Friends sometimes offer the old intention, ‘May you live in interesting times’. After taking a beat, they quickly add, ‘That’s not a blessing, it’s a curse’. Of course, it’s not intended as either; it’s an ironic take on the news of the day. However intended, it’s certainly true. We are living in most interesting times.
And that’s a challenge for investors. On the one hand, we can recite good news, such as positive economic growth, low unemployment, low interest rates, strong gains in home prices, a strong dollar, and declining new cases in the pandemic.
On the other hand, we can offer a litany of bad news, including the US’s humiliation in Afghanistan, an out-of-control US southern border, declining labour force participation, a market meltdown and slowing growth in China, and increased tensions with Iran, North Korea, and Russia.
Which is it?
We could easily expand both the good news and bad news lists. That’s the point. Most analysts pick sides and beat the drum, shouting either that it’s all good or the sky is falling. Investors can’t be blamed for being confused at best or deeply frustrated at worst. ‘Which is it?’ they ask.
Obviously, if the good news case were the prevailing trend, investing would be easy. You’d buy stocks, real estate, and corporate bonds, use leverage, and sit back and enjoy the ride.
Likewise, if the bad news case were the prevailing trend, investing would also be easy. You’d buy Treasury notes and gold, lighten up on stocks, reduce leverage, and increase your allocation to cash. Then you would wait out the storm and come back into the market to pick up bargains when the smoke clears.
Of course, investing is never that easy. You have to take the data as it comes and put it into a broader context. It’s not good enough just to pick sides in the growth versus slowdown debate and shout your opinions into the nearest microphone. That approach is for amateurs and TV talking heads.
The more rigorous approach is to ask why conflicting data appears, what the data is really saying, and, most importantly, put all the data into a single dynamic model to determine which trend will prevail in the intermediate- to long-term time frame that investors really care about.
Putting together a puzzle
In using our dynamic models, we work hard to avoid cognitive biases — especially confirmation bias. That’s when you embrace data that agrees with your thesis and discard data that doesn’t. It’s a great way to miss what’s really going on and get blindsided when the data you discarded turns out to be the most important clue to the puzzle.
Instead, we keep all the data in front of us and try to reconcile what first appears anomalous. This can lead to new insights and even revisions to the model if that’s needed to properly gauge what’s going on.
At The Daily Reckoning Australia, we’re not day traders and we’re not trying to scoop up nickels and dimes in front of a moving bulldozer. We’re trying to see which way the bulldozer is going and what will get crushed in its path. We’re also trying to see what will remain once the bulldozer (the real economy) has moved on.
In my coming editions of The Daily Reckoning Australia, we’ll review the main factors driving the economy today. These include the lingering pandemic, recent Federal Reserve announcements, the inflation narrative, and the trainwreck in Congress as the House and Senate fight about spending priorities and as progressive and more moderate Democrats fight among themselves about ‘going big’ on the US$3.5 trillion spending proposal.
Of course, this political infighting is set against a backdrop of the approaching 2022 midterm elections, in which Democrats could hang on to razor-thin majorities or Republicans could come roaring back to take control of the House and Senate.
Finally, we’ll look at the global macroeconomic and geopolitical situation including a credit crisis in China, humiliation in Afghanistan, the border crisis in Texas, and the return of King Dollar. These events are not just headlines in the usual news cycle.
They’re historic turning points that will affect investor portfolios for years to come.
This is one of the most complex and demanding palettes of events we’ve ever seen. Fortunately, we have the tools to make sense of it all. Sit back, relax, and enjoy the trip.
Make sure you stay tuned to my next editions of The Daily Reckoning Australia for all this and more.
Strategist,The Daily Reckoning Australia
This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.