Synopsis: Ernest Hemingway worked for over a year writing and revising The Sun Also Rises. Financial writers don’t have that kind of time to perfect their narrative. A two-step process will help investors decide if any story should keep them from running with the bulls.
The fiesta had ended badly. It had begun brilliantly, but ended badly. Flaming and sparking, the fiesta ran white hot, spitting and hissing until it faded to nothing. The writer thought of this while drinking strong coffee and watching workers gather spent fireworks in the square in the late morning. The cafés were putting out the good furniture, gathered up and stored for seven days while the fiesta went on. The coffee was strong and helped him keep the general feeling of lousiness at bay.
The morning ended and afternoon came on. Bill came down and met him in the café. They ordered shrimps and beer while shop owners swept the streets. The town felt cooler now that the rains and the crowds had come and gone.
“Fella, that was some fiesta.” Bill’s face had a weary, parchment look to it.
“Some good, some not.”
“Well, the bulls were excellent.”
He nodded. “Yes, the bulls were very good.” He did not really feel it, but he said it anyway.
“Quite right. I say, that Ordonez fellow was wonderful to see.” Bill was from Michigan and as American as apple pie. But a few weeks with the English and he’d taken up their speech. He liked the bullfighter named Ordonez.
“Wonderful. I may just write about that.”
“About the bulls?”
“About all of it.”
Bill was quiet for a time. He ordered more beer from the waiter. “All of it?”
“Well, how would it go? Give me the draft version if you please. Let’s talk it through.”
“Well, a man living in Paris and his friend from the States take a trip to Pamplona for the festival of San Fermin to watch the bull fights.”
“They are joined by some English ex-pats and the man is in love with one of them.”
“Well, she is engaged to one of the Englishmen, but has had an affair with another man on the trip. Everyone drinks too much and there is a big row. The end.”
“What about the fishing?”
“Yes, I’ll write about that too. They fish the Irati river and teach the trout a hell of a lesson.”
“Well, that about sums it up. Tough sell for your publisher, though. Too life-like. No one will believe it.”
“Must not be daunted, though. Write it anyway and see what happens. Secret to my considerable success? I was never daunted.”
Ernest Hemingway was not daunted. He turned his sojourn to Spain, featuring his friend Bill Smith from Michigan and a mishmash of other ex-patriots, into The Sun Also Rises. The novel propelled him to stardom and made him the premier writer for what became known as the Lost Generation. His style became legendary for being long on dialogue and short on adjectives, adverbs and the semicolon. Having learned his craft as a journalist, the result was spare, direct prose focused on telling the story. He got quickly to the question: “and then?” And only stopped when the tale was told.
Hemingway was also known to be a tireless and fanatical revisionist, rewriting, reworking and stripping out unnecessary prose. After beginning the book immediately after the festival in July of 1925, he had his fist working manuscript by the end of the Fall. His editor still felt that “it is almost unpublishable.” In May 1926, Hemingway would again refocus, stripping out detail and deleting the first sixteen pages. By August, after another trip to Pamplona, he finished the proofs for the novel in Paris for publication in the Fall of 1926.
Today, journalists face more pressure to publish quickly than Ernest “Papa” Hemingway ever did. In a 24-hour digital news cycle there is very little time to rework and revise. Hence, we get a lot of information, usually without the full plot or context. Finance journalists usually don’t ask the important question “…and then?” They will leave you (or me) to fish for it.
Take, for instance, a recent Wall Street Journal article that mentioned that interest in the VIX, ostensibly a measurement of short-term market volatility, has risen of late:
“There is a pattern emerging here: A Google Trends search shows the last time interest in the VIX was this high was August 2011, when tumult in Washington over the debt ceiling sent markets tumbling.”
Well, two can play the Google game. A Google Finance search will show that the S&P500 returned over 79% since August of 2011. If it all turned out the same this time around, like Hemingway and his friends, we’d all have a lot to drink about. Of course, it won’t turn out exactly the same. Past performance is certainly no guarantee of what the future holds. But there is no reason to be more nervous than usual about something that last happened in 2011. Here is how to read this story à la Hemingway:
1) Strip out the extraneous information. The VIX hasn’t been this high since August 2011.
2) And then? The bull (market) was excellent.
Papa, I think, would be proud.
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Synopsis: Recent economic numbers are underwhelming, but confidence surveys are increasingly optimistic. Hard data or soft statistics, which one gives a more reliable picture? A WWII bombing operation might give some insight as to where we are heading and what really matters on your own mission.
The B-25’s engines droned on and the Pacific slid by two hundred feet below like an endless blue scroll unfurling in front of them. From the cockpit of the lead bomber, the copilot of aircraft number 40-2344, glanced backward over the left and right wings to see a great V shaped wedge of sixteen similar aircraft. Like migrating geese, he thought.
Then the call that made his arms turn to goose flesh: “Bandits, two o’clock high. Looks like they are going away from us.” “Zeroes.” Someone else in the formation added, indicating that the planes were the formidable Mitsubishi A6Ms.
He stared at the enemy formation, willing them to keep moving up and out over the Pacific. Don’t see us. Come on, let us have one break today. Japanese picket vessels had spotted them aboard the USS Hornet early that morning, and though the Navy made quick work in sinking them, it had to be assumed that the carrier’s presence was known and their element of surprise gone. So, the giant Army Air Force bombers lumbered down the flight deck of the Navy’s aircraft carrier twelve hours ahead of schedule. He’d watched the “boat” as the sailors called it, turn hard after the last launch and steam east, back to base. There would be no landings on her deck after this mission. That, he tried hard not to think about.
“They’re turning,” someone announced over the squadron frequency. He tensed and his stomach dropped hundreds of feet to the wave tops below. We aren’t geese… we’re more like sitting ducks. He looked left where his pilot, Jimmy Doolittle, sat looking intently ahead.
“No…it was just a sun flash. They are still on the same course,” came a tense, clipped retort. The sun was another issue altogether. The early departure led them to change from a night mission to this assault in broad daylight. But the sun, the mid-day sun, masked them as they flew in from the east. The fighters never saw the formation of bombers, or if they did, assumed them to be Japanese. In moments, they were gone and the great land mass of Honshu Island loomed, a gray brown smudge on the horizon that grew to fill the cockpit around him.
Doolittle began a climb to bombing altitude and asked simply: “You ready?” The copilot, Richard Cole, nodded and began adjusting the propeller pitch and coordinating with the bomb crews. In a few seconds, the plane rocked gently and the first red light illuminated on the panel in front of them. “One away.” Three more quickly followed and in thirty seconds it was all over. Doolittle slammed the throttles forward and dove for the deck, the crew watching as black smoke billowed from their targets, now on fire aft of the right wing. Five months after Pearl Harbor, American forces had struck back, hitting targets in and around Tokyo.
Doolittle’s Raiders had about six hours to congratulate themselves, continuing westward toward landing fields in China. Then they either crash landed or bailed out after nightfall. Dick Cole gave himself a black eye pulling on the rip cord on his parachute, was met on the ground by Chinese Nationalist sympathizers and reunited with Doolittle. Of the eighty men crewing the raid, eight were captured, one died in captivity and three were killed. Doolittle was distraught, believing that the damage done was insignificant and the loss of men and aircraft meant the mission was a failure.
In the card hold arithmetic of war, he was correct. The raid didn’t degrade the enemy’s fighting capabilities much, nor did it permanently damage supplies or material. The hard data would seem to support the pessimistic view. But Doolittle turned out to be wrong. His Raiders were hailed as heroes back home and the mission seen as sending an important message to the Japanese public. They gave the seemingly invincible forces of the Emperor something to fear. And they gave Americans, still stewing over Pearl Harbor, hope.
So, what matters more, hard or soft data? Much of the financial media is asking a similar question today as economic numbers underwhelm, but confidence and survey responses indicate increasingly optimistic sentiment. Here’s how to fly through this tricky period by keeping three things in mind:
1) The hard data isn’t all pessimistic. Despite his misgivings, Doolittle’s raid did have some concrete results, including damage to a ship that was to be converted to an aircraft carrier and was delayed for months. In the Pacific theatre in 1942 one ship could mean quite a bit. Today, in a low-growth economy, every measurement also means quite a bit. But one data point doesn’t make a trend any more than one mission wins or loses an entire war. And much of the recent angst is over data showing not decline, but slower than expected growth which is nothing to bail out over.
2) Sentiment can change the future. The realization by the Japanese public that they were no longer insulated from the war forced the high command to do things differently. In effect, the sentiment forced them to seek a decisive battle sooner than they wanted at the Battle of Midway, where the Americans narrowly prevailed. Likewise, soft data can change our behavior and pull us in positive or negative directions. Believing things are good can help consumer spending or corporate investment, but won’t show up for a while in the “real” data. Sometimes you have to keep flying forward to find out what is there.
3) None of this should be scary. Doolittle’s Raid took place seventy-five years ago this month. As of this writing, Dick Cole at age 101, is the only living survivor. He noted that the scariest part of the mission, taking off in a huge bomber from an aircraft carrier designed for smaller planes, turned out to be the easiest. “I was flying with the best pilot, so why worry?” If the seemingly divergent nature of hard and soft data is worrying you, you don’t have the right strategic plan or a steady hand at the controls. If you live to be 101, there will be numerous instances of hard and soft data not seeming to agree and a good financial plan will take those ups and downs into account. So why worry?
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Links to Sources:
1) The Doolittle Raid, 1942," EyeWitness to History, www.eyewitnesstohistory.com (2007). http://www.eyewitnesstohistory.com/doolittle.html
Synopsis: Many accept as doctrine that the entire rebound in stock prices since 2009 has been driven solely by artificially low interest rates. The observations of a 15th Century sage should be enough to tame that dogma.
The two ecclesiastical scholars looked warily at each other across the table. Outside, street carts noisily rumbled past on their way to a sunny, bright market day. Inside the Cathedral in Frauenberg, it was silent, cool and dark. The men drank ale and ate hard cheese, enjoying a companionable silence punctuated by occasional drabs of conversation.
“You know Bishop, I’ve been making astronomical observations for quite a while. In fact, I remember the exact day I began, March 9th in the year 1497. And I’ve learned a few things, come to a few conclusions.” Announced the Canon of Frauenberg wistfully.
“Ah, such as?” Asked the Bishop.
“Well, I think we’ve been mistaken about the sun revolving around the earth. I believe it is the other way around,” announced the Canon.
A silence ensued. Old boards groaned and somewhere a shutter hinge squeaked. The men eyed each other across what seemed to be a widening distance. Then, the Bishop slapped the wooden table as if he intended to split it in half. He bellowed and snorted, then nearly giggled with joy. Tears streamed from his eyes. “Nic, that’s funny. Really funny.” His face sobered, the mirth draining like a tankard of good beer. “But don’t let anyone else hear you joke about that stuff. I don’t want to see you burned as a heretic.”
Now it was the Canon, Nicolaus Copernicus, whose face drained; of color. He quickly shifted topics as his boss sipped and nibbled. “Right then, how about we discuss that issue with the currency?” Lucky for him, Copernicus could converse about multiple topics. He was multi-talented, working simultaneously on determining the motions of heavenly bodies and managing the monetary matters of Prussian Poland. And you thought talking on the phone while perusing Facebook was serious multi-tasking?
Five hundred years later, we recently completed the eighth revolution around the sun since the bull market began back in March of 2009. Has it all been a Fed induced, easy money binge? Will future orbits be more sobering? Are there alternate theories that won’t get us burned at the stake? The two topics Copernicus knew best help us reach a revolutionary conclusion:
1. Monetary theory: Cracking the questions of the cosmos is nice and all, but Copernicus also dabbled in man’s greatest ambition: money management. (I may be biased.) As the Canon, one of his responsibilities was maintaining the local currency. An original monetarist, he opined that inflation was a matter of too much money chasing too few goods and that excess amounts of currency or loose monetary policies should be avoided. Prices rise when there is money to buy and excess liquidity leads to increased inflation. And talk of bubbles dawns when easy money chases things like stocks, artificially driving up values.
2. Heliocentricity: Copernicus’s idea that the sun was the center of the solar system broke with the classical theories of Greek philosophers like Aristotle and Ptolemy. Yet, for all that time since classical antiquity no one could accurately say why some bodies seemed to move across our sky and then move backwards, or retrograde, before continuing on the primary path. Through his calculations he sought “…a more reasonable arrangement of circles, from which every apparent regularity would be derived while everything in itself would move uniformly, as is required by the rule of perfect motion.” It would take decades before anyone would widely accept that they weren’t at the center of the universe.
In places like the Federal Reserve, they still find it hard to believe the cosmos doesn’t revolve around them. Yet their efforts to make money more available through low interest rates have been only partially successful. Such funds have been more stationary than inflationary, parked on corporate balance sheets and held as excess reserves at financial institutions. Creating it isn’t enough; the money must circulate to create price pressures in the form of inflation or bubbles.
Today, the most reasonable arrangement of data for stock investors should have less to do with the Fed and more to do with earnings. That is, valuations don’t seem to be artificial at all. Since markets stopped moving in retrograde back in 2009, solid earnings have made stocks more and more attractive. And the first quarter of 2017 is no exception with the S&P 500 projected to have the highest year-over-year earnings growth since 2011.
Revolution #9 should see us grabbing a beer and putting the fun back in fundamentals, paying less attention to Federal Reserve press conferences (yawn) and more to corporate earnings calls (okay, also yawn). For those who believe this period since the Great Recession is a Fed induced bubble, most of this will seem like heresy. But, much like that whole heliocentricity thing, being heretical doesn’t make it wrong.
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Links to Sources:
2. https://www.astronomyclub.xyz/uniform-circular/copernicus-and-planetary-motions.html 3.https://insight.factset.com/hubfs/Resources/Research%20Desk/Earnings%20Insight/EarningsInsight_032417.pdf
5. Federal Reserve Bank of St. Louis, Excess Reserves of Depository Institutions [EXCSRESNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EXCSRESNS, March 29, 2017.
Synopsis: The French and Indian War, as it became known in America, launched the career of a young soldier who learned many lessons during his time on the frontier. His story presents four key lessons for investors and their money. If they saddle up and don’t call in sick.
“Ahem. Ah, listen, I’m not sure I can make it today.” He’d awoken and felt okay, but his stomach was a bit sour and he was pretty sure it was going to get worse. No sense in pushing it, and if he had to exaggerate a bit to get his point across, so be it.
Silence. The boss wasn’t buying it.
“No, I’m telling you, I’m not fit.” He coughed once or twice, but since he was complaining of dysentery wasn’t sure why. This wasn’t going well at all.
“I’m sure someone else can handle it. I mean I’m not the only one, right?” He was one of three people doing the same job, and he had just joined, so was it really that important he get up and go with them?
“Besides, there is more. I have other medical issues as well.” He went on to detail them at some length.
“Alright Georgie. Do as you will. We can’t expect a lad from the backwoods to pull his weight in the real army, can we? We’ll move on without you.” General Braddock, stern as ever and a proper blue blooded Englishman, stood to leave.
His aide, a young Virginian planter of just twenty-three years, sighed heavily and rose, though a bit unsteadily. “I’ll mount up and ride with you, sir. It is my duty and my pleasure.” Like most twenty-somethings, he just needed a little motivation. He found it, and much more, throughout that July day in 1755, a battle with French forces near present day Pittsburgh. Complaining of dysentery, fever and riding on pillows to help the pain of hemorrhoids, he was singled out for bravery and valor in a running retreat across southern Pennsylvania and Maryland after General Braddock was mortally wounded. He would continue to gain renown in the war that engulfed the Colonies and much of Europe throughout the 1750s, though the British army would never fully accept him as anything other than a nice kid from the wrong side of the Atlantic. The conflict, known as the French and Indian War ended via the Treaty of Paris on February 10th, 1763.
As a result, the British gained most of North America east of the Mississippi River, crippled the French Navy and expelled them from India, Louisiana and Canada. Not a bad decade’s work in the grand scheme of the empire. However, it was a lot to consume and like a bad pudding, it would later give the British people a considerable bout of indigestion. Nearly broke, government ministers attempted to raise revenues from the Colonies leading to disenchantment and a desire to throw away perfectly good tea in protest of taxes and tariffs. Meanwhile, the French seethed and decided to retaliate by backing the nascent independence movement championed by a military veteran who was denied a commission in the British army. But by then no one was calling him Georgie. They called him General Washington.
This President’s Day week, here are a few points for those looking to invest their dollars wisely, from the life of the man whose picture now graces them:
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Synopsis: A team for the ages won more games than anyone else over a four-year period during which they lost four Super Bowls. Were they all-time greats or merely a band of lovable losers? In sports, as in investing, it is important to make sure you are asking the right question.
It was thirty-eight degrees on January 20, 1991 and winter winds were whipping up from Lake Erie, making suburban Buffalo feel more like it was closer to single digits on the Fahrenheit scale. From the shotgun formation, the quarterback of the Buffalo Bills surveyed the scene, adjusting his receiver’s routes with an audible.
He had a not-so-secret hatred toward cold weather; he hated it enough to flee his native Pittsburgh (craziness!) to attend college in sunny southern Florida at the University of Miami. But he didn’t feel the cold now, although his breath was visible in a steady and even plume as he sized up the defense in front of him. A thin sheen of sweat covered his face and adrenaline coursed through him every time the crowd exploded into cheers, which had been often over the last few minutes. He felt strong, warm and loose. In contrast, the beefy boys on the defensive line breathed in irregular gasps, their lungs tight and muscles burning. They were already hunched over, gasping. The pace was punishing. Unable to make substitutions, the defense had taken a timeout two plays previously to rest.
“Hey Kelly, can you slow it down? Seriously!” bellowed Howie Long, a future Hall of Famer, his hands on his knees gasping for breath.
Buffalo Bills quarterback Jim Kelly, a future Hall of Famer himself, had a brief reply: “Hut!” And the next assault was underway.
Long and his compatriots were still in the same defensive set that had been carved up for over eighty yards in under four minutes. So, Kelly knew exactly what he was facing and how to make them pay on 2nd down and goal to go. But he soon realized something was wrong. The snap, arcing to his left, glanced off his hand and flopped to the artificial turf, landing on the hash mark at the 18-yard line. The AFC Championship game, which had started so promisingly seemed about to turn. Perhaps the smart move was to fall on the ball and regroup?
But Jim Kelly was a gambler. Indeed, he was a former Houston Gambler of the now defunct United States Football League. As a young, brash rookie, he had spurned Buffalo’s offer during the NFL draft because it was on a short list of cold weather cities he told his agent not to consider. It turned out to be a blessing for the Bills. While in Houston, Kelly came under the tutelage of “Mouse” Davis (formerly of Portland State) who redefined what offensive football could look like with an up-tempo, “run and gun” offense that placed a premium on quick decision making and limiting defensive substitutions. An early adopter of the philosophy, Kelly was now a master of the craft and would eventually come around on the whole Buffalo thing.
Now, picking up the ball, he rolled right to buy time and spotted a receiver breaking toward the middle of the field at about the 5-yard line. On the run, he squared up and delivered a strike, hitting him in stride so he could cruise untouched into the end zone. The delirious crowd thundered its approval, the noise swelling as a wintry mix of rain and sleet began to fall. The kicker, Scott Norwood kicked the extra point with 11:30 still on the clock in the first quarter. It was 7-0, but there was a lot of time left. Unfortunately for Howie Long and the Raiders, more time merely meant more offensive series for Kelly and the Bills. The “K-Gun” offense rolled to the most lopsided victory in an AFC title game, 51-3 and the Bills were headed to their first Super Bowl. Installed as 7 point favorites over the cross-state New York Giants for Super Bowl XXV, Kelly and Bills fans had to feel like the best was yet to come.
It wasn’t. As is often the case, the highest of highs proceed the lowest of lows. The Bills luck turned cold against a defensive coordinator named Bill Belichick and a Giants offense that gobbled up clock on long, plodding drives. Norwood missed a forty-seven-yard field goal that went wide to the right that would have won the game. The Bills lost a heart breaker but promised they would return to the big game. To their credit, they did, three times. Each trip they found new and interesting ways to lose the Super Bowl. It had all started so promisingly on that cold January day in Buffalo. By the time they lost Super Bowl XXVIII, everyone was asking: Were these the biggest losers in all of football?
Yes, they underperformed at big moments, but losers? The saying goes that when everyone is asking the same question, it is often the wrong one. The Bills weren’t losers at all. Indeed, over that four-year period they had the best overall record in the sport, including a 14-2 record versus supposedly dominant NFC opponents in the regular season. Howie Long, a Super Bowl winner and their overwhelmed opponent from January 1991, said “some people label them losers. Not me, though.” Indeed, he thought them worthy of consideration for his list of The Ten Best Teams of All Time.
The questions I’m hearing early in the game in 2017 seem to be the wrong ones as well. Will a stray tweet wreck the stock market rally? Are interest rates going to continue to rise this year? Is China going to replace America as the preferred global trading partner? Even if you knew the answers, could you move fast enough on offense to take advantage of them? Not likely. My advice is to keep the big picture in mind and ignore the noise of the crowd. Don’t be too euphoric when ahead or too depressed when behind. When it comes to the short-term news cycle, perhaps the best question an investor can ask is the simplest: so what?