converging viewpoints

4 Oct

Over the past month I’ve been mostly out of the portfolio management game, and it has been titillating (to make use of an oft-unused word) from a personal standpoint to watch the capital markets from the sidelines.  There is a constant need for client management, nearly as much as actually managing money, when managing portfolios.  And when markets are volatile and the world seems more uncertain, client management can be nearly, or more, time consuming than actually trying to add value to managed assets.  I have been able to view it through another lens and it has been fascinating.

The above is not the main subject of this post.

Though I am not actively managing client assets, I am still deeply involved in thinking about the economy, capital markets, and specific investments.  In that vein, I’ve been corresponding with a friend about the situation in the world today.  Europe finds itself in crisis.  The U.S. may be in another recession and is growing anemically at the very least.  Or that’s the way the world – viewed through the media – now seems to portray it.

My friend has always been at odds with the prevailing view of the world.  He’s been a heavy investor in foreign currencies and gold, and short the market from time to time.  Not really the buy and hold type.  Today he was lamenting that he seems to have lost his footing.  That is, the investment world seems to be saying the things he’s been saying for years.  “Wait, you agree with me?  I’m not used to that!”  When a contrarian opinion becomes consensus, it often leads to these awkward feelings.  I’ve been there myself several times.

While I’m not a ‘buy gold, the world will eventually collapse’ investor, I do think we are in what would technically be a depression.  But it’s ongoing deleveraging that leads me to that conclusion, not a hatred of Western society or the President.  (Not that my friend is motivated by these, either.)  Robust economic growth the past couple decades was borrowed from the future in the form of private and public sector debt used for consumption more than long-term asset building.  This must be now paid down.  Put matter-of-fact-ly, aggregate growth will be lower no matter what fiscal and/or monetary efforts are wielded against it. I came to this conclusion around the same time others did, albeit independently, during late 2008.  History foretells what is bound to happen out of similar conditions and this is an experiment we’ve seen run before.

Back to the main point.  Anytime one has an unwavering view that doesn’t ebb and flow with the tides of investment sentiments, the collective view will occasionally converge with it.  Sometimes, it happens in a big way.

So I’ve held this worldview and when the prevailing viewpoint is congruent with mine I, too, feel strange.  The initial feeling when the world seems to agree is one of vindication but, summarily, the contrarian in me feels uncomfortable and leads me toward rigid self-examination.  Okay, I was right but will I continue to be?  If so, why?  Is the data coming out that seems to vindicate these views even accurate?  How to capitalize on the situation from here?  It is not profitable to hold one view forever in spite of the evidence so one needs to constantly question.  The philosophical part of the post is over.  [Continue reading for more stream-of-consciousness.  This is the most fun way to write a blog – get some thoughts out on paper and minimally edit them.  Who was it – ? – Pascal or some prolific writer – who didn’t edit typos because he thought it a waste of time.  I agree to a point, though MS Word sees to it that I have far fewer typos that had I been inscribing this on papyrus several hundred years ago with a feather and charcoal.]

* * * * *

With talk of the Dow headed lower, I will always remember the WSJ headline the day before (or day of) the bottom discussing how the markets could go MUCH lower than they were at the time.  World trade data was terrible.  Unemployment was rising.  One difference between then and now is that it’s a worldwide — or at least multi-country — phenomenon, and the Fed has blown most of its firepower and, more importantly, its credibility, to little effect.  The world is more at the mercy of natural forces rather than some (flawed) idea that fiscal and monetary intervention, poorly conceived, can get us out of any mess.  The can has been kicked as far as it can go and investors know there will have to be real losses…and that governments really can’t do much about it other than let it play out.  Sure, there will be efforts to do one thing or another and on some level they might be successful.  But ultimately debt has to be paid down and that means lower growth and a slower recovery period than we’ve been used to for several decades.  Bummer, I know.  Grab a drink.

A closing thought I alluded to above: typically when the collective is leaning one way, it may not be the right way to lean.  Is it time to look for opportunities in the ‘it turns out better than everyone thinks’ trade?  Late MIT economist Rudiger Dornbusch said something like, The crisis takes longer than you think, then hits faster than you would have thought.  I would not personally bet on things getting better on a macro basis, but I think individual opportunities are clearly out there.

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