“Which is it to-day,” I asked, “morphine or cocaine?”
He raised his eyes languidly from the old black-letter volume which he had opened.
“It is cocaine,” he said, “a seven-per-cent solution. Would you care to try it?”
The Sign of Four, Sir Arthur Conan Doyle, (1890)
No thanks, Mr. Holmes. Been there; done that.
Sir Conan Doyle’s Sherlock Holmes is perhaps literature’s most famous cocaine addict, showing, as indicated above, a decided preference for a 7% solution. Seeing as how the former was a physician himself, I’m assuming that this is an effective mixture. 5% would probably not do the job. 15% might kill a horse.
Key risk management lesson: gotta get the percentages right.
Percentages are always important but at this pass, they are particularly ascendant. They’ve been coming at us fast and furious, and the stream has not yet run its course. But it behooves (behoves?) us, nonetheless, to review a few of the figures.
We begin with the >8% ranges, which is where this past week’s Inflation statistics dropped. CPI 8.1%; PPI 8.7%.
Or do I have this backwards? I’m not convinced it matters much.
Because either way, these numbers were significantly higher than what everyone (myself included) expected. They catalyzed a wicked equity selloff, with much of the carnage transpiring on Tuesday, in the wake of the CPI surprise. This caused Gallant 500 to retreat 4.307% and Captain Naz to turn tail to the tune of 5.542%.
This was the worst daily showing in, well, in quite a spell.
And these markets, after meekly gathering themselves on Wednesday, continued their downward slide across the rest of the week.
Moving on, however, the next percentage figure we must consider is 6%, the level through which the average thirty-year fixed mortgage rate breached this past week. Last time mortgages were in these vicinities was late ‘08/early ’09.
As I recall, this wasn’t particularly accretive to the housing market, but hey, new day/new way, right?
All of which points toward the Percentage Grandaddy of ‘em All – the Fed’s decision on interest rates, scheduled to be revealed to a breathless financial world on Wednesday.
After the Inflation numbers, the prognostication graph has shifted ominously to the right, with the projected range now toggling not between 0.5% and 0.75%, but rather between 0.75% and 1.00%:
Trust me here and take the under. No way the Fed goes 1.00% — in an economy that is showing unmistakable signs of slowing and ~6 weeks before an election in which their political paymasters own any and all associated negative impacts:
Further signs of deterioration derive from the Private Sector, particularly the widely socialized, buzzkill comments of the new top dog at FedEx, in the midst of a rather dire negative pre-announcement.
To offer a blindingly obvious observation, when the guy that controls those Memphis-originating trucks and planes tells us he’s anticipating a significant worldwide recession, we should pay attention.
Because he oughta know.
Thus, as an investor, one is faced with the formidable challenge of allocating capital into a slowing economy, featuring stubbornly persistent inflation and skyrocketing (e.g. mortgages) interest rates.
It’s enough to cause a body to turn to drugs. Or return to them. Or if already a user, to amp up dosages – maybe well beyond the 7% threshold that Holmes worked to such advantage.
But as your risk manager, I can hardly countenance this.
Nope, we’re gonna have to find other means to navigate our myriad difficulties.
All of which brings us to our last percentage analysis, which is one that cannot be calculated, but only estimated. I checked my trusty Zippia.com dashboard and learned that the average age of a professionally employed portfolio manager in the United States is 45. This implies that at the time of the ’08 crash, our Mr. or Ms. Average was a tender 31. If they were, at the time, managing money (probably a minority of them) they caught the last third of a 40-year rally in Treasuries. Methuselah types like myself have navigated with the benefit of declining yields, and their attendant positive impact on equity valuations, for our entire careers:
Bond Yields and Equity Valuations: A Long Tale of a Long Tape
This implies that virtually all risk takers – call it, conservatively, >80%, have operated with a secular tailwind at their backs. But now, the winds may not have just died, but reversed themselves.
How prepared, therefore, are any of us for a market environment where the null hypothesis is not rising, but either flat, or perhaps declining, prices?
Not very, I suspect.
Perhaps these longer-term trends will reassert themselves, but – not gonna lie – I don’t see any support for this hypothesis, and we thus may very well be forced to accelerate our climb on the learning curve, however we choose to do so.
But it may be an expensive education, as, in the meanwhile, those inserting risk into the markets are almost unilaterally operating without an historical roadmap. Accidents may happen; we may get lost. It’s happened many times before when surveyors have travelled into uncharted territory.
Sometimes it works out. Chris Columbus wanted to travel East and instead headed West. Lots of good stuff happened in result over the subsequent > 5.25 Centuries (disgraceful attempts to refute this notwithstanding). In Doyle’s “The Sign of the Four” (Spoiler Alert), Holmes solves the case, and Watson gains a wife.
Other lessons from history, however, are not as uplifting.
Unpacking it all may be the case of our lifetimes, but, unlike Holmes, a 7% mixture of cocaine is unlikely to assist us in cracking it.
Meantime, it’s best, I believe, to play the percentages, which don’t for the moment, augur in our favor. Let’s remain alert, stay nimble and see what unfolds from here. Lacking a magic % solution to enhance our clarity of thought (yours and mine), it’s about the best risk management advice I can offer – for now.
TIMSHEL