Broker Check


| March 29, 2023

I often tell clients that I don’t sell guarantees and I don’t promise investment return—I sell probability.  An Investment Manager, in short, should be allocating client assets based on a dispassionate view of where the economy will be at some point in the future, and should do their best to place those investments ahead of the herd.

Remaining “dispassionate” is the tricky part of the job.  To paraphrase Warren Buffet, one must buy when others are selling and sell when others are buying.  To ignore one’s own emotion when nobody else seems to be able to do so is, naturally, harder than it sounds.

Most of my work is based not on stock picking, but analyzing different sectors of the economy to invest in, different global environments, and attempting to digest as much economic news as possible.

One key concept, while studying the market and the economy, is to try to process information in proportion.   There is always good news and there is always bad news, but when does one start to outweigh the other?

Reading the tea leaves in my own unique manner, I find that there is no way around the fact that there are far more negative indicators than positive.  The storm clouds seem to be gathering.  While we may be set up for a short-term rally as the market gains mental distance from bank failures, I find myself a bit surprised that stocks are hanging on so well. 

Here are some of the current indicators.

First the good news.  The Purchasing Managers Index (PMI) is a prime indicator of economic trends as viewed by business purchasing managers of various sectors, and it rebounded in February after indicating weakness for months.  I see this as part of the “surprisingly resilient economy” narrative. 

PMI is intended to indicate whether the economy is expanding, staying the same or contracting.  The composite reading in March rose to 53.3, from 50.1 the month beforeA reading above 50 indicates growth, while a reading below 50 indicates economic decline.  Manufacturing PMI posted a surprising recovery from 47.3 to 49.3: still “negative” but indicating the first acceleration in months. 

My concern, returning to the idea of proportion, is that the bad seems to be starting to drown the good.  These are just A FEW of the items which I’ve bookmarked over the last week:

I don’t know if they appear to be so, but these are interrelated—and the implication is not good.

In short, banks are facing outflows.  As those outflows compound, they have less money to lend out.  They have to promise higher rates of payout on the consumer side to attempt to stem customer withdrawals.  Lending gets more expensive (higher rates come out of the bank’s pocket) and bank margins are compressed—even as they have less capital to lend against. 

Meanwhile, as bank lending tightens, less money becomes available for businesses to borrow.  Businesses who can’t borrow begin to shutter, and things like junk bond defaults begin to spike.  The situation becomes a drain at the bottom of the economy.

Because there haven’t been any additional bank failures over the last week-plus the market has stabilized and attempted to rally.  I’m not predicting additional bank failures (remember: I sell probability), but there is no doubt that financial conditions are worse today than they were a month ago.

A few other headlines of note from the last week:

I was a rookie in the Financial Services industry during the Great Recession.  I didn’t have enough experience or knowledge at the time to comprehend all that was going on.  I’ve been much more able to sit back and observe this time around.  I’m watched with intrigue the “smart money” trying to pile back into riskier assets (as I write this, the comparatively-risker Nasdaq 100 is up almost 12% this year).    Of course, that is the right move in a sense: buy tech stocks, buy small companies, et cetera, when everyone else is scared.  It may also be a little premature.  The idea is to hold your “dry powder” until the average investor can’t take any more losses.  It could easily turn out that I’m the one that is wrong, but I think the critical point—the time to buy when others flee—is still in front of us.  Even if I am wrong, I take a Hippocratic Oath approach with client money: first do no harm.  I’d rather be late to the rally than part of the panic.

I was recently chuckling with a client whom I have a standing breakfast meeting with.  I told him ninety days ago that we are nearing an inflection point, that things will either be really good or really bad, and we should know in about ninety days.  We sat down for breakfast last week and I found myself saying something eerily similar.

As I told him last week, we are definitely much closer to the end of the beginning.  Ninety days from now at least we should know.