September 11, 2020

Pessimism Is In

“We can be blind to the obvious, and we are also blind to our blindness”

-Daniel Kahneman author of Thinking Fast and Slow

My then teenage son was once asked to describe his father, to which he replied I was a smart person who wishes he weren’t. I must admit that his description is accurate since I’ve often noted that in 30 years analyzing the capital markets, I’ve often found the smartest players to often be the most pessimistic. A consistent example in my life has been in witnessing the fortunes made by people with scant educations and humble beginnings. Welcome to capitalism, welcome to democracy.

The Markets

The broad indexes gave up more of their oversold conditions, particularly the tech stocks, those with the most familiar names. This is in part to the concerns of moving into the fall season that is faced with end of year tax considerations, continued congressional failure for new stimulus and the final weeks of this year’s presidential campaign efforts. Both promise some continued volatility for sure. But also true to efforts are the post Covid companies that lagged the said indexes and are both going up or staying quiet. Even in the tech sector some candidates that lagged the upswing , such as Alphabet (GOOGL) and Microsoft (MSFT), that are still well positioned with their respective product platforms, going down less that their more overvalued competitors. Worth noting is the constant litany of negative outlooks that emanate from the media and even a few of the well known pundits, one of whom had the gall to spin a lecture on greed in a recent commentary. It’s all keeping us well invested along the same strategy of letting the markets come to us for new ideas and in the meantime using patience to our advantage. While new cash has been allocated in small percentages, leaving ample cash for opportunities as the markets remain volatile, no new cash was raised this week, but there are good ideas at hand presenting ripe conditions where existing cash can be allocated quickly.

The Economy

This week had a number of post-employment releases but none as important as those which pointed to firmer inflation. Beginning with the Producer Price Index (PPI)  the resulting gain of .3% was a slight decline from the previous months which were still stronger on the back of more manufacturing activity in the previous two months. Today’s result of the Consumer Price Index was another sign that inflation is on the rise, coming in above consensus at .4%. Much of the gain was an expected favorable result in used car and truck sales, household furnishings and even a small rise in Real Average Hourly Earnings. As previously mentioned, the economy shares the coming headwinds, and while economic activity is open, it’s open at limited capacity which in of itself translates to limited goods and services. and with too much money in the hands of consumers. The end result is usually inflation, but for now, it’s mild inflation, as we wait for wider reopening.

External Events

Little has been discussed in the media regarding the stalemate in Washington to come up with any kind of compromise, and now they are faced with yet another potential government shutdown. And the narrative continues to focus more on who to blame than to the problem at hand and the options for a solution. And while I remain optimistic that many concerns are overblown, the problem in my opinion is that both sides of the divide are hopelessly confident that they are on the right side of the argument. What made us all so smart? The proverbial information highway and mobile devices gave us the ability to research everything from nature to politics along with the brazen assumption that we believed everything we read. And it gets even more abstract when we are endlessly watching and listening, to everything from news to views, but not necessarily to one another. So is it any wonder the stock market is anything but a bundle if volatile uncertainty? 

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