize any market behavior in terms of causes, of what makes them transpire. We experience affirmation, an inner solace of sorts, when a particular market happening can be explained as the arithmetically collaboration of its inner parts. You just purchased a basket of bond-like stocks trading at growth-stock-like multiples? Not to worry, they will say, as it’s all relative to what can be earned elsewhere! Are you worried about your investments current earnings-per-share multiple? Not to worry, they will declare, as stock multiples are backwoods research – you need to look at the return-on-equity (ROE). Etc., etc., etc.
Investors take comfort in the utterances of economists and other financial theorists who’ve mistaken markets for physics and themselves for scientists. The result is an investor class confusing market movement as chemistry or physics; as if market trends can be understood in terms of their constituent parts. And as long as investors compete with physics, as long as investors think economics is a science, the more prone we are to move from bubble-to-bubble. Three decades of experience has taught me that the market does not come draped in a differential equation!
I choose to explain markets in terms of purpose, because purpose is a utility of the beliefs and values whose purpose it is! This line of thought will provide the investor with unparalleled freedom; deeply diminishing the substance of personal investment beliefs – which are usually amiss – while highlighting investment values. Below are some examples of purpose-driven investing:
? Market Timing: Instead of spending time and chance on predicting the next market crash, you will appropriate time preparing for the inevitable crash you cannot time or see.
? Economic Data: You will hold lightly any economic theory, asset allocation modeling, or anything else predicated on the notion of linear dynamics; all of which has produced a litany of awards but not much else.
? Economic Reporting: You will draw the curtains on personal investment decisions based on the next set of economic data chiefly because the data may not be telling you what you think it is or should be.
? Investment Risk: There will be no grounds for thinking that this idea of total certainty is anything other than an illusion, a piece of wishful thinking which has absolutely no relation to reality. All of human life requires taking risks – there are no sacred cows.
? Investment Philosophy: You wear cultural blinders; you deeply respect the dangers of the unexamined superiority of your cultural moment and how that can devastate investment decision making.
? Unexamined Assumptions: Probability theory and the “Infinite Monkey Theorem” argue that a monkey, given a typewriter and an infinite amount of time will eventually produce a given text, such as the complete works of William Shakespeare. The real question is whether the monkey could have manufactured the typewriter by chance?