Perspective: The Key To The Market Vault

Perspective: The Biggest Shortcoming

Inflation

As stated in my biography, I’ve been around the market in a meaningful way since 1970. One of my pet peeves then, as it is now, was the lack of depth demonstrated by the media in reporting on financial matters. Back then, television consisted of 3 networks – ABC, NBC and CBS. The news at the time was actually reported by competent journalists with no political or ideological axe to grind, i.e., no editorializing. There was no internet. Essentially, the news (the facts as they were best able to be determined) was the same coming from each outlet. The only difference was the presenter… David Brinkley vs. Walter Cronkite, and the importance accorded to each story. Even then, the economy and market were given short shrift (i.e., more bad news on inflation today… CPI inflation up .5% last month, and that was above expectations by 1/10 of 1 percent, bringing the latest 12 month total to 9.5%). There was no effort made, as is the same case today, to contextualize that .5%. For example, that .5% reading, if annualized, would equal a 6% inflation rate – well down from 9.5%. So we missed by 1/10 % on the estimate, the number was certainly trending in the right direction.

This last week’s wholesale price (PPI) inflation number was treated in exactly the same manner. PPI inflation came in at +.3% (expectation was +.2%). The annualized rate versus a year ago was still very high at 7.4%. There is no mention of the the fact that the average increase in producer prices from June through November was a bit under 3% (June 1.1%, July -.5%, August -.1%, September .3%, October .3% and November .3%). Annualizing a 3% number would get you back to a 12-month rate of 3.6%. With all the gloom and doom around (confirmed by AAII‘s most recent sentiment survey), it is likely that most people’s favorite news sources were not keeping them up on this very positive trend.

The point being here that you never hear the succinct phrase: the Fed’s policy is beginning to work and the inflation data is trending – as it should be – in the right direction. As to media fare, seldom is heard an encouraging word and the sky is all cloudy all day.

Interest rates

This is an easy one. See if you can remember why the rate on the 10-year Treasury note spent so much time under 3% / under 2%. If you answered “the financial crisis and market implosion of 2007/2009,” move to the head of the class. A good follow-on answer would be a weak economy and fear of falling back into recession… or worse, fear of a 1937-style return to recession. At the whisper of any potential geopolitical or economic problem, the fear trade would kick in as investors would pile into the 10-year, putting upward pressure on their prices and downward pressure on their yields.

Political pressure on Jerome Powell was intense to keep rates low in the first part of his chairmanship. Enter Covid-19. With all the Federal stimulus dollars Covid brought to the economy, which was not that weak going into the pandemic, the reopening was explosive. The inflation was inevitable, and for the first time in over a decade, it was clear that the economy was strong enough to support a higher, more normalized interest rate structure.

With this as a backdrop, no one ever mentions the fact that for most of the last 50 years, the 10-year yield has averaged much above 6%. I started my career in October 1970. According to the interactive version of this chart (available on the St. Louis Fed’s website), the 10-year was yielding 7.33%. You might say that’s all fine, but from 1981 rates begin trending in the right direction. My counter would be that businesses still had to deal with higher inflation and rates at the time, and they and the economy in general did just fine.

The point I make here is that regardless of the constant media moaning and groaning on the topic of rates, they are still historically low and that much higher rates have not kept the economy from solid growth in the past.

Recession

One does not have to work too hard in the consumption of any media – financial, mainstream or political – to hear or see the “R” word. There is a constant drone about the subject and constant speculation about when, where and how this calamity might befall us.

What is a recession?

“A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.”

The National Bureau of Economic Research (NBER) Business Cycle Dating Committee – the official recession scorekeeper – defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

According to the above definitions, a recession is an economic slowdown and not Armageddon. But listening to the rhetoric and emotion that abounds in media comments on the topic, you might think otherwise.

Recessions are normal economic events, oft-predicted, seldom seen. My guess is we may see the next one as part of the Fed’s effort to combat inflation, but it is just a guess. The economy is very strong and inflation is trending lower. Who knows? Predicting is a very difficult sport.

One last item (scary last item) that might be playing here under the surface is the out-of-left-field nature of our two most recent financial crises – the 2008 collapse and the Covid debacle (most of us saw neither coming). These were obviously traumatic, and there maybe fear that another may be just around the corner on the back of something like Bankman-Fried’s escapades or banks playing fast and loose with credit standards. There is a narrative out there that this “something” may be a systemic issue and that the banks could take a hit. The bank stocks should be rising as a beneficiary of higher interest rates, but they are not. They have been moving in the opposite direction.

You might recall that the banking industry was required to become hugely overcapitalized after the financial crisis. If there is exposure to cyber or general bankruptcy due to a recession, it is likely to be well-contained. If not, there is always the lender of last resort (i.e., the Fed), and of course, the usual bailout. This is really far-fetched but not out of the realm of possibility, based on past recent investor experience. It is not my forecast, but it makes great fodder for the internet and general media as well.

My aim here is to point out that this negative media obsession with what is a normal economic event is way overblown. A recession or worse – even one of those nasty black swan events – will not be the end of the world. I repeat, recessions have been much predicted, but very rarely have they actually happened.

Media Lack of Perspective: The Causes

I am driven to two conclusions. Either there is a lack of rigorous effort in pursuit of the facts, or the more cynical view that there is a purposeful omission of positive perspective because bad news without it sells better. The political bent of your favorite news source may also play a role. None of this leads to good critical thinking. That is up to you. In light of what I’ve laid out in this post, view, listen or read carefully the output of media you use. Ask if they are giving you the background information that you need to form a rational opinion about the market and the economy based only on today’s headlines. My guess is that most economic news is reported with little or no mention of the backstory or historic detail that might temper investor concern or alarm. In the case of my PPI comments above, it takes very little to check recent PPI readings. Just ask Google. That’s what I did.

“Knowledge is Power”

In the market, knowledge (perspective) is power. Without perspective, you are just taking information from sources whose primary goals are engagement (bad news sells) rather than imparting useful information. To wit, we have had months of negative investor and consumer sentiment statistics in one of the strongest employment (3.5% to 3.7% unemployment) and wage growth (at the lower end of the wage spectrum where most people live) economies that this country has ever seen. Many have seen huge wage gains, well outstripping inflation. This has been juxtaposed against a background of a media voice telling us that inflation and rates should make us unhappy and that the boom is about to fall. Based on the low level of enthusiasm for the market, I would say this has become consensus.

Bottom line: Operating with perspective and betting against the consensus have generally always been keys to the market vault!

What’s your take?

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