Practical analysis for investment professionals
14 January 2016

Weekend Reads: The Recurring Death of Certainty

Posted In: Weekend Reads

When are we going to learn?

The most persistent theme I’ve ever noticed has been that anyone who professes to know exactly what’s going to happen is wrong, cheating, or both. Markets, it’s been proven, just don’t work that way. Neither does life.

Even forecasts as simple as “the sun will come up tomorrow” can be complicated by clouds.

I don’t generally write these Weekend Reads columns, so when I fill in for colleagues, I like to take the opportunity to share provocative ideas that I believe will stand the test of time.

Last time I shared some of my favorite works on subjects ranging from effective strategic thinking to the tax treatment of zombies.

This time, I’m writing as the prices of risk assets plummet and investors’ collective attention seems to be focused anywhere but on the long term. So I’m going to try to help you contextualize the here and now in the hopes that you’ll be able to see beyond it to opportunity.

With his characteristic brilliance, CNBC’s Jim Cramer summed up the prevailing risk appetites in a tweet:

When a lotto ticket compares favorably to the equity of the 137th ranked member of the Fortune 500 and the second-largest natural gas producer in the United States, it’s time to re-examine your beliefs. Whatever they are.

For those of you who are fortunate enough to be members of CFA Institute, I’m pleased to report we’ve just released a tool to help you examine and develop those beliefs.

Our Investment Idea Generation Guide is a compendium of tools to help you figure out what you really think, strategies to harmonize those thoughts into a worldview, and approaches you can use to translate that worldview into measurable alpha. Jason Voss, CFA, and I had a tremendous amount of fun working on it, and I honestly think that sitting down with it is one of the more productive things that you can do. And now seems to be the perfect time.

If you’re not a CFA Institute member yet, no big deal. We’d love for you to join or, barring that, pick up a copy on Amazon. Or just keep reading. Because for the balance of this post, I’m going to try and round up a few things that are objectively true at the moment and highly relevant.

1. Spreads are widening, and people are noticing.

Specifically, Enterprising Investor colleague Martin Fridson, CFA. In an interview with Bloomberg, he points out that the 7.39% spread investors in high-yield bonds were demanding over Treasuries during the month ending 8 January points to a 44% chance of recession. Stripping out the uniformly shellacked commodities sector, he still finds a market-derived probability of 20%. Though he goes on to note that he is inclined towards optimism, those new to these developments would do well to read the 2 December 2015 note from colleague David Schawel, CFA. Those not so new to the story will likely already know that the daily spread has widened since Marty highlighted the issue.

2. If you’re looking for inflation expectations, you can find them in the toilet.

The 5-year, 5-year forward inflation expectation rate is at the lowest level ever, apart from the 2008–2009 recession. But what does that really mean? Though this spread is widely used as an indicator of inflation, it’s really just the output of a formula. The implications of that are well detailed here. In fact, it might be a fantastic time to buy protection against rising inflation. But it’s worth remembering that even if this series doesn’t axiomatically mean inflation expectations are falling, its sustained decline certainly doesn’t mean that expectations are rising.

3. Real growth expectations are right next to them.

The Atlanta Fed’s GDPNow model is suggesting that GDP growth will come in at an annualized rate of .8% for the fourth quarter of 2015. Forecasters surveyed by the Wall Street Journal have divergent expectations, but they are almost uniformly higher. A paper analyzing the accuracy of GDPNow found that it had particular trouble forecasting private inventories and exports. Though likely incorporated into the current reading already, a sharply higher dollar in the fourth quarter of 2015 and flattening private inventories through the third quarter of 2015 don’t seem to indicate that the model is erring on the high end.

4. Not many US stocks have hit new 52-week highs.

Duh, right? After all, stock indices themselves are well below their peaks, so you wouldn’t expect a large number of the equities that compose them to be trading near record levels. But here’s the thing: The number of stocks making new highs was falling even as headline indices were rising. You can see what I’m getting at by taking a look at the NYSE High-Low Index, which — you guessed it — tracks that relationship. Check out this tutorial for a quick primer on how to peer inside of this interplay and how to use the tool to make decisions. You should be able to tell right away that the market’s breadth sure isn’t minty.

5. Nobody seems to want oil.

I spoke with a very sharp friend in the oil business on Tuesday night who shared a cutting observation: “At $40 oil, people were confident. At $30, oil they’re terrified.” The evidence would appear to support a sense of doom. Here are five charts that purport to “definitively prove oil is toast.” That analysis was conducted before the Tuesday inventory report, which noted that “inventories remain near levels not seen for this time of year in at least the last 80 years.” It’s unclear what will come of this. All I can say is that if you’re considering taking down some of that inventory for your personal account, I’d advise against accepting physical delivery. One of the few moments of levity in the last six months of oil news came when Bloomberg’s Tracy Alloway did just that and reported on the absurdity of the process.

With those five points in mind, it’s time to focus longer term. Here’s some reading that will help you find opportunity.


Tech and Start-Ups


Getting Smarter

Fun Reads

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Sloane Ortel

Sloane Ortel is the founder of Invest Vegan, an ethics-first registered investment adviser that manages distinctive discretionary portfolios of public equities on behalf of aligned individuals and institutions. Before establishing her own firm, she joined CFA Institute’s staff as a sophomore at Fordham University and spent close to a decade helping members adapt to a changing investment landscape as a collaborator, curator, and commentator. She is also a co-host of Free Money, a podcast for sustainability-oriented investors with a sense of humor.

3 thoughts on “Weekend Reads: The Recurring Death of Certainty”

  1. Happy New Year, Will! Excellent work and thanks for all the great links.

    1. Will Ortel says:

      Many thanks Michael! Happy new year to you, and thanks for reading!

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