Be eyes-open to risk

Starting over again to study the markets. Feb 2019

By Boron Woofit, C.P.A.

At any given time, various factors are in chorus or conflict when it comes to the economy. Trying to get a handle on them seems worthwhile, but nearly chimerical.  As recession seems due, or overdue, there seems to be a host of theories on the interplay of factors in that regard, and a general sentiment surfacing that says we cant predict the timing of these things, but we can adjust risk-taking with some effect.

Years ago, I’d follow the mutuals – At some point I gave it up. Movements in a few ( 4, 5, or 6) individual factors seemed to coincide with larger movements in the economy. The four I tracked were the Dow Industrial Average, the Dollar vs. the Euro, Bonds (represented by a yield rate* on a T-bill (short, medium or long – I don’t recall), price of oil, price of Gold, a commodities index.

Here I would insert a look at some of these indicators as they have recently performed.

*Fear of bond rate inversion...

Yield curve inversion was much discussed at end of 2018. As people looked for harbingers. You cant tell by looking at one day what is going to happen tomorrow, but you can sense a longer term trend in correlating this to momentum, maybe, some say.

And here I’d share some notes related to a podcast that ran on Bloomberg today. Barry Ritholtz, who is a blogger/aggregator par excel-ant, is joined by Joe Davis, global chief economist, The Vanguard Group. He sees higher growth in a few years, but headwinds and even (this year) buffeting.

In an after-session, Davis discusses indicators to watch; firstly, saying Vanguard is into big data and looks at all of them.

The purpose in looking at indicators is the same as the weatherman looking at the barometer and thermometer - the handicapper looking at the post position and likely pace. Jobs, manufacturing, stocks .. and extract from that what is the momentum and what is the common signal across the broad economy.. in fits and starts any or all of them can be valuable or not valuable.

He thinks GDP is overhyped. Yield curve, however, can be useful, 10 and 3 month. The bond market gives more of a heads up on a downturn than the market. (Its not infallible.)

There is still a hangover from 2008. Re Bond yield >>  Mean reversion is the most powerful and dangerous force in commerce. What mean are we reverting to? What is Cape Ratio.

Stocks downturn put them in fair value range. Next 2 years have low expected return. But you have to try and catch the upturns. Be eyes open to risk during uncertainty.

https://www.bloomberg.com/news/audio/2019-02-15/vanguard-s-joe-davis-discusses-global-economics-podcast
https://youtu.be/h-ZaNNzkMVE

Let's go on a bit, because there were interesting things in Davis' blog discussion

Its a thing coming up again and again in readings - Unrelated developments have a decisive effect on the main event.

* Yield, understanding thereto - "Bonds that have already been issued and that continue to trade in the secondary market must continually re-adjust their prices and yields to stay in line with current interest rates. As a result, a decline in prevailing yields means that an investor can benefit from capital appreciation in addition to the yield."