What is a Free-Market Guy Supposed To Do When the Market Has ADD?

All of us know a person who is a little dry, has sort of a flat demeanor, often deadpan, but is quirky funny, and not because they are trying to be funny, but they say things in a way that with their personality something innocuous just comes out sounding hilarious. Yeah, that guy or gal, come on, we all know one. 

So, I’m talking to this friend of mine, who is that guy, and he just kind of casually says, “You know, I think the market has ADD.” Ok, so you would have had to have been there to get the full visual, but I’m laughing hysterically, and he’s looking at me like what is wrong with this guy. So, I apologize, and I tell him please finish your thought. 

“My point is that the market lurches from data point to data point, you know, like a teenager with his face in his phone because he might miss something on social media, and Heaven forbid he does because that would be the end of the world as we know it. And what, all of a sudden everyone understands economics? Seriously, does the Fed even understand economics? There’s this speech, and that speech, and the market goes manic or depressed. I swear, it’s as if there was no market history before 2008.  

Every time there’s a rally it’s the beginning of a new bull market. We’re in one of the three largest bubbles in history. Bubbles eventually get popped. Yeah, this one took a long time to go up so it’s probably going to take some time for it to go down, but who in their right mind gets long at these valuations?  

As you may have guessed this fellow is in the business, so he uses phrases like “gets long,” meaning to buy, in casual conversation as if everyone knows what he’s talking about. That aside, I totally understand his point. Investors have become conditioned to believe in all sorts of nonsense, like the purpose of the Fed is to backstop the markets from falling too far, and that low interest rates are the cure for whatever ails the market. 

There is an orthodoxy in the economic theory de jour about recession, depression, inflation, unemployment, etc., simply because it has been repeated over and over, without challenge with objective evidence, to the point that it is now taken as gospel. And, if challenged, the challengers are denounced, derided, and written off as economic dinosaurs that have failed to evolve to the reality of modern economics.  

Of course, I am a free market guy, and believe that the market should find its natural level of GDP and interest rates without any government intervention. Markets can and do exceed, to the upside and the downside due to the decisions and actions of millions of market participants, whether they be investors or speculators. Free-market capitalism has this wonderful convention called deflation, which is how the market heals itself from the excesses to the upside. 

Conversely, when markets exceed to the downside extraordinary values appear and natural greed kicks in. 


Subscribers should recognize this natural pattern of ebb and flow, which in IQ Trends speak is Undervalue to Overvalue and back to Undervalue again. At Undervalue, price is low and dividend yield is high, so buyers are attracted to the value. At Overvalue, price is high and dividend yield is low, so what once were buyers now become sellers to lock in the capital gains. All of this is accomplished by millions of investors that do not know each other acting independently on their own observations, no government assistance required. This is how the free market acts.

Yes, but what about the Great Depression? Ok, after WW1 there was a burst of economic growth, which translated into a very vibrant stock market, so much so that it attracted unprecedented levels of speculation. This speculative fever led to one of the greatest asset bubbles in history, which eventually burst as all bubbles do. What ensued was the aforementioned period of deflation, which is how markets heal themselves of excesses. By the fall of 1932 industrial output was back to pre-Crash levels. Was it a painful period? Of course. Could it have been avoided? Probably not, because once a boom is in place it runs its natural course, which is to bust. Did the Fed and fiscal policies of the government help or hinder the recovery? I have an opinion, but it is considered apostasy, so I will leave it at that. 

Nice dodge Wright, but what about the Pandemic? Really? You want to go there? No thank you, that gets into politics, which I don’t do from the dais or in the pages of IQ Trends. My point is to question whether or how much government intervention is necessary for a free market to function in its natural state. Investing is a risky business, and by risk there are efficient risks, and inefficient risks. Risk is part of the equation. 

When you put your money at risk there are consequences, one is good, and one is bad. Our job is to put the odds for good on our side, and limit the odds for bad as much as possible. 

To the point raised at the beginning of this missive, the various inflation gauges for October were released this morning. Headline CPI was 1/10 below forecasts on a year-over-year basis. On a month-to-month basis the reading was flat, meaning the CPI in October was the same as September. The PCI, or core rate, without the volatile food and energy indexes included, rose 4% on a year-over-year basis, a slight slowdown from the 4.1% level recorded in September, and rose 0.2% on a month-to-month basis, slightly slower than September’s 0.3% monthly rate. In short, inflation remains higher than the Fed’s 2.0% target.  

The market, of course, went manic as these readings surely mean the Fed will stand pat in December as well, and as one portfolio manager said, “We can see inflation bottom with a 2% handle in the first-half of 2024.”  

What was not said, but implied, is that the next move by the Fed will be to cut rates. Buy, buy, buy! Next week we observe a day of Thanksgiving. May you and yours have a safe and wonderful time with family and friends. Please know that I am grateful for your continued confidence in our approach and methods, and am humbled that you have invited us to accompany you on your investment journey. 

That is all, now soldier on.  


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