Opportunity Abides

Dennis asked:

Where is our government getting all of this money it is giving to my neighbors and me? Am I right in assuming that the government is just printing, printing, printing more money to throw at the country to stimulate our economy? If so:

  • What is going to happen to our economy in the near future?
  • How bad economically could it really get for us?
  • How do you see the next 12-24 months?
  • President Trump says that things are going to come back bigger and better than ever. Do you believe this?

Yes, the government is spending like there is no tomorrow even though there is a tomorrow and it will include the knock-on effects of higher government debt and a bigger Federal Reserve balance sheet.

It is impossible to know what consequences the supportive policy will create in the future. However, we heard similar questions and warnings back in 2008 when the Federal Reserve and government intervened. We were told the dollar would collapse, hyperinflation would set in, and Washington would go bankrupt.

These bearish forecasts were wrong. The current repeat of the same warnings could be wrong, too.

What-iffing in an ominous tone is easy to do. What if this, what if that, has been going on since the beginning of mass media, through which the stock market has risen two thirds of the time. I bet it will keep doing so.

I suspect that the reopening of the economy is going to go better than people fear. Expectations are so low that there is almost no way to disappoint. Perhaps small-business help will actually get to small businesses. That would be a positive surprise, and change of pace. Maybe companies will report more than zero earnings. That would be positive as well.

To Dennis’s first three questions, the only honest answer is that nobody knows. I believe the economy will muddle higher, that businesses will reopen, and that they will need employees. These factors will improve reports.

As for the next 12-24 months, well, why not the next 5-17 months, or 9.5-27.3 months? Time frames are arbitrary. Beats me, beats you, and beats every pundit. There will be a muddle higher over a not-as-long-as-you-think time frame. That’s my take. I don’t know how many months.

But you know what? I don’t need to know in order to confidently buy cheap stock prices. That’s the business we’re in around here, and this is as simple as it gets:

  • You know the economy will recover.
  • You know stocks will go higher.
  • You do not know when, and cannot know when.
  • You know that if you wait for better data, you will miss the stock recovery.

I submit that, therefore, it is best to continue our quarterly plans that have done such a good job navigating thus far, or engage in some other form of gradually putting money into stocks

What else would you do? Avoid stocks at cheap prices so you can kick yourself later?

Dennis’s last question was:

President Trump says that things are going to come back bigger and better than ever. Do you believe this?

It’s a loaded question with “Trump” thrown in there. It’s irrelevant what Trump or another person says about the economy. Who cares? Dennis could have plugged in any other name and my answer would be the same. “Trump says…” or “Jim Cramer says…” or even “Lady Gaga says…” — whatever.

Unload the baggage of “Trump says…” and the question becomes merely:

Do you think things are going to come back bigger and better than ever?

Answer: Of course! Haven’t they always? Humanity will get through this, life will resume, and we will look back on this the same way we look back on subprime, 9/11, the dot com collapse, and every other historical incident.

I could quote a collection of economists here, but why? They’re z-vals, arguing over arbitrary time frames and other irrelevant details.

Your job as an investor is to keep your eye on the ball of growing your portfolio balance. This is not the place for worldviews or big-picture guessing games. Leave that to the people who suffer no accountability for their 50% mistake rates.

All you need to know now is that the US Treasury and Federal Reserve want to keep the financial markets intact — and stock prices heading higher. Let them sort out future consequences. They did a darned good job of it last time, unlike bearish pundits. Side with the profiteers this time.

Like the chart at the top asks: How much of the recovery are you willing to miss?

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5 Comments

  1. He Who
    Posted April 23, 2020 at 1:55 am | Permalink

    I continue to question the illogic of assuming two contradictory premises: “Do you think things will come back bigger and better than ever? Of course!” (Reasoning: the future will resemble the past.) “To Dennis’s first three questions, the only honest answer is “Nobody knows!” (Reasoning: predicting the future is a fool’s game.)

    And yet, there is expressed certainty: “You know the economy will recover.” “You know that stocks will go higher.” “You know if you wait for better data you will miss the recovery.”

    My observations? 1. I was not around in the last global pandemic, nor do we have useful data that demonstrates that this pandemic is actually resembling – with sufficient correlation – any of the last pandemics looked to (e.g., Spanish Flu) 2. The ‘printing of money’ is and will (I believe) produce unintended consequences, and while those in the Eccles building are sufficiently educated and skilled at manipulating models with known variables, we are faced with that idiotic, but prescient, quote from Rumsfeld: its the unknown unknowns that we have to worry about. The Kelly Letter’s use of dollar cost averaging is probably as good as one can do when trading a random series with built in drift, and the use of ‘chandelier stops’ can probably improve returns somewhat, however, overconfidence in the magnitude, degree, and duration of the “drift” can expose the portfolio to drawdowns larger than one’s “stamina”. Entry points matter, as well. For a system to be sufficiently robust, a monte carlo simulation sliding fixed time frames across multiple business cycles (moving the entry of the window one day at a time) and running thousands of trials will reveal what the actual performance metric is. (And the weakness of that evaluation is that you cannot include the “subjective” adjustments made in reaction to real time events.) Even considering the static nature of testing a single model, I think it would be interesting (and somewhat surprising) if the Kelly Letter performed better than the inflation-adjusted treasury rate (e.g., an investment grade company’s cost of capital). While trying to avoid “doom-bias”, I have to suggest that the global exogenous shock represented by this pandemic is impacting the ’embedded’ drift to an unprecedented degree. Unlike the expressed certainty in this Note, I know that I just don’t know. (As all traders know, “hope is not a strategy.”)

  2. Luigi
    Posted April 23, 2020 at 12:27 am | Permalink

    Jason,

    Isn’t it the case that “God created weathermen to make economists look good” ?

  3. dltlv
    Posted April 22, 2020 at 11:56 pm | Permalink

    Good information as always. since using the “letter” my emotions are way less than in 2008 where I did not invest when the markets were so low during that down turn. was a big mistake but now all is good.

  4. Ariel
    Posted April 22, 2020 at 11:47 pm | Permalink

    The question about where the money comes from is interesting to me as well and remained unanswered and was looking for your insight? Where does the money come from? I assume the US can print as much money as needed like any other economy with its own currency, but is it doing so? And how does affect everything else?

  5. Tom Luciani
    Posted April 22, 2020 at 10:47 pm | Permalink

    I bought the recommendation for XLE and the news of oil being given away and doom. I sold it, and the XLE has not dropped. How can that be?
    TQQQ is wonderful.

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