top of page

Lions, partisans & discretionary income

Aside from life-threatening situations, one does not need a study to show that humans often struggle to incorporate new or conflicting information into their existing views. If you are standing near your car and see a lion running nearby, you won't wait for the New York Times to translate a recent study about such pickles into layman's terms. Yet it seems we rely on "scientific" studies, with their establishment and reporter interpretations, to guide our views in just about every other area of life. I am not downplaying the value of research and well structured studies, but in many arenas, researchers simply cannot control for all the confounding variables. Even when a researcher can identify all the variables, the results are often highly sensitive to small changes in those variables. For those who wonder how this could be true, it may be helpful to know Newton's theory of gravity would not have passed the p-value test.

Unfortunately today it seems nearly every important issue is politicized to the point where a person's interpretation of studies and events is far more likely to enlighten us as to their political leanings than provide any useful information on the subject at hand. That is, what they say about subject x doesn't help us better understand subject x. It's just hot air. Partisan commentary (which is most commentary) tossed about on the state of the economy and markets, as well as the pandemic, serves only as an opportunity to see where one party or another stands and how they may be altering their message. For gaining insight and thinking critically, it is nearly useless.

A few weeks ago, my wife asked me about current COVID-19 related risk of going out or traveling. I told her that in many places, where people are required to wear masks and physically distance, it is safer now than it was in February. This is not a political statement, but one of complexity mathematics. There's a fine line between exponential growth and exponential decay. We should, as a society, want to stay well below that line. The combination of masks, distancing, and testing go a long way towards ensuring that is the case. I do not mean here to get too far into the public health discussion; only to say that, like many risks, if the masses become aware of and take actions to mitigate the risks before reaching the tipping point, the chance of reaching a worst case diminishes with rapid velocity.

So we can see in the above example that our view when complacency is high is different than when fear is high. Our assessment is not stationary. The same principle applies in investing or complex or entrepreneurial endeavors. Any domain where conditions change or evolve. If you want to fail as an investor, avoid updating your view in light of evolving conditions. Also, do not distinguish between principles and conditional methods.

Below is an email I sent on August 26 to a sophisticated investor with whom I regularly discuss markets. This note provides a sense for how I am thinking about current conditions relative to a few months ago.

Following up on [our conversation] this morning re: the economy, discretionary income seems to have jumped for two reasons — 1) stimulus/enhanced unemployment benefits; and (2) reduced dining, travel, and other living expenses. While we were all focused on the former, the latter is more money for still employed workers. On top of that, the swift recovery in the indices is causing a “wealth effect” where people feel better and spend more; the polar opposite of the despair mindset the Fed was trying to head off.

None of that implies stocks are cheap or that we will not get a pull back. But if that wealth effect can be a part of the bridge, the economy could get moving again before the potentially severe and lasting negative economic consequences have a chance to set in. This is a subtle point about recession economics — every historical recession involves a long period of denial, usually 12-24 months, before the recession is obvious and despair sets in. In this case, the recession was so deep and swift, it won’t take much to get out of it — i.e. to get growing again. The denial and despair stages lasted about 5 minutes, so I wonder what that means for recovery.

This doesn't imply we won't get a sell off, and I hope we do, but likely a majority of the market is still priced for problems. A small number of sectors/companies are somewhere between overpriced (Apple) to indefensible (Tesla, Zoom). The regular CNBC/Bloomberg commentators throw all tech that’s risen into the same bucket. They mistakenly presume similarity equals equivalency.

None of this speaks to (1) what markets will do over the next few months or (2) the longer-term, potentially harmful effects of excessive debt levels or out-of-control inflation, which is a separate but larger risk. My discussion above addresses the direct, short-term impact of consumer behavior and resilience. In other words, the state of the American consumer at present and what is likely over the next few years. Banks are working with mortgage-holders. Many jobs are coming back on-line. The unemployment rate is falling from its unprecedentedly high level. Credit card debt is down significantly. This doesn't mean we get to avoid the pain all together. Only that the average Joe seems to be hanging in there better than anyone would have expected, though that does not discount the pain felt by an important subset of the economy like travel, leisure, and restaurant industries. I am optimistic economic activity will continue improving modestly or at least remain steady, but as always I reserve the right to change my mind.

Credit card debt down dramatically

Recent Posts

See All

Rates and Crises

Consensus has converged around a +25bp hike tomorrow (Wed. 3/22). This after conceding that no one knows how deep the banking carnage is (or could be), primarily so the Fed can show markets they are b

2022 Investor Letter II (Fall)

A preview of our second investor letter for 2022. Click here to read the full letter. “In order to outperform, by definition, you have to depart from the crowd. You have to hold a different position.


bottom of page