Here are some things I think I am thinking about:
1 – Scary Stories Sell Well. Morgan Housel has a great piece over at Motley Fool about why scary stories sound so smart in finance. Morgan rings off a bunch of reasons why scary stories usually sound smarter than bullish stories. This is particularly important to keep in mind when we’re going through rocky times like right now. Scary stories always sell well. And for good reason. People respect doctors for the same reason they respect financial market bears – they’re looking out for you. The problem is, in the financial markets, the bears aren’t always looking out for you. They often have an agenda that involves being permanently bearish. You know the usual characters…
In fairness, there is great value in bearish news. I actually spend as much time reading bearish sites as I do reading bullish sites. Reading views that you don’t always agree with will keep you grounded. In fact, most of the news I get is stuff I disagree with. But a permabear can be just as dangerous as a permabull. The extreme views are often the most dangerous views. You have to carefully decipher the scary news you read to avoid falling into the trap of becoming permanently bearish about the world. Because the thing is, the economy and the financial markets spend a lot more time expanding than they do contracting. Being a permabear is fighting an incredibly strong long-term tide. And as I like to say, nothing is more expensive in life than being permanently negative about everything.
2 – Nassim Taleb is Smart. I really liked this quote from Nassim Taleb:
It is a myth that markets are there for the discovery of “the” price. Markets are there so we can keep changing opinion about the price.
— NassimNicholasTaleb (@nntaleb) January 25, 2016
Perfect. How many times have we heard how the markets “discover” prices? What does that even mean? I have no idea. This process of “price discovery” seems a lot more like lost explorers than brilliant conquerors.
The markets are impossibly complex. And they’re controlled by emotionally fragile and irrational beings. Prices are, at best, an approximation of fundamentals. But we shouldn’t be fooled into believing that prices are “efficient”, “right” or “smart”. They’re just the figure where people agree. Funny thing is, price is something that, in the financial markets, both people agree on for different reasons thinking that they’re both right. And inevitably, one of those people will likely end up feeling very wrong at some point. In other words, by definition, prices in the financial markets are almost always wrong for half of the participants.
3 – A Recession Caused by Falling Oil Prices? James Hamilton has some smart thoughts on Donald Luskin’s assertion that a recession is brewing due to falling oil prices. The basic story is that falling oil prices and stock prices are leading to recession.
I have to admit that I’ve never liked the idea that the stock market is a leading indicator. The stock market is just a reflection of how profitable manic people expect certain corporations to be in the future. But stock prices are notoriously jittery because predicting future profits is damn near impossible. So, as Paul Samuelson once said, the stock market has predicted 9 of the last 5 recessions. Yes, it has a perfect track record because the stock market always falls when people get worried about, well, almost anything. So, be careful extrapolating too much from price changes in the stock market.
4 – Bonus Thing I Think I Think – Ray Dalio says smart stuff about QE and the long-term debt cycle. I don’t love Dalio’s long-term debt cycle theory because I think the credit markets are made up of lots of different concurring “debt cycles”, but I do love the idea that monetary policy has become ineffective because we’ve reached some natural limits in how it can filter through the economy. Go give his FT piece a read. It’s quite good.