The Lobotomy Paradigm™
written by at 28th May, 2020
in category
So let’s get one thing straight; the market has a price and that price clears all day, every day.
This makes it the correct price for here and now. This price also happens to reflect what the ‘here and now’ actually is as far as the market believes it to be. The fact that you, me, my neighbour’s dog and his uncle’s sister happen to disagree only means that we are wrong and the market is right. The market is always right. That’s why the price clears.
On the notion of the ‘here and now’ what you need to do is actually throw out all your textbooks, CFA designations, models et al and accept the very basic fact that the SPX is as much about ‘future earnings’ as I am about being a morally upright citizen. In short, neither of those things is true. More to the point, the SPX has come to signify a measure of risk willingness/aversion. It is the leader of sentiment and thus driver of most (if not in fact, all) asset classes. You’ve heard me utter that it’s all one trade, well it is, and it’s invariably led by the Spooz.
Now that I’ve cleared that up for you, let me explain the term I’ve coined; The Lobotomy Paradigm™
In the simplest of forms what I’m referring to is the fact that very little matters. The fact that the market is not the economy. The fact that the prevailing narrative doing the rounds now is ‘how could we be only 10% off all time highs when the US has north of 20mio unemployed, nations and industries are in varying states of complete shutdown etc etc etc and things will simply never be the same’.
Yeah, I hear all those concerns and likely even (somewhat) share a few of them myself, but guess what; there’s a price and that price clears. All day. Every day. There’s no point trying to skate to where you think the puck will or should be, skate in sweeping circles around where the puck is RIGHT NOW.
I’ve written before that in the absence of a severe second wave of Covid 19 (mainly in the US) we’re very unlikely to subvert the current direction of travel of the Spooz and subsequently, risk. Where we are now has been all but entirely underpinned by historic amounts of fiscal and monetary stimulus and frankly, human nature. Markets reflect their participants, and their participants ultimately believe that despite setbacks such as this pandemic, things will be ok. The pace of reversion to ‘ok’ might falter here and there but ultimately we’ll get there. If you believe that, why would you not want to own Spooz? Demonstrating and reinforcing that very point are diminishing rates of R and global easing of thus far stringent lockdown measures.
All the factors that people worry about; inflation, systemic market failures, diminishing economic fundamentals etc are valid concerns and worthy of attention and discussion. But mainly as cocktail party chit chat. The market doesn’t care. The sooner we acknowledge this and the sooner we realise that you need to deal with the here and now, the sooner you can avail yourself of such burden and embrace The Lobotomy Paradigm™
More to come in the following days but all this is to say that getting too caught up in highbrow ‘coulda, shoulda, woulda, didn’t’ macro will serve your p/l very little benefit…
As always, helmets on and good luck out there.
