Every action we take is based on our confidence that the action will produce a result, hopefully the desired result. Often we are not overwhelmed with confidence, but believe that we must do something, remembering that doing nothing is in itself an action.
In last week’s blog about my stock selection training vs. using passive ETFs, I indicated that it was rare that macro considerations impacted my investment selection decisions. Macro elements are what is happening to the world as a whole, whereas micro elements are what is happening to a single or a small group of potential investments. One of the reasons to focus on micro elements is that they have proven to be easier to identify. After any review of what various political, economic and investment gurus prognosticate, one has the feeling that there is a high error rate. Often the more clever pundits get some things right, but not enough to be truly helpful for those of us who have to make investment decisions for others.
While I think throughout the previous week what I am going to say in Monday Morning’s blog, I pay particular attention over the weekend. Often I search for confirmations or challenges of my beliefs online, frequently focusing on what is probably the largest data bank of computerized investment company data in the world as put together by my old firm, Lipper, Inc. This weekend I am coming up empty for relevant micro insights, as the range of potential outcomes on the macro side is too great and my confidence in the short run of the market is waning. (I do not have to be right, I just need to not be really wrong.)
The Macro Factors that can go either way:
The debate as to the final constellation of the euro
My frustration is that I cannot add anything to the debate. Worse, I do not see any progress to a permanent solution to the deficit production of governments and central banks supported by the general populations who in aggregate want more in government services than they are willing to pay. Having no responsibility to solve the currency problem, I can perhaps too easily come up with a grand solution. At the currency level, Finland, Denmark, Holland, and possibly Austria should lead Germany to a hard euro with responsible governments. France and Italy should lead the peripheral countries into a softer euro with one or more devaluations and probably some form of centrist government eventually. I hope the solution evolves quickly; then all of Europe as well as Russia and China can turn to a much more serious problem in their midst which is the growing population of Islamists that fundamentally hold different cultural norms, particularly in the rule of law.
China: can the government continue to get it right?
For at least the last decade, which is the Chinese Party’s time frame, no government has done a better job of controlling its economy in both a huge expansion and a slowing contraction. Power has devolved from the central control of a headquarters-based party to lower levels of government, including getting down to the village and city levels. Actually it is at the lowest level where the biggest monetary contribution is made to the general population’s benefit. From the study of large organizations be they political, military, corporate, religious, or sporting activities, we recognize how difficult it is for good orders from the top, (and they are not always good orders), to be carried out effectively at the lowest level. Recently China has experienced a significant problem on the political level and another at the industrial (railway) level. I am sure that there have been other malfunctions. At the speed that the society must find reasonably well-paying jobs for the population, the Party may not have sufficient control factors in place. An uncorrected mistake could spark the feared social tensions that could derail the growth plans. I will not have high confidence in this arena until I see what the new political leaders will do.
The US election may not be decisive
I do not know many potential voters that are happy with their particular favorite for President or for Senator, when one is running in their state. They vociferously favor their choice over the opposition, but are still not totally thrilled with their candidate. Perhaps this is a good thing, for many political leaders that came into office with a large wave of enthusiasm have disappointed. My real concerns are that unless things change dramatically, getting effective fiscal legislation through the Senate will be difficult. Along with the rest of the world there does not appear to be any groundswell in the US to drastically cut the costs of the things it enjoys and little delight in paying more taxes. Perhaps out of this morass some true statesmen or women will arise and lead the US onto a prudent growth path.
US exceptionalism comes with a price that it cannot deny
The exceptional results of the US are not solely, and may not be mainly, due to its population. The two ocean borders and the abundance of arable land and other natural resources should not be dismissed or discounted. At the moment the US has a large number of the leading universities of the world; I speak with a bias as a trustee of Caltech. In many fields such as software and biotechnology (including the Human Genome Project) the US is the leading developer of technology. With the gifts that have been given to the United States, the country has a responsibility to others less fortunate. If it shirks these responsibilities as it is now doing, other nations will surpass and could even suppress it. My meetings with the brightest young Americans I know does give me confidence, but not when I see many existing political and corporate leaders.
My short term confidence and those of others may recover very suddenly. Markets can move extremely rapidly from the present level. I would rather be a worried investor reasonably fully invested in equities than trying to time a re-entry move. Where possible I would have a significant investment in technology companies that have a practice of being leaders in disrupting the status quo. The world has progressed to such a point that all of my investments must address a global world to prosper. Sleep may be overrated as a priority in this pursuit.
Do you have confidence in your portfolio? In which securities and why?
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