Jason Trennert, chief investment strategist at Strategas Research Partners, appeared on Bloomberg this morning explaining why he thinks the US is entering recession along with Europe, Japan and China in hard landing, and that this presents downside risk to earnings, GDP and global stock markets.
1:57 minutes into his cogent, well reasoned discussion, co-host shopaholic Sarah cuts to the chase: “but can you really afford to be out of the stock market?” This is where the discussion perfectly reveals the madness and futility of the mainstream money management business with its perpetual stock allocations and benchmarking. Trennert pauses: “ah…if you’re a professional investor…not really…hard to be out…but you can’t plant your feet…you can really get run over.” Later he goes on to explain that prices are too high given the economic reality and then again “if you’re a professional you have to be involved, clients are still going to hold you to the standard of what the actual market did.” (really? even when markets drop 20-50%?) He then repeats his view that central banks have unduly driven up stock prices which are not supported by fundamentals, and that a day of reckoning is inevitable. This logic equates to this: things are very dangerous, but then what is a poor perpetual allocator to do but to keep capital in harm’s way anyhow? Isn’t that what you hire a professional to do with your savings?
The capital-destructive thinking here is endemic to a business that is paid not to manage risk, but to throw capital blindly into slot machines. “Professionals” running money is actually a euphemism. In truth the money they are “running” is the savings of real life people. So if constant stock allocations are dangerous for individuals, why in the world is it prudent for the so called professionals managing the savings of those individuals to keep shoveling those savings into the market fire when the odds of significant loss heavily outweigh the prospects for lasting gains?
This would be like hiring an engineer to design and oversee the construction of a skyscraper and then the engineer not bothering with measurements or prudent practice, saying that they have no choice but to be reckless because the client does not want any pauses or delays–doesn’t want them to dwell on risks–just wants the engineer to keep taking their money and piling on the girders. If the engineers are all doing it this way and the buildings inevitably collapse, could they then take refuge in the fact that all the other buildings fell down too?
This is the kind of professional the world can do without and is the very reason that mutual funds and conventional managers have continued to see massive outflows and redemption’s by unit holders over the past 10 years as they have repeatedly risked and lost client capital. Clients that think they want returns “with the market benchmark” don’t understand that this also means following the indices down into the depths of bear markets. A “professional” that adds no care or expertise is not a service worth paying for. The truth is that it is easier to collect assets and constantly toss them in than to think, measure, worry, weigh probabilities and manage risk. Valuable leadership and expertise are not a popularity contest that seeks to look busy and happy-go-lucky. Valuable managers do the right thing for the client especially when it is unpopular because they know that over time this discipline and care will make the difference between those who thrive, and those who suffer repeated loss and hardship.