Sunday, March 16, 2014

Everybody Knows That

The ability to be contrarian effectively is one of the most important traits an investor or analyst needs. You'll notice how I phrased that: being contrarian effectively means going against the grain of consensus opinion, but understanding that you may be either wrong or early, and managing that risk accordingly. In my first job, I'd sometimes criticize prevailing views I disagreed with, and my boss would retort, "Soros used to say consensus is only wrong at inflection points." That was both a reminder of the "wisdom of crowds" and that when the crowd failed, it could "stay irrational longer than [we] could stay solvent", just to fill this sentence with lots of lovely cliches.

One of the reasons I blog is to keep myself intellectually honest. It's a tough task, not because I'm unusually dishonest, but because as Richard Feynman said, "The first principle is that you must not fool yourself, and you are the easiest person to fool." So, writing thoughts down in a public forum is a good way to keep track of what I thought at a particular point in time. It's also a great way to elicit comments from others, and as you probably know, I worry constantly that I've tricked myself into thinking that I'm open-minded when I'm not (probably better to be biased and realistic about it).

So, with that preamble, welcome to the first edition of "Everybody Knows That", a list of commonly held opinions. The title of this post is a long-running family joke. Often, one person in the family will say something they think is unusual or little-known, and one of my sisters invariably responds, "Yeah, everybody knows that." But what does Everybody Know about the global economy and financial markets? I'll loosely define these as things that 2/3 or more of educated market participants, commentators or observers believe. I neither endorse nor deny these assertions (well, I do, but that's not the point of writing them down). The point is simply to get a feel for "consensus", and either shoot against that consensus in my writing or investing, or simply to observe when consensus has shifted. For example, I'd guess that as late as Dec 2012, Everybody Knew That emerging markets were the best place to be. Today, that of course looks very different. Equally, there are very smart people arguing against some of these views (e.g. on labour slack, see Evan Soltas). Again, not the point - I'm just trying to identify Things Everybody Knows. So here we go:

1) The Fed has been keeping interest rates low, but global interest rates are headed up.
2) As a result of (1), you'll lose money on bonds.
3) Emerging markets are slowing down, especially China.
4) China is rebalancing its economy from one that is driven by investment and exports to one driven by domestic consumption.
5) The Chinese shadow banking system presents a serious threat to the stability of the Chinese (and world) economy.
6) The slowdown of emerging markets, particularly China, will hurt the demand for commodities. Investing in commodities will be difficult, as will investing in commodity-driven economies, even developed ones like Australia and Canada.
7) Debt ratios are too high for advanced economies and its households.
8) Europe will probably go through a long period of slow growth (more than 3-5 years) as it goes through a deleveraging process. 
9) Most of the advanced economies will grow slowly too, as they also deleverage, but faster than Europe.
10) There's a lot of slack in the US economy.

 Feel free to add more in the comments section!

1 comment:

  1. Monetary policy, particularly in the US, is extraordinarily and dangerously loose