Tomorrow’s Crisis

Tomorrow’s Crisis

US equities headed into May coming off their best month since the election and analysts are still upbeat.

Sentences like that one have a tendency to elicit eye rolls from folks like myself who demand profundity. If you’re a rally skeptic or a Fed critic, you might instinctually emit what you’ve come to conceptualize as cynical chuckles although, if you’re being honest with yourself, you’re emoting something more akin to frustrated jeers.

Late this week, Credit Suisse’s Jonathan Golub lifted his year-end target for the S&P to 4,600 from 4,300. That made him the biggest bull on Wall Street, overtaking JPMorgan’s Dubravko Lakos-Bujas and Cantor’s Eric Johnston (4,400).

Golub called the US economy “red-hot,” and raised his 2021 EPS estimate from $185 to $200. “In the early stages of an economic cycle, analysts tend to underestimate operating leverage, leading to positive revisions, a trend that can last two to three years,” he said.

I’ve mentioned this before, but I should probably bring it up more often: It’s important to separate for-profit purveyors of formulaic reading material and the on-air prognostications of attention-seeking “brand names” from earnest analysis. Most market participants aren’t particularly adept at doing that and are easily duped into mistaking snake oil salesmen and/or the entertainment business for something they’re not.

Generally speaking, online portals and newsletters that rely on what you might describe as a paint-by-numbers method to churn out content and commentary are for-profit, entertainment enterprises. When your favorite big-name hedge fund manager shows up on CNBC to declare himself “concerned” about valuations or leverage or some other generic talking point, that too is just entertainment.

There’s nothing “wrong” with consuming that kind of content as long as you recognize it for what it is. Just as you wouldn’t make The National Enquirer your go-to source for incisive, reliable world news, you shouldn’t bombard yourself with market propaganda, especially of the bearish variety. That’s not to say all bearish macro calls are incorrect. But make no mistake: Most of the time they aren’t “calls” at all. Rather, they’re a product. And you’re the customer.

How many blog posts have you read (or at least seen) over the past five years predicting Deutsche Bank might collapse triggering a systemic crisis? You’ll probably see Credit Suisse get the same treatment (from the some of the same portals) going forward. How many times has Jeff Gundlach predicted some manner of extremely adverse macro event? How many times has Kyle Bass made a dire prediction about China? How many times have newsletter writers boasting of expertise in markets or government insisted the US economy is a kind of Potemkin village or that America’s “debt bomb” is poised to explode? Or that the great “dollar collapse” is just around the corner and that the only way to prepare yourself is to buy gold? How many of those predictions have panned out?

That’s something to keep in mind amid what, at times, can seem like a ceaseless, deafening cacophony of nebulous warnings. Could something go horribly awry for benchmark equity indices on Monday and wipe away a third of your retirement account by this time next week? Sure. Is it likely? No.

If you’ve been in the business of predicting broad-based financial calamities on a regular basis, you’ve been right three times in 21 years.

Above, I alluded to a distinction between folks who want something more out of their market commentary than generic, boilerplate statements of what’s obvious and those who deride all bullish rhetoric as somehow inherently wrong despite the reality that shows up on your monitor when you pull up a chart of the S&P and click “All” for the timeframe. I’m in the former camp — I like profundity, or at least pretensions to it, but I recognize that spreading fear isn’t synonymous with being smart.

Over the last dozen or so years, large swaths of the investing public have been duped into believing that being bearish is somehow akin to being wise or in the know. As I put it several years back, post-2008, fear became the new cognitive principle. If you spread fear, it looks like you have a deep knowledge of things. Being calm is like being ignorant.

“Perhaps the biggest disconnect between the pre- and post-2008 world is encapsulated in the change of the attitude towards tail risk as a barometer of fear,” Deutsche Bank’s Aleksandar Kocic wrote, in 2019. “In the past, fear had bad reputation,” was a sign of “incompleteness” and was generally seen as “something one needs to outgrow,” he went on to remark, adding that over the past decade or so, “fear became a sign of wisdom, elevated to a new heuristic as well as a source of considerable profit.”

Those inclined to point to the pandemic as an example of alarmists being “correct” are gently reminded that no market-based portal or newsletter than I’m aware of spent much time pre-COVID obsessing over pestilence. Sure, disease probably got a mention at some point, but so did supervolcanos, meteor strikes, nuclear meltdowns, wars and, in at least a few cases, UFOs. The folks shouting from the rooftops about the inevitability of another pandemic were scientists, virologists and epidemiologists, not people writing market-based doomsday blogs or peddling bearish newsletters to gullible retirees.

Most investors claim to understand that tomorrow’s crisis almost never comes about as a result of today’s popular bearish talking points. The reason for that is simple: If everyone sees something coming, that collective knowledge will likely prevent it from happening, or at least blunt the impact. And yet, each and every day, market participants debate the same set of “next crisis” talking points. Everyone is worried about the same thing or the same list of things.

In hindsight, everyone said they predicted the bursting of the dot-com bubble. After the fact, folks came out of the woodwork to claim they predicted the housing collapse. In reality, almost no one did. The Big Short only had a few protagonists.

Tomorrow’s crisis is coming, as sure as night follows day. But you’re not likely to read about it on anyone’s blog or hear about it from any commentator on financial television. Laugh as you might, but Credit Suisse’s Jonathan Golub has a much better chance of seeing his 4,600 S&P call play out than any doomsayer does of realizing his or her latest armageddon fantasy.

4 thoughts on “Tomorrow’s Crisis

  1. Translation. Over time markets have a tendency to go up. Investing smart is a long game. As long as you can tolerate the fluctuations and have the time mostly staying invested wins.

  2. There was a time I was a chop stocks boiler room pumper (stock broker). I always told my clients to invest only the amount of money they could afford to lose, as if were “monopoly money”. To my knowledge they always slept well.

  3. The boy who cried wolf syndrome is another analogy, and whilst the point H makes that “fear sells” is a valid point, its about tail risks—equities are a giant carry trade, incremental small gains, persistent gains, made possible by liquidity and leverage, but punctuated by devestating de-risking events whose timing is uncertain and often have little to do with perceived catalysts which only become “obvious” and written about after the fact. I believe this is what H is implying in this piece but if not feel free to correct.

  4. Yeah I could claim I predicted the housing market collapse and while that is true it is also true my reasoning doesn’t actual mean it was going to happen. I could clearly see the valuations were so high that no one that did not already own a house could feasibly enter the market if not already very wealthy. This meant my generation and the next would be priced out. If that was true then who was going to buy the houses to keep the valuations growing?

    So it was sound, except I now realize that realistically… buyers existed had they wanted to own the US housing market. Imagine if the Saudi Sovereign Wealth fund had decided owning and renting US real estate was a good long term plan. Sure stuff like this is happening post crisis but it could have happened before the collapse and the collapse may never have occurred.

    So yes, even seeing the fundamentals is not the same as seeing the future. There is always more things to know than can be known. It’s all educated wagers of varying risk and you don’t even really know the odds.

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