This week, I will start Common Cents with a passage from George Orwell’s dystopian classic 1984.
“To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy was impossible and that the Party was the guardian of democracy, to forget whatever it was necessary to forget, then to draw it back into memory again at the moment when it was needed, and then promptly to forget it again: and above all, to apply the same process to the process itself. That was the ultimate subtlety: consciously to induce unconsciousness, and then, once again, to become unconscious of the act of hypnosis you had just performed. Even to understand the word ‘doublethink’ involved the use of doublethink.”
What does this sound like to you, this doublethink, or should I ask who does it sound like? I suppose the answer is up to the individual. If you tend to lean more conservative (or what passes for it these days), I imagine this sounds like what the Democrats and mainstream media have been trying to do for the last four years. If you are more liberal (or, again, what passes for it these days), I suspect you are convinced this is what the Trump Administration has been doing, not trying. Am I right?
Ah, doublethink! At one point in my life, you were merely an essay question on an English exam. Today, you are what passes for news in our society, or seemingly so, because it is hard to determine the truth anymore. Perhaps this is the natural, ultimate outcome of a materialistic society free to speak its mind: cynicism. Maybe it is the technology which allows everyone to have an opinion on everything. What happens when the sheer supply of opinion swamps the public’s demand for it? Just like anything else when supply is greater than demand, it goes down in value, potentially to worthlessness.
Voila. There you have it. The worthlessness of our opinions has bred our current cynicism. This presents a problem for middle-aged men who write weekly newsletters as part of their livelihood. Ha, or should it be: ha, right?
It hasn’t been too terribly long ago when the average person had to exert a little effort to have a public opinion, on anything really. The best outlet for someone wanting to bent their spleen was probably the ‘letters to the editor’ section of the newspaper. As implied, you had to physically write a letter to the editor, and someone from the paper would follow back up with you to: 1) to see if you were the person who actually submitted the response, and; 2) whether you still wished to have the paper print it.
As a result, it was significantly harder to spread what we now call ‘fake news,’ and there weren’t as many trolls whose primary purpose in life is to stoke societal discord. There were essentially two types of people who had public opinions: 1) those who cared passionately about the subject, and; 2) crackpots, who were usually pretty easy to spot. Today, you can simply set up a social media account with a bogus name and a purloined picture and spout off at the mouth on any topic you please, the more salacious the better. Heck, your hobby of [messing] around on social media can garner you followers, and, if you get enough of them, you can actually make money from advertisers.
The truth? Who cares about the truth if there is money to be made on Twitter, Facebook, etc., by fomenting discord? By being ridiculous? By trolling? All the while being anonymous to co-workers, friends, and family members!
This explosion in this type of behavior and the sheer number of people hitting various news sites/outlets has fundamentally changed the news industry. For instance, back in the day not so long ago, the newspaper in a city like Birmingham competed largely with itself, for all intents and purposes. As a result, it couldn’t step too far out on a limb without running the risk of alienating potential subscribers and, therefore, advertisers. To be certain, the bias at any individual paper leaned this way or that; however, reporting was more neutral by economic necessity.
Larger cities, like New York, had multiple newspapers due to the sheer size of the market. As a result, they could ‘afford’ to be a little more opinionated in their bias. This usually led to a more liberal newspaper and a more conservative one, but everyone knew the drill. However, great extremes? Naw, the Times didn’t want to unnecessarily push too many people to the Post.
Today, the potential market for a news outlet comes literally from around the world. There are hundreds of millions, if not billions, of potential ‘eyeballs’ and subscribers. As a result, there is no reason not to skew the bias and coverage, potentially significantly. Further, there is every economic incentive to do so. To be, again, salacious. To produce headlines which garner clicks, likes, and shares. To understand your market is a subset of a much larger global market, as opposed to a somewhat limited geographic area. To ultimately get to a point where ‘your brand’ is a specific type of news, or news with a definitive slant, as opposed to the simple, impartial regurgitation of facts. There isn’t any money in that any longer.
I would argue this is where we find ourselves today.
Wait a second Norris. You wrote about 550 words ago or so, how opinions are so ubiquitous as to be worthless. Apparently, they aren’t if news outlets are getting eyeballs and advertisers by having strong ones. Right? Perhaps, but what if I argued if the intellectual thought process behind the media’s opinion isn’t the value-added proposition? That it is the validation they provide to the worthlessness of the public opinions of the unwashed masses? See you aren’t alone! There are others who believe like you do! You have value. You have worth.
As a result, I imagine people login or tune into to, say, CNN to get a certain type of news that meets their particular worldview and personal biases. The same could be said of Fox News. People who tune into Chris Cuomo, Anderson Cooper, Don Lemon, and/or Erin Burnett during weekly primetime know what they are going to get: a steady drumbeat of what an [ignoramus] Donald Trump, and presumably anyone who would be dumb enough to vote for him, is. They don’t have to be neutral, providing the ratings generate enough advertising dollars. The same could be said for folks turning on, say, Sean Hannity at night. They watch to hear more about how Northeast and left coast liberals are destroying America, and to yell when a picture of AOC or Nancy Pelosi pops up on the screen.
Oh…there is money to be made by being divisive. It is a good thing actual data drives the investment markets far more than sensational headlines.
You may or may not be surprised the number of times a client, co-worker, or prospect asks a member of our investment committee something along the lines of the following: “how can you make sense of all the horrible news that’s out there? It seems like the world is falling apart, and, still, the market keeps going up and up and up.” Personally, I get a variant of that question at least once a day, at least. It all depends on how many people with whom I interact, nothing more. In response, I typically say something along the lines of: “all of the headlines and opinions are mostly meaningless. Over time, the markets tend to respond best to facts, as opposed to rumors or conjecture. Eventually, it all comes back to economic activity and corporate profitability.”
So, here are some of the facts we have been imparting on people who ask:
- History suggests you can’t fight the Fed. Good things tend to happen when it throws money at the markets, which it has been doing.
- The US consumer is the biggest component of the US economy. Low energy prices and low interest rates have historically been tailwinds for domestic consumer expenditures.
- While a short-term inversion in the yield curve might not be a perfect predictor of an economic recession, all recorded recessions have had an inverted yield curve as a characteristic prior to this manufactured one. Right now, the yield curve is positively sloped.
- The money supply is growing nicely.
- Leading economic indicators have been strongly positive for the last 4 months.
- The US banking system currently has plenty of liquidity, and are in much healthier shape than they were leading into the 2008 financial crisis.
- The fixed income markets provide very little potential for a strong positive rate of return.
- Cash isn’t paying much of anything, well less than the rate of inflation. It isn’t even close.
- The dividend yield on the S&P 500 is currently greater than the yield to maturity of the 30-Year US Treasury Bond.
- The current P/E multiple on the S&P 500 is higher than the historical average.
- The current Earnings Yield of the S&P 500 (E/P) is much, much higher than the yield to maturity of any US Treasury security.
- Without another relief package out of Washington, another lockdown of the economy like we had in the Spring will absolutely crush it. While that might sound like an opinion, it isn’t.
That is where we are. Those aren’t political opinions, and no sensible person could argue with them without veering off into conjecture. Those are the current facts, and the current facts suggest US equities offer the highest potential for a meaningful, positive rate of return of any primary, domestic ‘paper’ asset class. While clearly an opinion, it is one based on facts and experience, as opposed to trying to rile up people or otherwise foment dissent and division. As Sgt. Joe Friday said all the way back in 1953: “All we know are the facts, ma’am.”
In an age when the media engages in almost dystopian disinformation, it is kind of refreshing the investment markets still boil down to cold, hard facts. To be certain, investment managers have to have opinions about the future, but they generally base them on historical observation and experience, as opposed to pure political bias. After all, there is more money to be made in being right than by being an idealogue.
In that way, while the world around you might seem like Orwell’s 1984, and I think it sort of does, you can sleep easy at night knowing the markets will always ultimately seek out the truth, whatever the truth may be. After all, long-term, opinions are basically worthless, and no one ever made money by ‘loading the boat’ with worthlessness.
Take care, and I hope everyone has a great weekend.
John Norris
Chief Economist
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.