In an economy that can’t be trusted
When an economy is understood, up or down, it’s possible to plan, to concentrate resources, and to invest with reasonable confidence, even if results don’t follow as expected. Below is a market thesis for the year ahead, which may be different from those behind, in an economy that isn’t understood, and can’t be trusted.
- The life-long economic plans and actions of an individual or enterprise — an education, a career, a residence, a strategic direction — are concentrated investments that can’t be easily diversified or hedged, offloaded, changed, or liquefied. The economy maps these things out, which is to say, it guides and lets us track the big decisions.
- In 2020, so much of the economy was rendered worthless. Often permanently. On a dime. For reasons unrelated to the individual’s affairs. This was unprecedented, it is said, both in its magnitude and unexpectedness. And it has naturally left a deep impression.
- The active trade that drove the market in this time was, in this way of seeing things, a sort of panic. Its flight was to liquidity, to diversification, to the hedge potential — those things, in other words, which are the opposite of what the natural economy presents to many — as economic plans took such an awful turn for such large numbers.
- With markets rising fast while the economy lingers uncertain, it isn’t as has been by some suggested that the two have been “decoupled.” Nor is it that the market is six months ahead, or only that, as others keep insisting. The connection is just different now… The driver of the market is still economic, as it’s always been, but the lead is much less opportunity supply (business performance) than opportunity demand (investor flows).
- In short, the market has become inordinately pushed by sentiment, and a particular type at that, which is not necessarily irrational (for reasons stated). This atmosphere may take some time before it fades, as markets in the long run tend towards the business fundamentals all the same. But in the meanwhile, cold and detached, the analysis may be less quantified and formulaic than it has been in markets past…
- … because a current price is based on an expected future price, which, more so than before is based on future sentiment…
- … and because sentiment is different and more complex than earnings, which furthermore are not, like sentiment, contagious…
- … and because sentiment, much more than earnings, is prone to unexpected change…
- … and because sentiment may not be market-wide, but picks its spots, or fades from them, in isolated clusters in the market network.
This is a thesis, not a forecast, but the potential consequences are worth noting.
The tipping point and fundamentals
Linear perception, exponential change, and the new value