“Last week I found myself wondering why I don’t buy more piñatas, because right now I’d love to beat the holy crap out of something and then sit in the grass and eat candy.”- Susan Blankston
When you listen to newscasters talk about the financial markets, volatility is often explained away in a very linear and simplistic manner. Even if their explanation contradicts itself from one day to the next, they do what they can to pinpoint one reason for the ups and downs. What’s often left out is the range of emotions that have also come into play – hopes, fears, greed, and more that also get mixed into the elements.
Over the last couple of years we have seen an off kilter supply and demand – with demand greatly outweighing supply in many areas. We’ve seen shock waves of disruption as the markets responded to Covid, the war in Ukraine, and more. As the gap narrows a bit now, let’s take a closer look at what we’re seeing and what it means for investors.
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full-service firm here in Boulder, Colorado.
Today I wanted to talk a little bit about the volatility in the market. You might read or watch on TV that it’s up one day because of X and it’s down the next day because of Y, and the journalists seem to be very confident that the reason that they’ve given for a complex question is absolutely right despite the fact that the day before might have been contradictory. They’re optimistic on day one and pessimistic on day two and then optimistic and renewed on day three. It really doesn’t make a lot of sense many times.
When I was in college we learned about this thing called CAPM which is the capital asset pricing model. A guy by the name of Markowitz came up with that, a brilliant economist. He actually received a Nobel Prize in economics in the early 1990s because of it. His work was followed up by the work from a guy by the name of Kahneman and work by the name of Thaler, T-H-A-L-E-R, Thaler. They received Nobel Prizes 20 years ago and another one about five years ago. What they determined is that unlike what I learned in college and what Markowitz had said is it’s not all about math. The reason why the value of an asset – in this case it could be the stock market, the bond market – it’s not all mathematics. It’s not just a stream of income payments in the future and the entire formula. It’s an efficient market meaning everyone’s got the available information and not everyone, though, is logical. That’s really the biggest work that came out of the last 20 to 25 years is that go figure, people sometimes are emotional and are illogical.
So, I take that into consideration when I look at what’s happening right now. A lot of it has to do with some of the emotions that we have, some of our predictions, some of our fears, some of our hopes, some of our greed, some of our real fear. And that all boils together in a pot to get what we see on a daily basis and then is in the news.
Over the last two-and-a-half years we’ve had on the demand side. It’s a demand and supply, but on the demand side we’ve had $7 trillion helping to support the demand for goods. Whereas, on the flip side the supply has been restricted. We’ve had supply chain issues. You have lots of demand, lots of money with lower supply. It hasn’t been transitory. The impact of that is being inflation and it’s been exacerbated by various shocks to the system. COVID waves that have led to one right after another. Then we’ve got Ukraine being invaded by Russia. There’s a reason why it’s been this inequality of demand and supply and out of whack has been extended longer than what is frankly comfortable.
What we’ve seen recently is we have the supply chain, there’s an agreed upon consensus throughout the world that we need to focus on getting that fluid again. On the flip side, demand is coming down mainly because of the inflation, the reaction to it. What I would say is the overreaction. The oversold we talked about. So, interest rates are coming down because the real estate, really with mortgage rates dramatically increasing to 40 year highs for mortgage rates, people are buying less houses and so the demand throughout the entire economy has reduced due to some of the inflationary pressures that we’ve seen. But at the same time we’re seeing the supplies go up and so they’re going to be back. Hopefully we’ve got some demand and supply coming back into equilibrium which is what we want to see and that’s good for us. Good for us as investors. Of course good for us as long-term investors as well as things start to settle down.
I always hate it when there’s a volatility. I never mind it on the upside. You get two or three days of an upside and you’re like, “Yeah, right. Things are back.” And then we have a day or two of downs. The important thing is as we stream them together that there are more ups than downs and that starts to happen when things go back into equilibrium. It takes a while for it to happen. I would say that it took a while for it to come to this situation. It’s possible – sorry guys, that’s my dog right here underneath the table – it takes a little while for it to work itself out as well. The risk to us is if there is a shock, especially to the supply side. On the demand side printing more money doesn’t seem politically feasible at this point in time. However, from a supply side if we have a major shock to the supply side that won’t be good. That will derail us from coming back into equilibrium which is what we want for that demand and supply side.
Anyway, Mike Brady, Generosity Wealth Management, 303-747-6455. You have a wonderful day. Thank you.