Letters to Clients

The Man Behind the Curtain: Welcome to Oz, Folks

If you just started paying attention to the news recently, you’re probably wondering what exactly is going on here: trade tensions, yield curve inversions, near-miss geopolitical crises...oh my! But the stock market continues to march up the proverbial “wall of worry,” albeit with some recent volatility, as the whirlwind of concerning news events unfold at an exceedingly fast pace. Yes still, it would almost seem that someone, or something, is operating behind the scenes to keep the façade of a harmonious investment market in play.

It is true that the length of the current bull market in the US is hitting a record, and akin to an aging human, it would be reasonable to ask the question: “when shall poor old Mr. Market bite the dust?” Fortunately, we were taught at an early stage in our investment careers that “a bull market doesn’t die of old age, it dies when the Federal Reserve takes it behind the woodshed and…” (we’ll save you the gory details).

Inversion Diversion

haruspex / ha-rus-pex (noun) : a diviner in ancient Rome basing his predictions on inspection of the entrails of sacrificial animals

- Merriam-Webster Dictionary

If you watch or read a lot of financial news, you’ve probably wondered at some point if a market commentator is more akin to a haruspex (see above) than a real expert – desperately attempting to predict the future of the markets based on the economic indicator du jour. Well, today that economic indicator under inspection is the current shape of the US yield curve (Technical Note: The yield curve we are referencing here is the difference between the 10-year US Treasury yield and the 3-month US Treasury Bill yield), which for at least a brief moment was recently considered “inverted.”

At this point, you are likely asking yourself “what is a yield curve inversion AND is it really as ominous as the pundits make it sound?” We will attempt to answer this in two parts: 1) a brief, but necessary, Yield Curve 101; and 2) a summary of important conclusions about yield curve inversions.

Don’t Let a Good Correction Go to Waste

“Only when the tide goes out do you discover who’s been swimming naked.” - Warren Buffett

That sinking feeling in your stomach is normal – when stock markets gyrate, and red numbers show upon your statement, it’s natural to want to sell and run to the exits. Our instincts have served us well for survival, but not so much for how we manage our own money. That’s part of the reason why market sell-offs even occur, as the cycle from greed to fear plays out time and time again.

Market fluctuations are normal. While the path to wealth over time in stocks has been great, there are frequent bumps along the road – 10% corrections almost annually, 20% every four years and 30% or more once a decade, are all typical detours to expect along the way. Markets do tend to correlate with the growth in business profits over time, but over- and under-shoot regularly.

Our Own Worst Enemy

“All I want to know is where I’m going to die so I’ll never go there.”

– Charlie Munger, Vice Chairman of Berkshire Hathaway

We human beings are a funny race. It’s amazing what all man-kind has accomplished, and yet at the same time, how distinctly flawed (and sometimes reckless) we can be. This is particularly true as it relates to money, which by the way, is the only category of human behavior we may be able to discuss with any bit of authority. And even we, as investment professionals, are not immune to the suboptimal tendencies that humans have with money – frankly, it’s just how people are wired. Nonetheless, being aware of the fact that our emotions can cloud our judgement with money decisions is the first step for preventing it. We truly are our own worst enemies.

Step One

Step Two

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