There’s a Bull Market in Macro Doom
(Bloomberg Opinion) – There is a style of investment research that consistently predicts economic disaster that I call “macro doom.” It has become very popular. Everyone seems to be an expert in macroeconomics today, and they are all predicting some sort of movement.
There’s always something to worry about for this group, and these days it’s mainly about inflation and how the prices of commodities will go to infinity due to a decrease in almost every tradable raw material. Oil is a particular focus, with macro doomers predicting a baseline of $200 a barrel for West Texas Intermediate crude or even higher. Some are now starting to focus on agriculture, and there is open discussion on Twitter about an impending famine – in America!
Being somewhat of an inflationist myself, I sympathize with these views. For example, I agree that the bull case is strong for agricultural commodities based on rising fertilizer prices, which would encourage farmers to use less fertilizer, resulting in lower crop yields. But some predictions are so extreme as to be completely ridiculous. Too many things would go wrong at the exact same time there was a famine in America, I would characterize this as an exaggeration.
However, it is not all about hyperinflation. Macro is a subgenre of doom that focuses on a rising dollar, which will lead to deflation and falling bond yields. This dollar-bull-deflation-doom thesis has many adherents. I don’t understand the thesis and I don’t care. You’d think that going from 2% to 8% a year would stigmatize these people, but they’re louder than ever.
Many people think that the economy is crash-prone, and that shocks come again and again and run the risk of plunging the economy into a deep recession. The Covid-19 pandemic is an example of this. But people learned the wrong lesson from the pandemic, which is that the economy is not crash-prone, but accident-resistant. For all that has happened, there have only been four major bear markets in the past 100 years. We know very well why the market crashes, but we don’t know why it doesn’t.
However, Doom sells newsletters, which is probably why I don’t sell many newsletters these days. I am saying that everything is going to be fine. To be honest, bearish arguments are always more compelling than bullish arguments because they seem smarter. They are often tempting for novice investors. Also, bearish strategies are harder to implement. I had lunch in 2012 in my hometown of Myrtle Beach, South Carolina with a novice investor who was convinced the stock market was about to crash. I quickly identified the source of his information, and suggested that he shut down doom porn. He felt bad, and I haven’t spoken to him since. The S&P 500 index is up 250 percent since the end of 2011.
It is unproductive to have a monotonous recession and think that bad things are going to happen all the time. But it’s good to be skeptical — and there’s a difference. For example, I thought that a few years ago there were good questions being asked about the adverse effects of index investing, and I was one of the first to ask those questions. I pointed out that the flow of ownership in index funds is concentrated in a handful of mega-cap stocks, leading to a phenomenon where the larger stocks grow even larger and dominate the index’s returns, making it better for active managers. It becomes difficult to perform – which is exactly what is played.
There were a lot of skeptics about Cathy Wood’s investment strategy of buying the most expensive technology companies with promising technologies, and they were well rewarded if they got the time to trade. A skeptical argument has implicit knowledge that there is an imbalance or distortion, but this is probably going to persist because the market is always correct. Being skeptical rather than bearish keeps you out of trouble.
To be sure, being monotonously sharp is a little less dumb. As everyone knows, stocks tend to go up over time with rising earnings and economic growth. But there is no rule that stocks should go up. There was such a period in history, from 1929 to 1946, when they went down for 17 years. This is to ask an investor to reduce their basis by dollar cost averaging over a long period of time. However with the knowledge that stocks typically rise over time, it makes sense to position yourself for future gains along with a healthy dose of skepticism to help you manage your risk.
The Macro Doom crowd is made up of very smart people, and they are definitely fun to hang out with. Also, it’s good to have a variety of opinions that challenge established narratives. It’s no secret that great business usually begins with some crazy person tweeting in the void, like Michael Burry of “The Big Short” fame. Maybe the rush of macro doom proves to be true this time around. It certainly doesn’t seem like the current high inflation rate will come down anytime soon without drastic action by the Federal Reserve, which is hesitant to do so. who am I kidding? Everything will be okay. maybe.
More from the authors of Bloomberg Opinion:
Fed has created an inevitable US recession: Bill Dudley
Why Fed’s shrinking balance sheet matters: Mohamed El-Erian
Earnings won’t do what you expect: John Author
To contact the author of this story:
Jared Dillon [email protected]