Great 2018 investing analysis: "Do facts matter anymore?"

In these Trumpian times it often seems like we live in a post-truth world where reality is whatever someone wants it to be. But investing is one area where facts can be ignored for a while, but eventually always come back with a vengeance.

So when I saw that our investment advisor's most recent quarterly musing about how things are going both internationally and here in the United States was titled, "Do facts matter anymore?," I read it more closely than I usually do. 

Since I'm pretty sure this analysis only goes to clients, I've blacked out the name of the investment advisor, along with one other identifying word. Here it is in PDF form, complete with my orange highlighting. 
Download Do facts matter anymore?

I'm a long-time investor who has learned one basic truth over many years: believing you are smarter than the markets, or other investors, is foolish. Here's a couple of blog posts I've written about the logical conclusion derived from that truth: invest in index funds. 

Index investing lets me relax in a stock market crash
Index investing rocks and Jim Cramer sucks

Since basically all I do these days investing-wise is rebalance our portfolio to keep it at roughly a 50-50 balance between stock index funds and bond index funds, I don't pay much attention to "gurus" who claim to be able to know where the markets are heading.

This includes the quarterly investment analysis that comes from our advisor (who I need to be able to invest in Dimensional Fund Advisors, DFA, funds -- since they aren't available to individual investors who don't have a financial advisor).

After all, index investors like me aren't really concerned all that much with which way the economic winds are blowing, since we're content with riding out both scary storms and pleasant breezes.

And at the opposite end of the investment philosophy spectrum, day traders, and commonly now, millisecond traders who rely on lightning-fast movements in a financial instrument to make their money, also aren't concerned with long-term trends, just whatever works to make some quick profits.

So the analysis prepared by my investment advisor is a throwback to simpler times, written on paper, mailed out quarterly, a reasoned discussion of what various facts, figures, trends, and such mean to investors with a lengthy time horizon. Again, here's a link to the PDF file. 

I'm sharing this analysis in part because it is believably gloomy, and when the markets take a big downturn, as they inevitably will, I can have the satisfaction of saying "I told you so!" Or more accurately, I told you what my investment advisor said was going to happen, a matter of when, not if. 

Here's some of what I found most interesting in "Do facts matter anymore?"

-- U.S. federal debt is included in GDP growth. Makes sense. I just had never heard of this before. The Trump tax cuts have us headed toward trillion dollar annual deficits in the near future. The way GDP is calculated, this will be counted as something positive, not negative, as it should be, especially since tax cuts in a strong economy are super-stupid.

-- This isn't new news, but I was surprised to read that adjusted for inflation, "breadwinner" incomes paying an average of $45,000 annually have risen just 0.8% since 2001. Also, that 26.9 million part-time workers have been classified as employed if they work one hour a week or more.

-- I'd also read this before, but it bears repeating: "Debt financed stock buybacks are the primary driver for these breathtaking stock prices and valuations, not company fundamentals or macroeconomic underpinnings." My advisor added, "No problem, optimistic future prospects and narratives, not current earnings and revenues, are all that matter at the moment."

-- As an investor, I found this both pleasing and disturbing: "Earnings aren't necessary for stock prices to rise any more since in the aggregate companies are spending all or more of their net income buying back shares of their own stock and paying dividends to shareholders, reducing share float and boosting earnings by dividing earnings across far fewer shares."

-- A story in today's Oregonian about a cooling in Portland's real estate market echoed my advisor's observation that mortgage applications and pending home sales are declining. Rising mortgage rates and prices make it difficult for new home owners to enter the market, with affordability a major problem,

For those who don't want to read the entirety of "Do facts matter anymore?," here's my investment advisor's not-so-cheery conclusion:

Narratives and prices can change quickly. Company fundamentals like valuations and macroeconomic variables like income growth, ignored for years, will eventually matter again. Don't expect Wall Street or the Fed or various experts to see any trouble coming.

In April 2008, former Fed Chairman Ben Bernacke confidently proclaimed there was no problem. In 2010 a House committee investigating the 2008 crisis learned that former Federal Reserve Chairman, Alan Greenspan "the Oracle," admitted he had been blindsided by the housing crash and credit market collapse in 2008.

Facts do matter, no matter how Trump tries to ignore this clear, well, fact. Right now the markets are in a state of irrational exuberance, to not-coin a phrase. 

At some point rational despair will wash over the investment community, and we'll head into what hopefully will be a fairly short-lived recession marked by a steep stock market decline.

Since this is a virtual 100% certainty, the only bright side I can get from this is if it happens before the 2020 presidential election, so American voters will have an additional reason to dump Trump.

Comments

[tucson]

Somebody once put the names of all the stocks on a wall and threw darts at them. Whatever the darts hit they bought. They ended up with better results than most professional stock pickers.