February 25, 2020

The Effect is Never Different, Only the Cause

From dogs who don’t want to be taught new tricks to armchair gurus quoting stock market savants from over 50 years ago, the penchant for managing investments from the standpoint of autopiloting has lost momentum in the digitally volatile twenty first century, which presented an often rewarding alternative, namely, to stop it!  Nassim Nicholas Taleb points out in his most recent book “Skin in the Game”, that he feels dumb if his has no skin in the game, meaning being invested. I agree, of all the books and videos and blogs I’ve come in contact with over the decades I gladly admit that what risk meant at that time completely changed once I began engaging in it for others.

I bring this up because as the markets have precipitously dropped this week, the inclination for online declarations to buy or sell seem more a function of auto pilot. I say this because all of the events that appear to be influencing the widespread selling are happening collectively through what has for many become a familiar environment, uncertainty. This is clearer in the drop in interest rates, particularly within the US Treasury market that is a frequent destination for capital seeking protection. In all, there isn’t much else to say, the markets are working off an overbought condition, cash treasury holdings are serving as a buffer, and for now patience is the best strategy.

The biggest concern currently influencing the global capital markets appears to be the connection between the coronavirus and the potential for economic slowdown. This is logical, just as a hurricane such as Sandy can shut down a large city, the outcome should be seen as much for what is learned as for what has actually been broken or disrupted. For now, the economic growth in the US remains on track even with some interruption in imports from China being delayed. Likewise, as the virus spreads in Europe, the collective economies are impacted internally as well as from China. For now, only the economic data, as it comes out over the next few months will shed some light on the true impact of the virus, and at that time whether Fed stimulus will be warranted.

External Events
This is where the real challenges for the capital markets reside. First is the ongoing spread of the corona virus and the lack of concrete data on the state of precautions taken by countries that have more recently been affected. In my opinion this is important in the sense that the domestic broad indexes are looking for an end to the frustrating hesitation to release fact, and an answer may lie in how the US is ultimately affected by the virus and how transparently it tracks the problem. However, where uncertainty regarding the virus starts to dissipate, uncertainty regarding the growing probability of an ideological clash defining the upcoming presidential election is, in many respects. of greater potential to disrupt the capital markets than the virus.  For now, no matter how favorably uncertainty can be exploited, that’s a lot of uncertainty to swallow. And for that, it’s best to maintain comfortable levels of cash with intention to buy, and monitoring the current risk on the table to make sure we’re keeping an active eye on the road in front of us, not behind.