The British are leaving! The British are leaving!… and it’s not a good thing.
The confusion caused by the recent surprise outcome of a United Kingdom referendum to choose to “Leave” the European Union has been quite dramatic. The uncertain nature of the choice to leave has been driving big swings up and down in equity prices worldwide since the outcome was announced.
The uncertain process of the United Kingdom leaving the EU leaves the markets feeling extra anxious. There is no precedent and the outcome of the process is impossible to predict. As The Economist points out, there could be years of uncertainty and costs for Europe and the UK.
It is not likely that new agreements will be made that allow much of the previous cross continent economic activity to continue, but it is also possible that trade ties will be reestablished in new ways. The market reaction is reminiscent of a combination of the surprise Black Monday of 1987 and the buildup to the year 2000, or Y2K scare. Both of those market events were perceived to be of great import. After a huge buildup of fear and scaremongering Y2K was famously a non-event. The crash of ’87 was a sudden shock, but the market regained the losses in less than a year as a long period of growth unfolded. This event seems to be getting digested by the market rather quickly as a significant rally moves into the close of the quarter.
In the short term these dramatic and surprising events can feel like the world has fundamentally changed. The hyper speed and computer driven global markets are continuously impacted by sophisticated traders looking to pounce on the volatility created by surprise events. Hot money pours into the market in an effort to profit on fear and certainty, make short-term trades and get out. Volatile price swings day to day are unnerving for long term investors, but likely not meaningful. Ultimately, new treaties will be negotiated and the European continent will move forward to face future challenges and opportunities.
The parade of gloom and doom forecasting will most certainly be ramped up. Media outlets will fill with all types of scary proclamations. Worst case scenario bluster from pundits lining up for their chance to appear in print, online, and televised media thrives on this sort of uncertainty. The surprise outcome of the vote was particularly dramatic as the markets had anticipated the outcome to be a validation of the status quo. Going into the referendum, the market had moved up significantly. These higher prices prior to the surprise “Leave” vote made the selloff even more dramatic.
The complexity of international trade, immigration and regulatory standards will continue to confound and challenge policy makers. Political messaging with a bias to manipulating voters with populist messages make it perplexing to observe the messy process of democracy in the face of complex globalized markets. Angst and a yearning for the “simpler” times of some past golden age are always present but there seems to be a strong thread of this type of thought that is currently prominent on the stage of public consciousness. Greater engagement, more trade, and free movement of people and ideas are likely to lead to better markets, economic activity and higher standards of living.
The Rational Optimist, by Matt Ridley gives us some great and humorous perspective on these trains of negativity in the midst of ever rising living standards.
This should not need saying, but it does. There are people today who think life was better in the past. They argue that there was not only simplicity, tranquility, sociability and spirituality about life in the distant past that has been lost, but a virtue too. This rose-tinted nostalgia, please note, is generally confined to the wealthy. It is easier to wax elegiac for the life of a peasant when you do not have to use a long-drop toilet. Imagine that it is 1800, somewhere in Western Europe or eastern North America. The family is gathering around the hearth in the simple timber-framed house. Father reads aloud from the Bible while mother prepares to dish out a stew of beef and onions. The baby boy is being comforted by one of his sisters and the eldest lad is pouring water from a pitcher into the earthenware mugs on the table. His elder sister is feeding the horse in the stable. Outside there is no noise of traffic, there are no drug dealers and neither dioxins nor radioactive fall-out have been found in the cow’s milk. All is tranquil; a bird sings outside the window.
Oh please! Though this is one of the better-off families in the village, father’s Scripture reading is interrupted by a bronchitic cough that presages the pneumonia that will kill him at 53 – not helped by the wood smoke of the fire. (He is lucky: life expectancy even in England was less than 40 in 1800.) The baby will die of the smallpox that is now causing him to cry; his sister will soon be the chattel of a drunken husband. The water the son is pouring tastes of the cows that drink from the brook. Toothache tortures the mother. The neighbour’s lodger is getting the other girl pregnant in the hayshed even now and her child will be sent to an orphanage. The stew is grey and gristly yet meat is a rare change from gruel; there is no fruit or salad at this season. It is eaten with a wooden spoon from a wooden bowl. Candles cost too much, so firelight is all there is to see by. Nobody in the family has ever seen a play, painted a picture or heard a piano. School is a few years of dull Latin taught by a bigoted martinet at the vicarage. Father visited the city once, but the travel cost him a week’s wages and the others have never travelled more than fifteen miles from home. Each daughter owns two wool dresses, two linen shirts and one pair of shoes. Father’s jacket cost him a month’s wages but is now infested with lice. The children sleep two to a bed on straw mattresses on the floor. As for the bird outside the window, tomorrow it will be trapped and eaten by the boy.
Ridley, Matt (2010-06-10). The Rational Optimist (P.S.) (Kindle Locations 226-230). HarperCollins. Kindle Edition.
The endless stream of surprise and uncertainty always existed. It is humorous to observe people discussing how uncertain things seem “now.” We need to constantly accept that the day of clarity is not coming. The essence a successful investing is a toughness in the face of the mystery that is our future. The urge to build defense or buffers in the face of this volatile reality leads people to crave the feeling of stability or safety. This craving for avoidance of losses causes so many people to allocate in ways that may be too conservative. Just the same as those that succumb to too many cookies at the expense of healthy living.
The Marshmallows in your future
There is an incredible body of research and data that has been compiled by renowned psychologist Walter Mischel, Ph.D. The data reinforces the notion that ability of delaying the urge for gratification leads to all kinds of life benefits as we seize our days.
http://www.cc.com/video-clips/g36k7p/the-colbert-report-walter-mischel
Fascinating evidence and data derived from following the lives of children that showed signs of ability to delay gratification have been studied for many years. The longitudinal data seems to show that those with abilities to buffer the impulse for pleasure at a young age had a higher probability for quality of life and success as adults.
A very informative piece written for the New Yorker by Jonah Lehrer in 2009 can be found at http://www.newyorker.com/magazine/2009/05/18/dont-2
(From New Yorker piece)
In adults, this skill is often referred to as metacognition, or thinking about thinking, and it’s what allows people to outsmart their shortcomings. (When Odysseus had himself tied to the ship’s mast, he was using some of the skills of metacognition: knowing he wouldn’t be able to resist the Sirens’ song, he made it impossible to give in.)
There are so many powerful lessons for investors and those of us that are always striving to live better lives. The power of patience and the ability to wait for portfolios to fully realize their potential is most certainly a key component of successful investing.
Investors are constantly challenged by the urge to take action. The desire to see gains or avoid losses lead to investment decisions when the right path is often one based on patience and the simple but arduous passing of time.
Gratification in the process of investing is one of the most abstract and subtle challenges that often go unnoticed. The challenge never ends. We want gains now and always want to avoid loss. Loss aversion can drive people to simply never invest. The future benefit that we seek is difficult for our psyche to appreciate.
(From New Yorker piece)
What, then, determined self-control? Mischel’s conclusion, based on hundreds of hours of observation, was that the crucial skill was the “strategic allocation of attention.” Instead of getting obsessed with the marshmallow—the “hot stimulus”—the patient children distracted themselves by covering their eyes, pretending to play hide-and-seek underneath the desk, or singing songs from “Sesame Street.” Their desire wasn’t defeated—it was merely forgotten. “If you’re thinking about the marshmallow and how delicious it is, then you’re going to eat it,” Mischel says. “The key is to avoid thinking about it in the first place.”
The approach of our mind to common frustrations such as delayed gratification is likely to have a direct impact on our future quality of life. Abstractions like enjoyment of future savings are much more difficult for our brains to rationally assess than the excitement of a new car of ritzy vacation. At the deepest level, sincere belief and understanding in why we are holding out for a better future by sacrificing some of the pleasures of today is a trait that is precious and must be constantly guarded and nurtured.
The breakthrough that lies in the Marshmallow studies is that even if someone does not necessarily have the impulse control to wait, these tendencies can be learned and refined. Mischel has indicated that our self-control, patience and perspective can be refined through mindful practice and visualization of the future self and life that we wish for.
The desire to repress our fears and push back against pessimism is another area where many can benefit from improving our awareness and skills. The battle with the world’s perpetual stream of negativity and sensational scares is never-ending. Mindfulness training, meditation and complete awareness of the tough road ahead are techniques that can help prepare for success. Turning off the news can also help, (haha).
The good news keeps quietly rolling in and few are talking about it. US economic data that shows massive recovery from the brutal stretch in 2007-2009 has been pretty consistent. In light of today’s perceived troubles, it may be helpful to remember how resilient the modern market and economy has shown itself to be.
Low interest rates and falling unemployment are pushing down problem debt contrary to the pessimism that we are hearing in the political realm. There is certainly lots of pain in sectors of our economy, but growth and economic progress have been more robust than is commonly indicated. Wealth is also rising; of course those at the top are getting a disproportionate share. The imbalance at the top is a big challenge for our capitalist democracy.
It does not seem that long ago when there were stories that 20-50% of all United States home mortgages were underwater. Now in 2016, the housing and debt story is much different. According to the Wall Street Journal: Meanwhile, as credit scores are rising, defaults are near record lows. Some 0.81% of consumer loan dollars—including mortgages, auto loans and general-purpose credit cards—were in default as of May, the lowest level in records going back to 2004, according to the S&P/Experian Consumer Credit Default Composite Index. This is down from 0.88% a year ago and a peak of 5.51% in May 2009. Much of that improvement is due to plummeting mortgage defaults in recent years.
“People are putting those delinquencies further and further in the rearview mirror,” said Ethan Dornhelm, senior director of scores and analytics at FICO.
Borrowers also are managing their debt more responsibly, with fewer incidences of defaults and collections. Some 11.8% of borrowers were 90 days or more past due on at least one debt obligation during the 12 months through April, down from 13.3% during the 12 months through October 2013, according to FICO.
http://www.wsj.com/articles/consumers-improving-credit-scores-give-banks-reason-to-cheer-1466587801
It is also very encouraging to note that total American Wealth has hit record levels.
Innovation is where those who want to rise to higher levels of wealth will always gravitate. The power of efficient energy, lighting technology and American ingenuity are poised to create an entire new industry of indoor farming. It is likely that the march of American ingenuity along with continual decline of in the cost of things that until recently were out of reach will create entire new branches of the domestic and global economy.
Indoor agriculture is the type of innovation that will address many of the challenges presented by a growing urban population globally and the great challenge water scarcity.
http://www.wsj.com/articles/are-shipping-containers-the-future-of-farming-1465393797
On a personal note, I was in the incredible position to write this anniversary message to my wife recently…
Rhonda, My Love:
25 years ago I closed the Greatest Deal I have ever made.
I am in awe of our life together. I am grateful and happy to have such a wonderful partner and love in my life. I see every day the great fortune of our beautiful daughters and the strength that you give all of us with your love, patience and willingness to help with whatever and whenever you are needed.
You and I have had so many blessings, great moments, wonderful days, and precious time. I am looking forward to even more of these in our future.
I am so very lucky to have you by my side as we go forward together.
Yours Forever,
David
I want to say that another anniversary for me this year will be my 24th year as a financial advisor. I am so very fortunate to have so many wonderful relationships with all of you. I am looking forward to being here for all of you and helping you make the best decisions each and every time I can help. I want to again express my infinite gratitude for the continuing chance to work with you all to help maximize your financial future. Stay with this, there is very likely great rewards to come for those who wait.