There is a link in yesterday’s reads that I violently disagreed with but found quite interesting nonetheless.
Just as retweets aren’t endorsements, my AM reads include things I find fascinating, important, and well-written — regardless of whether or not they reflect my beliefs. If anything, finding contrary pieces helps reduce confirmation bias and curtails my time in a limited information bubble of my own construction. We cannot avoid that fate entirely but we can do our best to keep it to a minimum.
The link was to James Mackintosh’s column “Five Not-Quite-Impossible Things the Market Believes.” I subscribe to Mackintosh because he is a) a very good writer who is always interesting; b) plugged into the gestalt of Wall Street through his perch at the WSJ; and, c) a rational thinker. But rational people can reasonably disagree on anything market-related — after all, someone has to be on the other side of your trade.
My nuanced disagreements: This is not so much an “overheated economy pushing up inflation and a hot jobs market pushing up wages;” rather, inflation traces to the oddities of reopening a closed economy and the impact of $5 trillion in three CARES Act stimuli (among other things); A year of WFH and/or generous unemployment benefits allowed lots of workers to upskill and get better jobs and/or start their own firms. Additionally, the bottom quartile (perhaps even half) of wage earners had been driving Deflation, not Inflation for decades as minimum wage lagged inflation, productivity, corporate profits, and (especially) executive comp. This was a long overdue reset.
As to what the market “knows:” Stop Anthropomorphizing Mr. Market. The market doesn’t “know” anything; it is an inanimate collection of investors, a disparate crowd with differing views putting its capital at risk to generate a return. Markets neither agree nor disagree with any of this, they merely reflect a broad spectrum of behavior (and occasional misbehavior) among its participants.
Prices are more or less “right” — at least relative to returns for the risks assumed — during long trends. When big reversals occur, the dynamics of that risk/reward ratio change, often leading to losses. This is how I conceptualize the idea that “Markets sometimes get it wrong.”
Does the bond market disagree with the stock market? I am not a fan of that framing; my preference is to note that different investors in equity and fixed income have very different risk tolerances stocks, time horizons, and investment goals. If these two markets appear to be suggesting two different future economic results, it is more likely a reflection of those investor differences than a result of markets collectively forecasting two different things. Those whose goals are a return on capital see the world very differently than those whose goals are a return of capital.
Other items worth mentioning as debatable:
New Nasdaq Bull Market? I do not adhere to the 20% meme – I believe it’s a meaningless media creation. Up 20% off of a 33% decline is a partial recovery, not a new bull.
Median forecasts: We can discuss the various forecasts — 10-year bond yields, Fed funds rate, equity markets, inflation expectations, consumer confidence, etc. — noting investors as a group do a terrible job making these predictions. Surveys of investors are laughable.
Uncertainty: The meme that refuses to die. “Yet, there’s no margin of safety in this market. With so much uncertainty, investors should want more security than usual.” There is always the same level of uncertainty — you have little to no idea what happens next. What changes are the circumstances allowing you to lie to yourself about it.
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Regardless, the question Mackintosh raises is this: “What does the market (aka the dominant activity of traders) know that you do not?” That is always a worthwhile question for investors and traders to ask themselves.
See also:
Five Not-Quite-Impossible Things the Market Believes
James Mackintosh
Wall Street Journal, Aug. 16, 2022
Previously:
Countertrend? (August 15, 2022)
Shift Your Perspective (July 22, 2022)
The Uncertainty Monster (July 21, 2022)
Who Is to Blame for Inflation, 1-15 (June 28, 2022)
Real Wages (November 22, 2021)
One-Sided Markets (September 29, 2021)
Elvis (Your Waiter) Has Left the Building (July 9, 2021)
The Great Reset (June 2, 2021)
End of the Secular Bull? Not So Fast (April 3, 2020)
