July 12, 2023

THE MORE THINGS CHANGE

by Jeffrey R. Miller, CFA

The pundits keep calling for a recession. I decided to review the historical record of recessions to establish that I have lived through ten of them since birth. I was blissfully unaware of them until college. Now we wring our hands anxiously while awaiting the next economic implosion. This has been predicted as now, the end of this year, 2024, or whenever. Yet the economy remains strong and unemployment low. Welcome to the power of prediction. With the incredible growth of computer power and immensity of available data, we still can’t get it right. Data is not knowledge.

The first half of this year has given us a strong recovery from last year’s debacle. This year’s winners are most concentrated in 20 stocks which represent the prior year’s biggest losers, and vice versa. Until recently, gains have not been broadly shared across the markets. It has been a good first 6 months of the year, though it doesn’t feel like it. Wall Street is consistently telling us that markets are overvalued, the economy is sputtering and the Recession is just around the corner. This has been a confusing time.

Now we have Artificial Intelligence! ChatGPT will tell us what to expect if only we ask the right questions. Perhaps ChatGPT can give us the date of the economic contraction. Consider me skeptical. In any event markets have been on a roll and momentum may or may not keep this going. It is true that specific measures of market valuation are stretched and certain sectors are experiencing great difficulty, such as commercial real estate.

The economy has changed much over the past 40 years. Globalization has reversed, geopolitical friction is high and interest rates may be on the rise for the longer term as First World debt burdens are at decades-long highs. Whole economic sectors are being re-engineered due to innovation, and no longer experience simultaneous economic cycles. This is a process which will only accelerate.

This is disconcerting to our million-year old ape-brains which find it difficult to adapt to a 24/7 news feed and social (antisocial?) media. It requires us as investors to remain focused on fundamental principles.

Stay diversified, manage risk, focus on the longer trends, because the more things change, the more they remain the same. Only faster—J. Miller