Flash Point: Price Drives Sentiment - Part 1
Gator don't play no... you feel me? Gator never been about that!
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” - Mark Twain
If you’re a student of history, or one of the unfortunate souls who enjoys studying semantics, you’ve likely come across this Mark Twain quote at one time or another. Even if your interests do not lie within one of those categories, you’re here reading this because you’re interested in financial markets, the handsome author, or both.
If you’re reading Hoags Research because of your interest in markets and investing, it’d be a safe bet to assume you’ve seen The Big Short (2015), which opens with Twain’s quote.
I was introduced to the quote when I saw The Big Short for the first time and it quickly became one of my favorites. Twain’s quote alludes to our tendency as humans (and investors) to believe that what we think is a matter of fact. In reality, what we believe to be true is nothing more than our interpretation and opinion of something presented to us. Further, when we act on a belief that hides under the guise of an objective fact, that is when things can go spectacularly wrong.
Take this quote for example: Despite the frequent attribution to Twain, he never actually said it. Misplaced certainty can be dangerous, especially in investing.
Although I am not a fan of semantics, I am a history junkie. If there is a major historical event concomitant with notable economic ramifications, I can promise you I’ve done my best to learn about it. I can also promise that no matter how big or small an event, humans will repeat it in one way or another. Since this is a family-friendly market newsletter, I’ll stick to investing commentary and let you get your nature vs nurture fix elsewhere.
Tom Versus Economics
Speaking of things that don’t change; when I was getting my degree in Economics at Penn State, I had a propensity of challenging everything I was taught, which is putting it mildly. My issue wasn’t with the professors, but with Econ as a whole - that markets and consumers were rational, yadda yadda. The whole ‘rational’ bullshit didn’t sit well with me and I made sure to make that known.
Would it have been easier to explain the theories as they were taught to me? Absolutely.
Did I do that so I could go along to get along?… Were Gator’s bitches using Jimmies? Absolutely not.
It’s in my nature to be relentless if I have a point to make and boy, oh boy, did I have a lot of points to make with the PhD’s teaching my classes.
During my senior year at Penn State, for example, I found myself teetering on the verge of failing a labor economics course, which I needed to pass in order to graduate on time*. In a last ditch effort of passing, I decided it was best to take it up with my professor, who, in all seriousness, I respect greatly and took four separate courses with.
*On Time: A semester after all of my friends, but hey, semantics, am I right?
My argument was simple: My years of outright refusal to ‘answer with the theory’ rather than real life outcomes - which I preferred - was proof that humans are not rational. Meaning, I wasn’t wrong, economics and the education system were wrong… I can’t say I changed his way of viewing economics, but I can say that it led to me passing the course.
Paying the Piper
All jokes aside, one of the most glaring things I learned about in the world of ‘Academic Economics’ is that no matter what has gone wrong in the past, economists, like investors, will not change unless they are forced to. We’ve seen economists move the goal posts time and time again, creating new ways of increasing or decreasing the money supply, controlling the yield curve, and so on. So far so good this time, right?
Wrong, unfortunately. Math, whether we like it or not, is like gravity. Economists can manipulate whatever they want in order to sleep at night, but one day we will have to Pay the Piper. There’s no free lunch, as they say.
Flash Point
Flash Point: A moment or event in which a conflict, especially a geopolitical conflict, suddenly escalates
As I said earlier, I am a student of history. I believe an understanding of history is a fundamental necessity for all good investors and traders. I understand that I don’t know what I don’t know, but one thing I know for certain is that I can learn from the past and prepare my portfolio in a way that allows me to withstand any and all market volatility.
The reason I am writing this now is not to be negative, it is to be proactive. There is nothing I hate more than being a pessimist, but Utopia doesn’t exist so I’d rather prepare for a rainy day and hope it never comes rather than the inverse.
Put another way - I don’t know when or what the Flash Point will be, but it’s out there. Sure, nominal GDP and wages are growing, but real inflation, which I measure using the Chapwood Index, not CPI, continues to show negative real wage growth. Moreover, recent soft economic data prints around job numbers and hourly wages have piqued my interest.
Gator’s Gat
What I’ve seen in markets the past year has had me quite worried, but if we’re using SPX levels to count records, I’m losing. Am I worried for good reason? Yes, I would say so, but like Mark Twain pointed out - what I think is factual is nothing more than my own opinion. An opinion which is based in my interpretation of the data that I’ve seen.
If I flip my perspective to that of the ‘long-and-strong’ crowd, I’d point to positive data points that has ignited investor appetite to line up at the 24/7 risk-on buffet.
I’ll leave you with this food for thought: if everybody’s in line, make sure you’ve got your eyes on the exit. Just because others let price drive sentiment does not mean you have to. Know what you own and do not let FOMO play a roll in your investing decisions.
Note: I have some significant announcements coming soon so keep your eyes out for an update coming in early Q3!
One more clip for old time’s sake: