December 2023
IN THIS ISSUE
John Henry knows better
Inflation’s tailwind
The Gas Station - PlayStation Indicator
In 2023, pessimism was expensive (again)
It’s December, so naturally everyone’s doing year-in-review pieces. 2023 presented plenty of causes for concern:
Inflation: Inflation has created a dark cloud over how everyday Americans view the economy
The Fed: Federal Reserve raises interest rates to 16-year high as fight to tame inflation persists
Hard landing: Hard landing to hit stocks in second half, says BofA
Recession: Interest rates: El-Erian blames Fed for ‘very high’ risk of a damaging recession
Silicon Valley Bank: Looking back at the banking crisis of 2023
Ukraine: World Bank warns of recession risk due to Ukraine war
Fed Chair Jerome Powell has been under fire for several years now, as his “transitory” inflation call did not age well and accommodative monetary policy for too long stoked persistent inflation.
Joseph Stiglitz argues Why the Federal Reserve chair Jerome Powell must go
Jeremy Siegel says Jerome Powell owes 'the American people an apology' for poor Fed policy
The Powell’s hawkish pivot had to convince everyone that they were serious about tackling inflation at whatever cost, even if that meant a “hard landing” recession.
But Does Fed Chair Jerome Powell Deserve All the Criticism He's Getting? No, of course not. In 2023 corporate profitability was strong via the resilient consumer, fueling the S&P 500’s 24% gain for the year, and the Fed seems well on its way to engineering the “soft landing” that just a few months ago many claimed was Powell’s aloof pipe dream.
Financial media was full of leading thinkers and prognosticators forecasting market crashes. In the extreme case, Jack Dorsey’s now-infamous “Hyperinflation is going to change everything. It’s happening” seems aloof at best as inflation is way down, Powell is in the driver’s seat, A smooth 'last mile' to 2% inflation may not be a stretch for Fed, and the overall economic narrative has changed markedly:
The Federal Reserve Rides to the Rescue: U.S. Banking Crisis Should Be Avoided
Stock Market Optimism Hasn't Been This High Since April 2021
US stock market: Wall Street climbs on optimism that Fed done hiking rates
Economists now predict the U.S. is heading for a "soft landing."
To be clear, it is very possible - perhaps even Likely - that consensus calls for recession in 2023 could be deferred to 2024 and this conversation next year will be very different. Markets can remain irrational longer than investors can remain solvent. Short covering may have contributed significantly to the November/December surge in stocks that could easily dissipate and retrace into losses in 2024.
But Peter Lynch famously said “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Those who positioned themselves for corrections and recessions this year felt the pain. Whether short sellers seek to profit in any market cycle, to reduce volatility, or to make a career-defining trade-of-a-lifetime, 2023 was undeniably brutal:
Here’s Ben Felix:
“Pessimism is expensive. The stock market is an incredible tool for long term wealth generation, but to benefit from it you have to participate in it consistently. Myopic loss aversion, overestimating the probability of crashes, having pessimistic subjective return expectations when expected returns are high, and conditioning expectations about the future on negative personal experiences can lead to missing out on the returns that the market has to offer.”
Nobody likes losses, and the appeal of hedge fund managers who claim to deliver profits in up, down, and sideways markets is undeniable.
Bill Ackman has made billions through activist short-selling, but that approach caught up with him with Valeant and Herbalife - Bill Ackman is done with activist short-selling, will focus on quieter, long-term approach. Here’s Ackman:
“Pershing is not a short-selling firm. We’ve shorted a couple stocks in our history. And the last one we did [Herbalife], I foreswore short-selling thereafter… not that I’m faint-of-heart, but I’m faint-of-heart with respect to short selling.”
And in his 2021 annual letter Ackman wrote:
“The aphorism that you ‘don’t need to make it back the way you lost it’ has always resonated with us.”
As for me, I am still short shorting. This strategy is such a tough way to make a buck, and this year - yet again - was no different.
ONE MORE THING…
John Henry knows better. At just one year, this time frame is too short to be explained by “man vs machine”. Much better explained by particular market dynamics of this year. Man beats machine in hedge fund investment battle
Inflation’s tailwind. “Why would I be the first to cut my margins when we just went through a period where we had the world’s best excuse [inflation] to recover [profit] margins?” As inflation falls, corporate America won't rush to pay the price
The Gas Station - PlayStation Indicator. From lower gas prices, consumer spending flowed from gas stations to PlayStations on Black Friday to the tune of a record $9.8 billion online. US Gasoline Prices Fall for 60 Straight Days in Win for US Holiday Spending
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