Fifty Years of Feardom
“LONG TERM, adjective, On Wall Street, a phrase used to describe a period
that begins approximately 30 seconds from now and ends, at most, a few weeks from now”
RUMOUR, noun, The Wall Street equivalent of a Fact” quotes by Jason Zweig
“If you can change your focus, you can change your future. Don’t spend a minute worrying about something that you can’t control. If something can’t be changed by you taking direct action, put it out your mind. Today’s society is overrun with useless distractions” Jim O’Shaughnessy
“What’s meant for ye will no go past ye” Granny McKay
I wrote an article last week for Daily Business which seems to have gone down quite well, especially in the US where in “A Dash of Insight” by Professor Jeff Miller, it was named “Read of the Week.” Really chuffed! So I thought I’d give you some thoughts along the same lines which you might find helpful given the hysteria in an increasingly one-sided gloomy view of the world as broadcast on and offline these days.
But before I do, let’s bring things up to date given what’s happened to Stock and Bond markets this last couple of days. According to The British Brainwashing Corporation, experts predict yet another recession. They’re not the only ones. Economists splattered all over the media appear to share this view.
Apparently it’s down this time to “an inverted yield curve”…. pay attention at the back! Now before I go any further you may wish to pour yourselves a stiff whisky and sit down. First of all, how accurate are expert predictions? In January the Wall Street Journal polled 69 economists (stop sniggering at the back. No, I don’t know why they chose 69 either)… and asked for their predictions of the income yield in June on US 10 year Treasury bonds only
6 months later. A simple task for experts you might think. Well think again.
Nobody predicted the yield would fall below 2.5%. The average guess was 3%. If you want to check you’ll find it’s now about 1.7%. Now do stay with me as I move further into economist-speak. It’s not painful but I’d pour another dram just in case. Now the difference between an income yield on Long Term Treasuries (10 years plus) and Short Termers (2 years) is called, for some inexplicable reason, “a yield curve.” And when pessimists become even more worried than usual about the “economy slowing” they insist a clear sign of impending doom is when short term yields pop higher than their long term relatives.
And this they call “an inverted yield curve” presumably because it sounds painful and the economic equivalent of an ingrown toenail. According to legend, since the late 1970s, such an inversion is followed by recession. They tell us there have been 5 recessions since 1978. That’s odd. Aren’t recessions being predicted every 5 months? The BBC reports that an inverted yield “thingy” predates a recession by “9 months on average.” I don’t know what you think of averages but since I discovered that the average human has one breast and one testicle I prefer to check for myself (no, not in that way!)…. Nullius in Verba.
Well, in the 5 previous occasions the gap between this nasty curve and recession was 1 month, 2 months, then 18, 19 and 22 months. How does that give us an average of 9 months? Good news though. In July, two of the world’s most famous “analysts” (note the first 4 letters) completed research into “inverted yield curves” from 1975 to establish if they could predict when stockmarkets would underperform against Short Term Bonds. They concluded (probably reluctantly) “there was no evidence of a link in all periods examined.”
But as broadcasters, financial writers, and pessimists get their knickers in a twist yet again about the “R” word, they also display their collective ignorance of simple arithmetic. As the Dow Jones Index shed 800 points because investors panicked en-masse, it was reported that this was the third biggest fall in history. Rubbish. As a 3% fall, that’s the 307th time since 1920. In other words it happens all the time. To have matched the biggest ever one-day fall of the 19th of October 1987, it would have had to have fallen 5,939 points! Can you imagine the reaction if that had happened? It doesn’t bear thinking about. Yikes.
As Jim O’Shaughnessy reminds us above “we are overrun with useless distractions.” He also went on to say “In my lifetime I have seen TV news go from being a relatively neutral 30 min report of what happened that day to 24 hours a day, 365 days a year of propaganda filled with narratives and talking points regardless of the dogma being sold. And they know what sells - Fear.” And he also quoted Jed McKenna who added “Humans are fear-based creatures. We are primarily emotional and our ruling emotion is fear.” (Actually we didn’t have a telly until I was 14, only 1 Channel, and the News was on once a day for 5 mins). Bliss !
However as Tim Price reminds us, the original purpose of the BBC as described in 3 words by dour Aberdonian, Lord Reith, the first BBC Director-General was to “Inform, Educate, Entertain” and to broadcast “All that is best in every department of human knowledge, endeavour and achievement.” I bet he’s turning in his grave.
Not that most financial columns are any better. They wallow in creating fear and panic. At this time of year they love reporting a “Dog List” of investment funds that have underperformed their benchmarks over a previous 3 year period. Presumably the purpose of this annual list is to encourage investors to sell out and move their money to recent winners instead. Hindsight is wonderful but wouldn’t it be more use if they’d predicted the current Dog List 3 years ago? Bet they’d get it as wrong as in the examples mentioned above.
5 years ago one of our “long term holdings” was in that year’s Dog List. Because we understood why the fund was underperforming, not only did we advise clients to stick by it, we suggested adding more to take advantage of an opportunity. That medium-risk income fund has since returned 65%, way more than double the return from the FT All Share Index total return. As I mentioned in last month’s Letter, legendary investor Peter Bernstein reckoned the secret of smoothed investment success lay in having uncomfortable diversification. Having a mix of styles and sectors helps avoid volatility and harmful losses. As a client said recently “My benchmark is sleeping soundly at night.” I’d agree with that. It’s worked for me too.
As I mentioned last month, this summer marks my 50th anniversary since persuading Scottish Widows that I was their actuarial dept’s missing link. 1969 was also the year I graduated from Edinburgh Uni with my Geography Degree. And next month there’s a 50th anniversary get-together of many of my fellow graduates, some of whom I haven’t seen since graduation day. Maybe it’s a good idea to brush up on glacial stuff like eskers, drumlins and climate change. When we were at Uni the consensus was that we were heading for an Ice Age. So like economic predictions it shows how wrong other “experts’ consensus” can be.
While 1969 was a decent year for optimists like Concorde designers, astronauts and Rock festival aficionados, pessimists weren’t left out either. Almost immediately when I started in actuarial, global stock markets fell sharply. Nothing to do with me though. Thanks to the Vietnam War and the Cold War/Middle East tensions things didn’t look too good. The UK economy was a dog’s dinner I recall (not much changes eh?) and the FT All Share Index fell 37%. That’s almost two-fifths in old money. Then when Rolls Royce collapsed 2 years later it fell another 20%. In 1973 (9 months after I started as an IFA, as luck would have it) the Index fell over 70%.
In 1979, prospects looked so bleak that on August 13th forty years ago, Business Week magazine published the now infamous (and completely wrong pessimistic economic prediction) entitled “The Death of Equities.” The Dow Jones Index stood at 875 and had been see-sawing around aimlessly for around 14 years. The authors saw no hope for stock markets and predicted a continuation of high interest rates and inflation. They recommended diamonds and gold as investments.
Well diamonds may have been a girl’s best friend but proved to be a dire investment. Gold rose for a year then collapsed, only to be revived lately as Fear returns to 1969 and 1979 levels. Seems to me having studied headlines and financial magazine covers over that
50 year timespan, there appears to be an “inverse return gap” between what’s consensus and what’s in the minority. And more often than not the minority come out on top. But only if you’re patient, ignore scary headlines and don’t tune into the “News”.