This Time Really is Different
May 14, 2020
Whenever I have strong views on markets, I have always had the discipline to back those views with my own money (In hindsight, it was never enough risk when I was correct, and it was never small enough when I was wrong!). To take it one step further, it always seemed illogical to me to have a view, and not to express that view through financial markets. I suppose that is why this is the career I chose, and I am lucky enough to live in a country that affords me this opportunity. I also consider myself extraordinarily fortunate, and forever grateful, to have learned risk management from some of the most talented and successful people in the world.
As a result of who I am as a person, what I have learned, or some combination of the two, I realize that my perspective on current events and social trends is very often different from most people. The bottom line is that I am comfortable with a minority viewpoint.
It is a blessing when investing to be able to examine situations in a clinical and detached manner. What I mean by that is: 1) understand the emotional reaction of people and society to situations, 2) assess the situation in a historical context, 3) examine what is different in this situation from history, and 4) make a simplified assessment of whether or not people are over or under reacting.
I always try to take stock of my views, and to alter the probable outcomes when new evidence emerges. This is more art than science, but given the evidence, my views (it seems to me) are being reinforced as time goes on.
So what have I learned in the past few weeks that may impact markets?
In general, people continue to alter their behaviors to prevent the spread of Covid; especially when it comes to the most vulnerable in society.
There are signs that the economy is opening-up, but social distancing will continue to a degree. That makes me think that models showing infection rates using relationships from March and early April will potentially overstate expectations for infection numbers rising as the economy opens-up on the margin.
The data continues to show both from the CDC and anecdotally that it is the oldest people and those with pre-existing conditions that are most susceptible to death. Perhaps the conversation will shift toward more targeted safety measures for the most vulnerable?
Anecdotally from my conversations with many people (old and young), they are very tired of being alone and bored. People seem to be looking for way to live more fully while also being careful of the risk of Covid. Elon Musk said enough is enough and opened his plant daring to have the authorities arrest him, and some in Texas have sent out local civil militias to protect tattoo parlors that want to open up (perhaps a step too far??).
There has been a lot of money given away, and there is more to come. The Fed and the government have both done more than I expected in terms of providing economic support.
From my proprietary indicators, defensiveness and negative outlook on the markets continues.
I think it is important to understand that the traditional view of pricing risk in financial assets continues to shift. The biggest risk takers are now the Central Banks, and it seems to me they want to avoid a self-reinforcing negative price spiral at all costs. They remain in a position (for now) to be the biggest influence on market prices. To those telling me to look at historical valuations of equity prices, I can only answer, I do not think it is possible to make an accurate comparison. The Fed is supporting the markets and the economy by printing the currency these assets are priced in, and they are doing it more aggressively than ever before.
Even though some companies will go bankrupt, the bulk of consumers and companies will at least muddle through this difficult time because of all the cash given to them by the government.
My view: the economy has started the process of coming back, the central banks and governments have provided the bridge loans (more if needed) to get the economy past its worst point, and portfolios appear to me much more defensive than they were in February.
I believe it makes more sense to play offense than defense in a portfolio despite the pervasive negative sentiment on Wall Street and on Main Street.
This is my view, and it would be illogical for me not to express it. Until I am proven wrong, or the evidence changes my mind, I will continue to remain positive and deploy my capital. Joseph Cardello, Principal
August Wealth Advisors
The Loft, 101 Franklin Street, Suite A
Westport, CT 06880
Direct (916) 461-9451 toll free (800) 985-9477
“Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA August Wealth Advisors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence.”