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Last week was a helluva week… but I still wouldn’t bet against history

Last week was a helluva week.

The final report of the Royal Commission into financial services was released by the government on Monday, sending mortgage brokers into a spin, bankers into their bunkers, and financial planners breathed a sigh of relief.

Yes, they’ll have to disclose if and when they can’t be considered ‘unbiased’ or ‘independent’, but things could have been worse.

On Tuesday, bank shareholders cheered with relief, spared from vertical integration and any significant financial pain. Bank shares, having been priced for (almost) maximum pessimism, roared back to life.

For all of the high drama during the Commission’s operation, Commissioner Hayne ended up striking a conservative tone.

Wednesday was the RBA’s turn in the news cycle, with Governor Philip Lowe striking a more concerned tone than in previous communications, saying “There are scenarios where the next move in the cash rate is up and other scenarios where it is down”.

Those last 7 words, simple as they are, telegraphed the RBA’s worry that the economy might be softer than it had hoped.

Then on Thursday, a bombshell came from NAB. First a trading halt, then confirmation that Chair Ken Henry and CEO Andrew Thorburn would pay the price for drawing the Royal Commissioner’s ire.

Thorburn will clear out his desk at the end of the month, and Henry will go once a new CEO has been appointed.

Not to be outdone, Friday morning brought fresh concerns, imported from the United States, that Presidents Xi and Trump were not making the hoped-for progress on trade talks, and the 90-day ‘truce’ that both parties had agreed to might end with no deal.

God help me, but I can’t understand why the market was surprised that such an outcome was possible. I mean, seriously. Have traders not been watching the first couple of years of the Trump presidency, or been aware that China is playing a long game?

That’s not to cast blame disproportionately to either side — just the simple reality of what has become a very confrontational negotiation to date.

As I mentioned on Your Money (the new name for Sky News Business) on Friday, traders and investors have been way too fickle on this one (as usual). The market seems to careen between starry-eyed optimism that a deal will be done, and deep pessimism that it won’t. Worse, those changes of mind owe more to nameless sources ‘familiar with the matter’ more than actual pronouncements.

Why would any serious investor swing wildly back and forth between these two relatively extreme outcomes, based on what insiders like to call ‘news flow’?

Search me.

Instead, any reasonable person, with anything approaching a long-term mindset, should instead think:

“This situation is largely unknowable. And, as with any negotiation, there’ll be swings back and forth. Not only that, but either — or both — sides will likely use the media as part of their negotiating strategy, meaning we’re likely being played.

“On balance, there’s a decent chance a deal doesn’t get done by the end of the so-called ‘truce’. It’s probable, as with most of these things, that there’ll be false dawns, and equally false dark nights.

“But it’s unlikely, for a host of reasons, that there’s not a deal done in the end. Both parties have too much to lose. So whether it’s done before or after the truce expires, it’s likely — though not certain — there’ll be a deal.”

And, if you accept that the above is a prudent, sensible approach, you wouldn’t ‘price in’ either despair or euphoria. You certainly wouldn’t swing wildly between the two, whenever the wind changed.

More importantly, you’d realise that, while the news media and many traders and investors are fixated on what makes for great headlines and ‘smart’ opinions, there are dozens of other risks that have, are, or will surface, in the absence of this one.

If it’s not trade talks, it’s Brexit. If it’s not Brexit it’s European nationalism. If it’s not that, it’s China’s debt. If not that, we can worry about oil prices. Or Venezuelan default. And that’s just this month.

As we entered January, we worried about the bear market in stocks. Except that by the first few days of February, the market had hit a four-month high.

I guess we have to cross that off the worry list. Then again, if we’re not fretting about the current bear market, there’s always the next one to worry about. Thank goodness.

And there’s always house prices. They’re too high. Or is that too low? Or falling too fast? I can’t keep up.

There’s an unresponsive RBA, keeping rates too high. Or a worried RBA, flagging lower rates. The dollar is too high. And then it’s too low.

Remember when it bought more than one US dollar? That was terrible. Oh, that’s right, it wasn’t. But 70c cents… that must be terrible, right?

The stock market is too high. Or too low. Or rising. Or falling.

Share prices are falling… who’s crazy enough to buy when prices are crashing?

Share prices are rising… I’m going to wait for the next fall…

Who buys at 52-week highs? Who buys at 52-week lows?

Plus, a few years ago, the Large Hadron Collider was going to create a black hole and kill us all!

Phew… did I mention I can’t keep up?

Of course, it possible that one of these risks comes to pass. That, with the benefit of hindsight, someone gets to say ‘Aha! Told you so!’

Which is, without that benefit, useless. There’s a litany of headlines about the risks that could lead to a market crash. In the last decade alone, they started with forecasts of a ‘double dip’ recession coming out of the GFC, and continued apace.

One of them could well have been right. One of them might still be right. Eventually. Or not.

Meanwhile, the ASX is up strongly since the GFC. 170%, in fact, including dividends. The US S&P 500 is up 284%.

I really hate investment cliches. They’re often just well-worn excuses or impressive apparent truisms that help financial types separate us from our money. But at least one is — begrudgingly — true: the market climbs a wall of worry.

There is always something to worry about. And eventually, one of those worries will come true, either causally or coincidentally.

But missing out on that 170% or 284%? That’s expensive.

And it’s different this time, right? Now, now, it’s really risky. Uh-huh.

I’ve been writing emails like this one for years. And articles on Fool.com.au for even longer. Eventually, as sure as night follows day, one of these emails will precede a big fall.

And someone will point and say I was wrong.

Someone who is optimistic, and occasionally wrong? There’s no credit for that.

And the person who is pessimistic, and occasionally right? They claim prescience and don’t buy drinks for a decade.

Pessimism seems smart. It seems measured. And oh so sensible.

But it’s the optimist who makes money, despite the occasional loss.

I don’t know what’ll happen next. I never have and never will. Nor does anyone else, at least not regularly.

I don’t know how or when the trade talks get resolved. Or house prices. Or interest rates. Or economic growth. Or the next technological advance, great new service or gains in efficiency or productivity.

What I do know is that markets zig and zag, but inexorably, over time, upwards.

The future — the long term future — belongs to the optimists.

Do you really want to bet against that?

Fool on!


Scott Phillips
Chief Investment Officer
Motley Fool Australia

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