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Fear And The Market’s Perverse Fascination With Calamity
If I didn't know any better, I'd be inclined to think that a lot of folks are actually hoping for a recession just to see what it's like.
The cacophony emanating from the Twitter peanut gallery and the financial media is deafening and, actually, the tone of some reader comments and e-mails betrays a kind of perverse fascination with the prospect of an economic downturn and concurrent market meltdown - you masochists, you.
Back on December 4, after the 2s5s and 3s5s inverted, I suggested trader
Jacob’s Ladder. Great film.
yay!
This is a general pattern of reaction to crisis. Crisis triggers return to the basic premises of the existing order of things, which typically tend to be only reinforced, not challenged or changed. We are currently dealing with an advanced stage of the populist response which is gradually permeating all human activities as resistance to nonsense is weakening. As theory goes, one should note a distinct pattern, present in any populist movement (not just the current one):
1) refusal to understand or engage with the complexity of the situation
2) emergence of conviction that there must be external agent (lurking behind the scene) which is responsible for the mess
3) fetishistic dimension: refusal to know — ignoring the facts (mistrusting them),clinging to the fetish
Ithink, all three check here
Is calamity the consequence of randomness, like an Indy 500 spectator hoping to see a spectacular accident, or is it an inevitable consequence of deficient leadership? The latter is a when, not if scenario, and the former is a fascination thing. Everyone I am listening to says “no recession” and we have a healthy, robust economy. It seems that the activity and forces promoting it are far from sustainable, and the commentators are talking their book. They are in in denial about the US economy legitimately generating enough growth to counterbalance a ballooning debt overhang.
Investors always do this because the future in unknown and any sign of confirmation in either way gives the investor confidence. How many times does one hear positives on the economy as stock prices rise. Where was the recession talk in Sept despite weaker autos, housing, biz spend, etc. but markets are forward looking etc. Now it is doomsday because stocks sell off and spreads go for stupid expensive to expensive. There is more to it but that is the jist of it. What matters is what CEOs and CFOs do because of their stock price and higher cost of capital. Do they cut workers, cut capex, reduce costs (R&D, advertising, travel, etc). Do they have maturities of debt that needs refinancing or are they generating a lot of FCF. And how do consumers respond to their wealth declines or possibly job losses (depending on the company) etc. is credit reduced. Sure breadth got worse through 2018 and cap spending came to a halt in Q3 so we see some of the impact of a higher cost of capital as well as tariffs and if sustained it will be a constraint going forward.
Too many investors are relative rather than absolute investors and that mindset leads to these manic depressive moments like we saw in Jan 2018 and Dec 2018. But for the wise investor the truth is usuall in the middle.