Is Milton Friedman above the law?

Happy Friday!

No weekly due to the short week, but let me know if you want to send something out and I’ll forward along an evergreen piece. 

It’s back!!!

I wrote the following back in 2019:

An advisor reached out and asked what I thought about Jeff Gundlach and his predictions. He is apparently out there saying the chances of a recession next year are 40%, and this spooked some of his clients.

I try to steer clear from criticizing billionaire investors, but the second I heard 40% I started to laugh. Anytime you hear a “40% chance,” you have full authority to shred whomever vomited out that number to you. Calling 40% has been used by thousands of pundits in everything from weather forecasting to presidential elections. Here’s why…

If you end up being right, you look like a genius. You can say, “See I told you!”

But if you are wrong, the odds were against you. You can say, “I didn’t say it was going to happen… Just that it was possible. Would you cross the street if there was a 60% chance of getting hit by a car?”

This is a great way for forecasters to appear bold without being bold. Because the nice thing about 40% is you never have to say you were wrong. Saying the odds of a recession are 40% and it not happening next year will actually confirm Gundlach’s call… That the odds of a recession were against one happening!

Gundlach is the Lebron of fixed income –  God given ability, one of the best bond investor of all time, but also can’t keep his mouth shut on non-bond subjects. Lebron likes to opine on why an MIT educated colleague of his does not fully understand the situation in Hong Kong, and Gundlach frequently makes predictions on equities which have almost always been wrong. Maybe that’s why he’s now going with 40% – to verbally hedge his bet and reputation. 

Also, let’s put our conspiracy theory cap on for a moment and ask ourselves why the current “bond king” is once again calling for material risk to equities? Could it be to get investors to sell stocks and buy more bonds? Concurrently, is Lebron’s public support of mainland China a result of the fact that their economy is rapidly making him a billionaire?

The bottom line is that the only logical response to any 40% prediction is laughter and public ridicule (whenever possible). 

I’ve lost count of the number of headlines and reports lately that point to a 40% recession next year. Just google “40% chance of recession”. Even Goldman came out with a 30% chance next year and 48% in two years. So brave!

To be clear, I’m not attacking the integrity of Wall Street research. The quality of their product already does that for me. All I’m saying is that placing odds on when a recession will arrive simply isn’t additive.

Why all the fuss?

Steven Segal famously opined in this seminal 80’s masterpiece, Above the Law:

“The anticipation of death is worse than death itself.”

I feel like this sage advice can be applied to this collective fear of an impending recession. Why is everyone so freaked out? Who could possibly be happy right now paying $6.50/gallon to go stay in a 400 sqft hotel room at $1,600/night? Do we really want that to continue?

Furthermore, name one business owner and/or manager who wants this “work from home” movement to continue. Just one. I can’t. 

I’d wager that any manager dealing with this lunacy right now is counting down the days before the avalanche of employees come barreling back to the office – each praying that they make it through the door first so they survive that inaugural round of layoffs. 

In fact, I think a recession could be exactly what our country needs. Here’s why.

First, it’s a natural process of any business cycle, and these downturns create the foundation for future growth every single time. It’s Darwinism at its finest – the strong get stronger and the weak die off. 

I’ve always loved this savage quote from Andrew Mellon (Treasury Secretary to Herbert Hoover) who said this as the country was falling into the Great Depression in 1929:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

Talk about ice water in the veins. It’s impossible to not respect a man like that.

Second, as Shelby Davis once said:

“You make most of your money during a bear market, you just don’t realize it at the time.”

Here’s another quote that I read earlier in the week from Eddy Elfenbein’s top tier blog, and it’s spectacular:

“Wall Street is the only place where a sale is announced and everyone runs out of the store screaming.” 

See where I’m going here? For those investors who can be patient, we could be seeing some incredible opportunities.

Third, I’m tired of talking about it all the time. Recessions usually don’t last long, and by the time we’re in one, the stock market tends to rip higher in anticipation of the recovery.

In fact, I’d wager handsomely that this one will be more of a cookie-cutter recession. As in, the tail end of a business cycle versus the systemic risk and accounting stupidity that ignited the financial crisis.

Furthermore, given the speed of markets these days and the overall health of corporate balance sheets and margins (relative to prior cycles), I’d say there’s a 40% chance that the next recession is shorter than the historical average. 

So, the next time a client comes in your office freaking out about the next recession, hand them one of these. Tell them to go home, pour a cocktail, turn on the TV, and pay attention. There’s no better prescription right now.

God amongst men

Milton Friedman has shaped the way I view the world in more ways than one. He wrote a three-page paper back in 1980, where he compares inflation to alcoholism. It’s stellar, and since I’m in the quoting mood today, here’s a doozy:

“Inflation is just like alcoholism. In both cases, when you start drinking or when you start printing too much money, the good effects come first, the bad effects only come later. That is why, in both cases, there is a strong temptation to overdo it—to drink too much or to print too much money. When it comes to the cure, it is the other way about. When you stop drinking, or when you stop printing money, the bad effects come first and the good effects only come later. That is why it is so hard to persist with the cure. In the United States, four times in the 20 years after 1957 we undertook the cure, but each time we lacked the will to continue.”

Will the current government have the ability to stick with the cure? I’d wager there’s a 40% chance.

This is fun

This website has nothing to do with investing, but having been a world traveler before kids, I found it to be pretty fascinating: