My sentiment on this first day of 2016 is to come clean about one little aspect of me that is either obnoxiously obvious to others or for which they do not have a clue. That is -- I am an optimist. I am a glass-half-full person. I do not believe in reality. There is no reality, there is only perception. The perception is that the glass is either half empty or half full. The only reality is that the glass has 4 ounces of liquid in it. But that's hardly useful is it?
The only thing that is useful is what do with it. Now you can either view the glass as half-empty, therefore living in constant fear because you believe that means half of it is gone and fear more of it is going -- or you can view it half full, therefore being highly hopeful that this is just the beginning of more good things and thereby set your energies on building more and taking positive actions towards that goal, rather than cowering under your bed in fear of losing more, convinced the world is ending.
Those are the two kinds of people who inhabit this world. You are either a cynic believing the world is in terrible shape, or an optimist who does not recognize the existence of problems, only that of challenges and opportunities to fix them. This was particularly the world we lived in during 2015 or, more accurately, since the beginning of the Great Recession. These years have been characterized by so much cynicism, so many people who believe the economy is on the verge of collapse despite the mountains of evidence to the contrary.
Cynics very much believe in reality, in fact refuse to even acknowledge that they are cynics but rather are only being realistic. "All you have to do is open your eyes," they say. "It's so obvious." Yes, it's obvious if you are only looking at one side and refuse to even acknowledge the existence of other facts. I took a finance class in 2010 where the gospel of gloom and doom was very much being preached. The prognosticators that year were predicting the imminent collapse of the markets within months, perhaps even weeks. So what happened? The market kept going up and up. This deterred them not one bit. "Oh, but it's about to collapse." Then on the few down days we had, "See, I told you. It's just going to keep getting worse." I know so many investors who have not been invested at all, have all their holdings in cash in the very firm belief that cash will be all that's left when the prophesy is fulfilled. They have missed out on the biggest bull market in history.
The cynics remain convinced we teeter on the edge of disaster. This is despite the fact that all objective economic indicators are positive -- productivity is up, hiring is up, consumer confidence is up and with it participation, housing is coming back, manufacturing is coming back, companies keep beating Wall Street forecasts over and over, and for the first time in modern history we have no inflation. The cynics insist this is all artificial and will soon collapse. It is all smoke and mirrors. No, there's nothing smoke and mirrors about factories manufacturing products that people are buying, about people being hired to make those products, about people once again being able to buy cars and homes, and about general sentiment being higher than it's been in years. But the cynics remain under their beds with all their worldly goods sitting in cash and stuffed in their mattresses, feeling that is the only safe haven. Even gold is no longer safe, having lost almost half of its value in the last five years. Anyone who bought gold in 2010 suffered the same losses as those who owned stocks in 2008.
So why am I am an optimist? Because there is nothing constructive about being a cynic. The fact is history has taught that most of the time things go right, so to bet against that is to bet against history. That has certainly been proven time and again in the past five years. The cynics still insist that disaster is coming at any time. Month after month, year after year, the economy grows. The cynics are not deterred. And they have lost out on historic opportunities. I am an optimist because I see nothing constructive in cynicism. Even if they are proven correct, it will be but temporary. Meanwhile, they live in fear and loathing. Optimists live with hope and growth. Cynics suffer from insomnia. Optimists sleep very well. It seems my way is better.
December saw some significant changes. After many months of monitoring an ever strengthening economy, the Fed raised interest rates 1/4% as the first step of many that will hopefully wean the markets off of QE. Not that QE was bad. It very likely saved us from a global depression. But we all knew it wasn't healthy to hold onto it one second longer than necessary. For years, investors have been in a dither over some imagined disaster that looms once interest rates are back to normal. That is why the market has been swinging wildly with any hint that a hike was coming. So this is the plan: interest rates will gradually go up and, with them, the market will gradually come down until things settle in a nice state of equilibrium. When investors see that there isn't going to be a collapse, that we actually do have a relatively healthy economy -- AND when we can finally see the end of all this volatility that has been caused by so many people betting against history, that is when we are going to see an economic boom of historic proportions. That is when we will finally see the fruition of this recovery.
I was inspired to write this because of Barry Ritholtz's Christmas Eve post with a 7 minute video with economists discussing why 2016, despite all the looming challenges, is likely going to be a very good year. The video is aptly titled, "The Optimist Guide to 2016." I am also including Ritholtz's New Year's reading list which includes among other things several good articles reflecting on what happened in the economy and the markets in 2015.
Enjoy ... and Happy New Year! As an optimist I must say ... I do believe it's going to be a great year!
The Optimist Guide to 2016 | The Big Picture 7 minute video
• Here Are the Best- and Worst-Performing Assets of 2015 (Bloomberg)
• In 2015 I Learned That… (Reformed Broker)
• A Painful Year for Contrarian Trades (Wealth of Common Sense)
• 2015: The Year in Money (Bloomberg)
• Europe, Asia Markets Outperform US (WSJ)
• Recession, retrenchment, revolution? Impact of low crude prices on oil powers (The Guardian) see also Not Even OPEC Can Fix Oil Glut (WSJ)
• Really rich people are suddenly paying quite a bit more in taxes (Wonkblog)
• Our 47 Weirdest Charts From 2015 (fivethirtyeight)
• Six Factors That Could Make a Difference for Republicans in 2016 (Bloomberg)
• Every hour, the sun radiates more energy onto the earth than the entire human population uses in one whole year. (American Energy Independence)
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