The Betrayal of Conventional Wisdom

I was just tryin’ to make the right mistake…

—Robbie Robertson

Wall Street suits, with no skin in the game, find it convenient to blithely project outcomes in the economy based on what “ought” to happen. “It’s time for capex,” my broker says. “…We think that some of the $1.7 trillion cash on corporate balance sheets could go toward capital expenditures this year, given the aging capital stock…We offer a screen of stocks that may benefit from increased capex…”

And, if we bother to check these guys’ error rates, we will find that they are wrong every time because the impetus for economic activity is social mood, not need. It may be counter intuitive, but you have to know if corporate America felt good about their future they would draw down that dough to modernize. If they felt really good, they would be borrowing to expand. They don’t feel optimistic. On the contrary, the cash stash reflects caution.

The collapsing market tells us that social mood is headed south. It will only get more fearful between now and the bottom of the market and the economy. “…our chief North American economist expects GDP growth to accelerate to about 3% this year, up from an estimated 1.7% growth in the first quarter,” reads the current report. Fat chance. Look for these guys and their colleagues on The Street to eat these words as the year progresses. I feel bad for their clients.

I said in my March 26 post that I felt that the bear market would resume in earnest in April. The decline is now happening in impulsive fashion. The next twenty four months will be the most difficult in the last two hundred years for investors. There are two reasons to be accepting of this outcome: 1) It won’t last long, and the values available to investors in all classes of assets will be extraordinary at the bottom. 2) The excesses in the financial system will be eliminated or significantly diminished as a result of the natural action of the market. Historically, this has been the only way the economy was purged of the self-dealing by the sociopaths that end up in power after a long bull market.

We just have to be patient.

Cheers,

Rod

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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