On Fake News

Perhaps it’s the fact that a near-death experience has stripped me of any vestiges of a filter.

Or maybe it’s that my natural inclination to intellectual discourse and attendant propensity to despise ignorance and bombast has come demanding an audience in the wake of Trump’s ascension to the White House.

But whatever the case may be, I’ve lost any semblance of patience for the bevy of “news” outlets that masquerade as an unbiased alternative to the mainstream media. This is a subject about which I am well informed. Unfortunately I can’t detail my experience here (you’re welcome to send me a direct message) but we’re placing more and more faith as a society on sources that didn’t get the memo about yelling “fire” in a crowded theatre – and that’s putting it nicely. And then on top of that we’ve elected a man whose favorite pass time is yelling fire in the crowded theatre that is Twitter all day long everyday.

When it comes to financial markets, the worst part of this societal backtracking is that we’ve come to believe that the only people entitled to criticize markets and the myriad bad actors that inhabit them are these very same “alternative” media outlets, which means that more often than not, we have to sift through mountains of completely ridiculous political agitprop to get our daily dose of Wall Street cynicism.

That’s why I was particularly pleased when FT published a new interview with Michael Lewis, one of the most prominent Wall Street critics to ever commit words to a page. Here’s what Lewis has to say about Trump and the portion of the American electorate whose deep disillusionment with financial markets has effectively cost them their sanity and made them susceptible to all manner of blatant nonsense in the process:

“Every which way, Trump is exploiting the faulty mechanisms in people’s minds. It feels like we are in a world where, to me, some meaningful part of the electorate is beyond reasoning with – beyond fact, anti-science. All the mental faculties that lead to human progress, they are opposed to.”

“I think of this as echoing of the 2008 financial crisis. The marketplace for politicians just did something as weird as the marketplace for securities did, and it did it in part because of what the market did. Without the financial crisis, we don’t get Trump as president. There are other necessary conditions. But it’s definitely a necessary condition.”

Lewis’ comments are presented in the context of his new book The Undoing Project which FT describes as “a heartfelt homage to two Israeli psychologists, Danny Kahneman and the late Amos Tversky, who upended economic models that assume people are rational by documenting systemic flaws in human thinking and decision-making.”

Some of those flaws are based on so-called “anchoring” in combination with the “availability heuristic” in which the person or organization looking to play tricks on the audiences’ mind uses bombastic imagery to skew popular perception.

Let me give you an example. Here’s a headline from a popular alt. news site celebrated for its anti-Wall Street rantings: “Dutch Anti-Islam Politician Geert Wilders Convicted Of Insulting, Inciting Discrimination Against Moroccans.” Now here’s a headline and sub-header that ran on the same site a couple of hours later:

Dutch Police Arrest Terror Suspect With Loaded AK-47 And ISIS Flag

Just hour after anti-Islam Dutch politician Geert Wilders was convicted of insulting and incting discrimination against Maroccans, moments ago the local police announced they have arrested a man in Rotterdam, suspected of planning a terrorist attack.

Now what’s the point here? Well, obviously the idea is to distract from the fact that Geert Wilders is a racist xenophobe (I’m not even sure he would deny that) by raising the specter of AK-47-wielding Muslim terrorists in Rotterdam.

Ok, so why am I telling you this? Because as mentioned above, we’ve come to conflate these sites with honesty thanks to their cynical take on Wall Street in the same way we’ve come to tolerate Donald Trump because he says some things we happen to like about crony capitalism. Meanwhile, news which actually is news and analysis which actually is analysis is scoffed at and derided as being the product of “bitter” leftists, “untrustworthy” mainstream media outlets, and hopelessy conflicted sellside strategists. Instead, we’ve put our trust in a handful of sites, some of which are literally run out of someone’s home office by people who are paid by who knows who to promote who knows what agenda. And then we pat ourselves on the back for supporting the “unbiased” media. It’s patently absurd.

What I do is simple: I watch the real news and read the sellside notes straight from the source and then make my own judgements about the implications for my life and my investments. I suggest you do the same. If what you want is to get your neighbor’s opinion on markets and politics then just go next door and ask your neighbor – don’t go to his website and then shout about how you’ve found a reliable source.

So with that in mind, let’s look at what Goldman sees ahead for markets.

After 35 years of strong risk-adjusted real returns, one of the longest bond bull markets since 1800 seems to be fading, as reflation momentum has picked up. Bonds yields are close to 140-year lows, despite the US economic recovery being in its 8th year. In recent years, with inflation undershooting targets, secular stagnation concerns and central bank buying of bonds, yields have been trending lower and lower. Most investors would agree that the long-term return potential for bonds is very poor: a 10-year US buy-and-hold bond return of 2.4% nominal is in the 6th percentile since 1870 (0.4% real, assuming 2% inflation, in the 13th percentile). The last time bond yields were at current levels was in the 1940s following the deflation of the 30s; the subsequent 40 years were one of the worst periods of real bond returns in history, including the stagflation periods of the 70s and 80s.

(click to enlarge)

But the opportunity set in risky assets does not look much better. Equity valuations look quite stretched as they have increased with falling bond yields, also resulting in a more depressed outlook for long-term returns. At the aggregate level, the S&P 500 trades at the 85th percentile of its historical valuation relative to the past 40 years, and the median S&P 500 company trades at the 98th percentile. Shiller P/Es are close to their highest levels outside the Tech Bubble of 2001. The predictive power of Shiller P/Es has been mixed (R2 of 0.25) but valuations might be a speed limit for returns. Using current bond and equity valuations to predict 5-year 60/40 returns results in a nominal return of only 2.3% p.a., which is only in the 13th percentile of 60/40 returns since 1871.

That’s a pretty dour outlook and guess what? You didn’t have to read through eight articles worth of utter nonsense to get it. Further, it came from someone with a PhD who doesn’t have a lifetime securities industry ban on their home office wall. Go figure.