Too many things don’t make sense

Are you as confused as most people with all the conflicting data and advice from economists and other forecasters? Who do you believe? On the one hand, this, on the other hand, that. Which is it? To paraphrase Harry Truman, “Somebody please find me a one-armed economist!”

There is a hilarious book about cowboy wisdom entitled “Don’t Squat with Yer Spurs On!” The book’s best advice is, “No matter who says what, don’t believe it if it doesn’t make sense.” It’s good advice.

Another line in the book is, “If you’re following a cow, there is a good chance it’s following another cow.” Now that makes sense. I don’t know much about herding cattle, but I’ve seen many westerns. If you’re following the herd, you must have faith that the lead cow knows where it’s going. That’s a giant leap of faith when you apply that logic to the stock market.

A lot of what you hear every day “doesn’t make sense,” and you shouldn’t believe it either. My “B.S.” detector is going off the chart. We hear that the economy is recovering rapidly, the consumer is back, inflation is going away, housing has bottomed, and we are seeing the beginning of the next great bull market. In light of the facts, those arguments “don’t make sense.”

In 2006 I was on CNBC when I predicted the Dow would hit 14,000 in 2007. At the time, that was an outrageous suggestion. I was right and was actually on the floor of the New York Stock Exchange with CNBC when it hit 14,000 in July 2007. Then I got cocky and said it would hit 15,000 by the end of the year. Oops! It hit 14,100 in November, and that was it. There is nothing like the stock market to humble you now and then.

There is a saying among technical traders that “the trend is your friend.” It would be better to say, “The trend is your friend until it isn’t.” The “isn’t” part is coming. I don’t know when. What worries me is what comes next and what that means to you and everyday investors. We have much volatility for now, and there doesn’t seem to be a discernable trend.

It would be nice to have some stability but a while, but stability creates instability. It is a weird statement, but it has much power. Economist Hyman Minsky described the process well. Minsky, who died in 1996, was an American economist and professor of economics at Washington University. His research attempted to provide an understanding and explanation of the characteristics of financial crises. Minsky was sometimes described as a post-Keynesian economist because, in the Keynesian tradition, he supported some government intervention in financial markets, opposed some of the popular deregulation policies in the 1980s, and argued against debt accumulation.

He pointed out that, over time, stability (or the lack of volatility) creates instability because people become accustomed to the status quo, become overconfident, and then take on more risk than they should.

But until then, the markets trend higher, propped up by the global central banks, who continually tell us not to worry because they’re here to ensure nothing wrong ever happens. The longer this situation goes on, the worse the eventual downturn becomes. This eventually creates the “Minsky moment” when people become too complacent. Perceived stability creates instability as people take on too much risk before it suddenly blows up.

One thing that worries me today is the possibility of a recession hitting soon. Almost everyone, including me, believes we are about to enter a recession or are already in one. If it happens, this might be the most anticipated recession in history.

I often think of Bob Farrell, the technical analyst for Merrill Lynch in the ’60s, the ’70s, and ’80s. He became famous for his “10 Rules” of investing. One particularly stands out to me“When all the experts and forecasts agree on what is going to happen, something else is going to happen.”

Logic tells me all things point to a recession, but the words of Bob Ferrell haunt me on this one. Be careful! We could get an upside surprise that catches us all off guard. Knowing this now is not the time to be too aggressive, but you also don’t want to be on the sidelines waiting on the platform while the train leaves without you. It would be best if you still had a portfolio of high-quality, long-term investments. Now THAT makes sense!