May Recap by Jack Moller

Pardon My Tardiness

I apologize for the lateness of this commentary.  Last week I returned from “conference week” in Texas and brought back much to ponder as well as a flu bug that’s kept me home sick for awhile.  My first conference was John Mauldin’s “Strategic Investment Conference” (SIC) in Dallas followed by a sort of health symposium called “Paleo-FX” in Austin.  Maybe I should find a different “health” conference next year that doesn’t get me sick?

I found the investment conference very interesting, though a bit depressing.  In a blogpost after the conference, a financial columnist wrote “… if you put together a list of the world’s most brilliant, most famous investment experts… they were at SIC.”  While I was flattered, of course, I don’t really think that I’m that famous.  Anyway, I’ll share a bit more about the conference below.

Market Bounces Around – Goes Nowhere

As has been the pattern for the past two-plus years, in May the market bounced a bit in a 600 point range (Dow) with a mid-month sell-off followed by a recovery to end the month just fractionally higher.  At around 17,900 on the Dow at the end of May, stocks are now trading at the higher end of the trading range that has persisted during the past two years, a range that has been bounded by 18,350 or so, on the high side and about 15,500 on the low side.  Time will tell if we will be able to break out of this range in a resumed uptrend or if the market soon retreats again inside this range.  (As I write this, a week into June, this rally has continued as the major averages seem intent on testing the old highs, led by continued recovery in the energy sector.) 

Some Thoughts / Observations from SIC

It is true that many “heavyweights” were there presenting, including some investment legends plus the former, long-time president of the Dallas Federal Reserve. 

A Historian Opened the Conference – Somewhat Bleak View

Interestingly, the investment conference started off with a presentation from historian Neil Howe, co-author of a book from 1997 called The Fourth Turning which predicted a crisis hitting in the middle of the first decade of the 21^st century.  Turns out that was quite a good call, amazingly made in the middle of the tech boom and euphoria.  While he is not a market guy, Howe is renowned for his expertise on generations (having coined the term “millenials”) and the repeating historic cycles.  He sees four different recurring cycles recurring every 80 years or so that last 20-ish years, the “fourth” of which is the crisis period that is sort of a cleansing and topples many institutions that no longer work (current political parties? European Union?...).  I could go on and on as I found his views fascinating, though unfortunately, he expects another decade-plus in this fourth turning of tough times (I’ll let you do the math to look at the last time we had a 4^th turning about 80 years before this one started!)

Economists and Strategists Filled in the Picture Howe Painted

Then we were “treated” to a steady diet of economists and market and geopolitical strategists, each independently laying out a fairly cogent case for their view of the world.  Unfortunately, most of them agreed that we are in and headed for further tough times, comparing many characteristics with the 1930s. Some of the similarities include obviously the financial crises but also chronic underemployement, deflation fears, “secular stagnation”, rising isolationism, rising nationalism, currency wars, etc.  Generally there was an emphasis on the burgeoning world-wide debt. 

Perhaps the biggest headline quote came from the retired fed president, Richard Fisher.  During a Q&A, he was asked what position he had his portfolio?  He response was classic, “Fetal”. 

Finally, Money Managers Much Less Pessimistic

This was striking to me.  After the historian and strategists, came the people who actually put their clients’ money to work.  They were much more optimistic, seeing various opportunities around the world.  It’s as if no matter how hard things might seem, someplace there are always opportunities to pick up investments at attractive prices. 

My Observations / Thoughts

• Market Strength – I can’t help but notice the contrast as these “experts” voice their bearish views, the market today is closing in on new record highs!  I came away remembering how the market is known to “climb a wall of worry”.  Maybe that includes worry from “brilliant”, “famous investment experts”.
• Slow Growth = Good Investments.  I learned a long time ago that some of the best opportunities are in slow, but steadily growing areas.  Fastest growing economies, companies, countries, etc. often result in unappetizing returns as prices have already been bid up and are expensive.  So, maybe, even if the experts are right about economic struggles, the market might continue to chug higher.
• Being Bearish Sounds Smart.  A while back Nate passed along to me a blog which made the point that being bearish sounds smart even if it is most often wrong.  These brilliant speakers no doubt are smart and their analysis is compelling yet it is always possible to make an intelligent case for the market to go down.  The problem is that it is usually wrong.  The flipside just doesn’t sound that smart to simply say the market will eventually work its way higher.  It always does. 
• How Much Worse, Really?  Every month we update numbers going back 25 years and take a look at the context.  Going back 25 years since 1991, we’ve experienced a huge assortment of challenges, including – Persian Gulf War, Savings & Loan Crisis, Presidential Impeachment, Iraq and Afghanistan Wars, 9/11, “Lost Decade”, Internet Bubble/Bust, Housing Bubble/Bust, Great Financial Crisis, Downgrade of U.S. Debt, Terror Attacks, ISIS, Ukraine …  Sounds pretty awful, doesn’t it?  So, of course with all these problems the Dow Jones Industrials had a six-fold increase, with the S&P 500 going up 5-1/2 times!  Is it really going to be worse over the next 25 years?  If so, maybe will stocks go up “only” 10 times?
• Fragility of the Market.  Many of the speakers made the case generally that the market is more fragile today that it has been in quite awhile.  Not only are we into our eighth year without a bear market but the governments around the world seem to have gone all in and thus might not be left with many policy levers to counteract the next downturn, thus it could end up being another fairly steep bear market / severe recession whenever it occurs.  This makes some sense to me.
• Summing my thoughts.  I do believe that the market and economic underpinnings are a bit fragile and the bull market is getting a bit aged so increased volatility is likely.  Nonetheless, it is important to never lose sight of the fact or faith in the inevitability that the market will head much higher over the decades.