By Dave Moenning
on Feb 22, 2017 09:01 am
I
recently had a conversation with a very smart, very experienced financial
advisor who happens to be both an attorney and an accountant. Our advisor
partner (my client) wanted to know what my "Trump Contingency Plan" looked like.
He informed me that a very bright and otherwise unflappable client had asked
this question of him. The advisor said that if the question hadn't come from a
constitutional law scholar he would have dismissed it outright. But since the
client was dead serious about the issue at hand, he needed our help in crafting
a response.
Specifically,
the client had asked, "what criteria we would use to assess whether or not
Trump's presidency is getting close to faltering... getting close to impeachable
offense... or possibly getting closer to Trump getting fed up and walking away
from the job." The client effectively wanted to know what the markets would do
and how we would protect his assets in the event of a "Presidential crisis."
My
first comment was to emphasize that we are not political analysts. And save the
Watergate affair and the resignation of Richard Nixon back in the 1970's, I was
not sure that being a political analyst had ever helped anyone manage money in
the markets.
Cutting
to the chase, I said simply, "We do not have a 'Trump Contingency Plan' per se.
Nor do we have a 'Trump Success Plan'." I pointed out that we manage the
markets, not our macro and/or political expectations.
I
then argued that the key to this game is to understand what Ms. Market IS doing
at any given point in time – as opposed to what one thinks the markets "should"
be doing. For example, currently the market is busy discounting stronger
economic growth and better earnings due to the Trump administration's policies.
Note that Janet Yellen said as much last Wednesday on Capitol Hill. So... as
long as we can stay on top of what the market is doing and why it is doing it,
then we don't really need to try and predict what might happen if some strange
event occurs – which in my experience, is a monumental waste of time and
intellectual energy.
From
my seat, the client was basically suggesting that we invest using a "macro view"
approach to the markets. The idea here is to look around at the big-picture
investing landscape, take a stand on what you "see," and invest accordingly.
Such an approach gained popularity after the 2008 crisis – because AFTER the
crisis, it was OBVIOUS what everyone SHOULD have done!
I've
written on this topic many times since the crisis and have argued that very few
investors are able to succeed with such an approach. I offered an
article detailing the losses incurred by George Soros, who is one of the
best known "macro" investors around, after he loaded up on shorts before the
election as a key point in my argument.
Then
there is the question of how the market will react to an event. I opined that
even if you COULD predict the event the client is worrying about – can you
seriously predict the market's reaction?
Exhibit
A: BREXIT. Exhibit B: The U.S. Presidential election. 'Nuf said, right!
My
big point was that even if you had a functioning crystal ball and were able to
get the "call" on the expected big, bad event correct, could you also get the
market reaction right? The answer is, Hmmm... maybe not!
In
short, everybody who tried to predict what would happen after recent political
events and then invested according to their predictions, got smoked. Yes,
including Mr. Soros.
In
summary, I told my advisor colleague that in all sincerity, there is simply no
upside in trying to predict the markets or the outcomes of political events. In
short, no one has ever been able to predict what will happen next in the market
for any reasonable length of time. I noted that every great prognosticator over
the years (Joe Granville, Robert Prechter, Elaine Garzarelli, etc.) eventually
fell from Grace.
The
advisor summed it nicely this way. "Dave, you bring the whole conversation back
to the fundamental truth that political events can't truly be predicted nor can
the market reaction to whichever event happens to surface. It is what the market
IS doing that should inform our thinking rather that all of the hundreds of
directions the market COULD do."
Perfect.
And if had gone to law school, perhaps I too could have summarized the situation
in 50 words instead of 500!
Publishing Note: I early
committments the rest of the week and will publish reports as my schedule - and
energy level - permits.
Thought
For The Day:
If
you want to go fast, go alone. If you want to go far, go with others. -African
Proverb
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