The Real Enemy, and It's Disturbing

*Please join Portfolio Manager Ed Dempsey, CFP, and Director of Research Charlie Bilello, CMT, for our market outlook webcast on Tuesday, Feb 28th at 4:15pm ET. Register HERE for a discussion on what you should do when others are greedy and more.

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From the Blog:

Going back to 1985, the evidence suggests that overbought is actually bullish, on average. Come again? In the year following an extreme overbought reading, the Nasdaq 100 Index has been higher 85.5% of the time with an average return of 14.8%. READ MORE

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“We have met the enemy and he is us.” – Walt Kelly

We have entered a dangerous time in history. A time when the truth changes every day.

The amount of misinformation being spread daily is nothing short of remarkable. It seems like everything is “fake news” now independent of who is reporting it. Rather than seek out the truth, confirmation bias results in the spreading of lies with little thought as to whether one’s existing beliefs are rooted in reality, or are complete fantasy. What is worse is that the speed with which this misinformation is spread trains our brains to not use Kahneman’s “System 2” part of the mind which is actually analytical. Rather, everyone now simply reacts and moves on to the next distraction.

What does any of this have to do with investing? Absolutely everything. At some point, the market prices in the actual truth, but only after overreacting in both directions. In between those two points, buy and sell decisions are made based on reacting to not only the recent past, but also to the narrative constructed around it. It is far easier to react to something that sounds like it makes sense rather than think about nuance, or even if the information presented is fiction or non.

The narrative now in the investment community is remarkably void of any actual questioning of both logic, and actual information. Interest rates will only go up, stocks will only go up, inflation is going to skyrocket, and volatility is going to remain historically low. Why does everyone believe this is the future? Because interest rates have already gone up, stocks have already gone up, inflation has already gone up, and volatility is historically low. The narrative reacts to what has already happened, and spreads like wildfire across the media. Entire investment decisions are then based on the story, rather than the fact that mean reversion dictates the exact opposite is the truth of the future.

What are these facts? Yes, rates MAY go up, stocks MAY go up, inflation MAY skyrocket, and inflation MAY go up. But realistically, it is hard for any of these to continue the way investors believe. Why? Because the narrative is predicated on Trump being a reflationary president through tax cuts, infrastructure spending, and regulatory reform. My biggest problem with this is that 1) seemingly everyone believes that this is a certainty, and 2) seemingly no one is addressing the not-so-alternate-fact that the current fiscal year end 2017 US federal government debt is estimated to be $20.1 trillion. And that’s before any actual legislation is passed. If Trump has his way, that debt will explode. Somehow, disturbingly, no one is discussing the potential that tacking on even more government debt is long-term deflationary (see Japan), represses long-term growth (since you’re pulling it forward), and tends to increase overall asset volatility.

But who cares right? Someone says something we agree with that confirms our own biases and beliefs, and it only reinforces our belief that what we think is true. Independent thought is impossible when inundated with information which confirms what we think, rather than what is actual reality. And when those beliefs turn out to be proven false, a new narrative is constructed to fit a new set of beliefs which are again formed on the recent past. 

We must, as investors, but more importantly as members of society, stop changing the truth to fit the moment. We must stop reacting to every bit of information, and instead make sure the information is valid. We must stop believing in false narrative. Perhaps most importantly, we must stop doing this to ourselves.

Michael A. Gayed, CFA

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.