Pity the poor fund manager: Their job is to invest according to their “style box.” Their difficulties come when their stylistic approach requires patience and discipline, while shorter term animal spirits run in the opposite direction.
That may explain the disconnect between the 2003 rally and some observers’ stubborn bearishness. We’ve referenced strategists in the past whose sagacity we respect. One such commentator is Jeremy Grantham, who made the bold observation last year that this was “The Greatest Sucker Rally in History.” Was he overstating the matter? If you measure your returns in years, then there’s still time for Grantham to be proven right. Meanwhile, the market keeps powering higher without the Bears. As Ned Davis asked, “Do you want to be right, or do you want to make money?”
That fund managers are measured on a quarterly basis makes the situation even more challenging. Follow a bearish “Macro call” – even one eventually proven right – and you would have you missed the biggest rally in years. This is the Fund Manager’s Dilemma: Whether to be a multi year investor, staying true to their discipline. Or, to be a quarterly trader, as opportunities and their skill set allows.
The Fund Manager’s Dilemma was brought into sharp focus Friday, when disappointing employment data showed essentially no new job creation. This revealed two things: First, it shows the difficulty traditional economists have in this very untraditional market cycle. Given our longstanding perspective that this cycle is anything but typical, it explains why forecasting has been so extraordinarily challenging.
Second, the lack of new jobs unmasks what a bogus statistic the “Unemployment Rate” is. Amongst the many Enron-like data points from the government, this one is the silliest. Indeed, it is so misleading, that another government statistic must be considered along side of it: “The Augmented Unemployment Rate” (see chart nearby).
It comes back to this atypical recession/recovery cycle. The long expansion boom, bubble, and bust created a very pliant Fed. They’ve been managing interest rates and money supply so as to artificially maintain consumer spending, thus softening the blow of the downturn. The business contraction continued, despite many interest rate cuts, until we reached historic levels of stimulus.
But alas, the piper must be paid. That’s why the market may be reinflating, but the economy is still not creating new jobs. That condition will continue until excess capacity is exhausted and real demand returns. The fund managers’ woes are not yet over . . .