Informed Optimism Should Be Your Starting Place in Markets

"If you were allowed one wish for your child, seriously consider wishing him or her optimism." -Daniel Kahneman

Markets looked like they were slated to make another record close before the bell on Friday. Netflix earnings and TSMC earnings put markets in a good mood after ASML cast some very ephemeral dispersion on the AI revolution. Despite the persistent march higher of markets, pessimism remains in ample supply. We actually think this is a positive sign and signifies we are in the early to middle stages of a powerful bull market, all pessimism aside.

In 1945, there were many reasons to be pessimistic. Humanity was engaged in a wholesale slaughter, the scale of which hasn’t been exceeded since. The nuclear age dawned, and before long, two major world powers were threatening each other with hydrogen bombs. After the horrors of World War II, it would have been a reasonable position to assume that humanity would shortly again consume itself with war, perhaps irreparably this time. Instead, the opposite happened. The post-war economic boom was a period of prosperity, innovation, and global collaboration that put all previous human renaissance to shame. The nuclear age brought unprecedented prosperity instead of unthinkable destruction.

There are two lessons from pessimism that many experienced after World War II. Firstly, it’s that seemingly volatile developments like the advent of atomic weapons can have counterintuitive effects. Since their invention and development, no two states that possess these weapons have directly confronted each other. And secondly, that people can be very pessimistic, while, in fact, positive things are going on. We can see this today with public perceptions of our economy. The economy is great by most measures; however, many people believe it is performing poorly.

You see, the pessimism going on about the US economy is not really all that harmful. While people have been pessimistic, the economy has been doing very well. Instead of engaging in ebullient and irresponsible spending behaviors, people have chosen to engage in frugal ones that make their businesses and home balance sheets healthy. Maybe since the demand that they expected to peter off stayed strong or got even stronger, they now must hire some extra help. And while most Americans may believe the economy is bad, economic experts are thrilled with what they see.

When pessimism peaks, it peaks in hyperbolic fashion. The pessimism of the authorities during the Second World War itself is perfectly understandable, but it also serves as an example of how pessimism can hamper forecasting. The horrors they saw around them, the frustrations and setbacks they endured, and the scale of tragedy they witnessed all contributed to a near-apocalyptic plan to invade the Japanese home islands called Operation Downfall.

The projections for casualties were in the millions. So high that the purple hearts preemptively printed for the estimated casualties of that planned invasion are still being awarded to US soldiers that are wounded in action. False beliefs can become pervasive, especially when a lot of evidence is of a disputed or emotional nature. If you’ve seen a city set on fire and your friends die, then you’re probably going to be pessimistic about what a future invasion of Japan would hold. Luckily, one wasn’t necessary.

We can have sympathy for our predecessors and their overly pessimistic worldview after what they endured. So too, though, should we have sympathy for ourselves and understand the rampant pessimism pervading markets in full context. It’s understandable. It’s also profitable if you know when to get on the other side of it. Optimism should be your starting position in markets rather than pessimism. There are not a lot of risks that scare Mr. Market as much as they scare you.

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As of March 2023, 1.1 million Americans died of COVID. It is the largest mass casualty event in American history and exceeds the American deaths from the Second World War by nearly threefold. So, the sympathy and understanding we grant our predecessors should certainly also be granted to ourselves. And similar to them, our negative experiences may be causing us to have an overly pessimistic view of the economy and the world around us.

?Furthermore, the tragic epoch of COVID was marked by deep polarization and division that has left enduring emotional wounds that can compromise sound judgement and analysis. When you also factor in that some of Wall Street’s core cultural beliefs were threatened by the Government and Federal Reserve response to COVID, the picture can get even more convoluted. Yes, Wall Street is a group just like any other group. And just like any group it is prone to false beliefs. False beliefs we can exploit.

There are a lot of stimuli compromising a lot of people’s judgements and leading to many false beliefs, like that a bear market is just around the corner. Punk Rock Traders has and will take the other side of that bet. We also will unabashedly tell you that the Hedgeyes and Zero Hedges of the world monetize this fear and false belief in a way that won’t help your portfolio. Being afraid of risk won’t get you rich. It will keep you rich, potentially. But it won’t get you there in under a decade or two.

Current market tools have evolved to enable much greater returns for astute investors than were possible a generation ago. That’s where Punk Rock Traders comes in. The Wall Street Research complex is stuck in the twentieth century avoiding risk, we want to bring you into the twenty-first century by embracing it. And frankly, we believe our trades will do most of the selling for us. So far, we’ve shown you what a mix of fundamental research and leverage can accomplish. Our Trade of the Week on $TSM, for example, gained 153% in under a month as of yesterday’s close.

Economic pessimism is high. Clickable content about an imminent depression is everywhere. Yet, when we look at the effect of COVID on commercial entities, it’s tough not to see a very optimistic picture. Despite a prolific bull market rally over the past few years, valuation has improved, not deteriorated. The artificial intelligence revolution is raging, the economy is humming, and we are entering a seasonally favorable period. Sometimes good is just good. It’s important to remember that the rampant pessimism and bubble accusations are part of early bull markets. You must start worrying when optimism seems infectious, not when it seems in short supply.

Yesterday, our Trade of the Week on Taiwan Semiconductor ($TSM) went up as much as 210% after the company pilloried Wall Street expectations and raised guidance. We also had our trades on Walgreens ($WBA), Hims & Hers ($HIMS), Home Depot ($HD), the VIX ($VIX) and Oil ($USO) all perform splendidly this week. We are very pleased with our initial trades and what we accomplished with TSM this week is a perfect example of what a punk rock trade is.

I worked for Fundstrat Global Advisors under famed strategist Tom Lee. I have seen him trounce the bulge brackets and other researchers time and time again by having an informed optimism that people who let their emotions get the better of them will find elusive. We are Fundstrat alumni here at Punk Rock Traders and we try to honor our old boss with our informed optimism. When you mix informed optimism with leverage and sound analysis, the financial results can be quite auspicious.