“Humility is the only true wisdom by which we prepare our minds for all the possible changes of life.”
Commentary & Analysis
Sometimes it feels good to blame the media for its ineptitude, irrelevance, or ill-informed views. But the problem may be with us and the sheer volume of useless “news” we’re willing to absorb. I don’t think this is a new idea – it has more or less been used as an explanation to why there are so many stories about awful things happening and so few stories about good things happening.
It’s kind of like driving by the scene of a car crash – there’s nothing good to see yet it is nearly impossible not to look. It’s called rubbernecking. And we’re seeing something akin to a media-induced rubbernecking in the wake of the Japanese earthquake and tsunami.
In the past week, I cannot count the number of times I’ve seen Japan’s economic future describe as uncertain, or its potential global impact described as unknown. The reports are flooding out of Japan, yet no one seems to know what it’s going to mean for markets overall. Not that we should expect anything more, but by looking at the markets, it is obvious. But that hasn’t stopped ample speculation among reporters, commentators and analysts as to what Japan’s disaster will mean for equities, crude oil, or the global economy.
It has become lucrative to seek out risk. I’ll plead guilty:
Europe still seems stuck in a hefty predicament between balancing out the financial positions of its core and periphery countries. It’s tough not to look at the ongoing eurozone ugliness even though the market is sending an entirely different message.
China has plenty of ugliness building inside its walls. From housing bubbles, to lending bubbles, to lopsided growth, to currency manipulation, rising inflation – the country gives commentators plenty of reason to be concerned. But China has kept it together in the face of growing risks to its economic model.
The Middle East is no stranger to unrest; and the consequent behavior of crude oil is known to serve up some dicey situations. But despite the many calls for supply threats and inflationary pressures, major blows to global economies and markets have not materialized.
Naturally, since the black swan of 2008, commentators have found it increasingly profitable, effective, and impactful to keep readers aware of all the risk piling up around the markets. Investors want some sense of security and now understand the value of staying up to speed on potentially big-time risk events.
A reader just sent us this quote overnight:
You probably should change your name to "White Swan" because the black swans currently outnumber the white ones.
Though many legitimate risks have recently come to light, it would seem only this disaster in Japan possesses the characteristics of a black swan event.
Policy makers have adopted the mantra of “Do something, just don’t do nothing.” And despite the critics, their actions have somehow inspired confidence and emboldened investors in a self-fulfilling manner. Here’s how Martin Feldstein described the recent development of the US economy:
“The key driver of the increase in final sales was a strong rise in consumer spending. Real personal consumer spending grew at a robust 4.4% rate, as spending on consumer durables soared by 21%. That meant that the acceleration of growth in consumer spending accounted for nearly 100% of the increase in GDP, with the rise in durable spending accounting for almost half of that increase.
“The rise in consumer spending was not, however, due to higher employment or faster income growth. Instead, it reflected a fall in the personal saving rate. Household saving had risen from less than 2% of after-tax incomes in 2007 to 6.3% in the spring of 2010. But then the saving rate fell by a full percentage point, reaching 5.3% in December 2010.
“A likely reason for the fall in the saving rate and resulting rise in consumer spending was the sharp increase in the stock market, which rose by 15% between August and the end of the year. That, of course, is what the Fed had been hoping for.”
With so many people looking for risks and so many policy-makers acknowledging them and their plans at mitigating these risks, what’s left to worry about? Nothing is going to sneak up on the markets and wipe away my assets before I have a chance to react. I’ll be happy sitting on my investment positions now until there is real reason to be scared.
Not sure what might constitute a real reason. And actually, a real reason would be blindsiding in its nature, like a true black swan event. But for now, those sitting and staring in the face of uncertainty are looking pretty smart.
This returns me to an excerpt from The Logical Trader by Mark Fisher about not knowing why a market is behaving a certain way, and honoring the move anyway:
If a market is making a substantial move and traders seem to understand why, this market trend is not going to last very long. However, if the market is moving in one direction and no one has a clue as to why then the trend is going to be prolonged. When a market goes up or down for no apparent reason, it tends to go a lot further in that direction than people can imagine.
I will argue that’s how the recent 2009-2011 rally snuck up on so many, me included.
Along those lines, it is common vernacular that markets climb a wall of worry. That could imply this run-up in stocks and commodities is the beginning of a longer-term uptrend that will continue after some of the doubts are washed away through a correction and subsequent rally to new highs. Call it the “unrecognized trend” of the Boom-Bust Sequence that marks the beginning of a bull market, if you will:
Or … that’s not where we are in the sequence and we should instead prepare ourselves
for the opposite – this strong rally was simply a “successful test”. If the decline of the
last two weeks runs deeper beyond explanation, then maybe something is changing that
we don’t see. If Elliott Wave had their way I’d bet they’d put us very near the top of a
bear market rally, perhaps looking a little something like this on the S&P 500 quarterly