This special guest commentary was written by Peter Atwater of Financial Insyghts.
Survival Instincts
“I survived the corona virus scare of 2020”
If the T-shirts haven’t already been printed with the tag line above, they soon will be. And with that another “scare” shirt can be added to the pile. The past couple of years have been a golden age for custom printers. Investors have been scared more than kids in a haunted house and now have drawers full of novelty-wear to show for it.
Earlier this week, I joked on Twitter that there are so many dead canaries at this point that miners must think the floor has yellow carpeting. Every possible risk has been trampled. Greece is the new one percent.
What is so worrisome to me, though, about investors’ trampling of the corona virus, isn’t that they fully discounted a pandemic, but they did so immediately. Fear - if can call a 7-point rise in the VIX that - lasted less than the virus’ own incubation period. As Bloomberg’s John Authers pointed out with this chart, investors played fortnight.
After two weeks, when the Economist cover landed, it was game over. Time to move on.
To be fair, things are naturally accelerated here. But I fear that we are reaching a dangerous tipping point with respect to investors’ ability to focus. Like an exhausted boxer in the ring, the hits to the head are coming so quickly and violently that investors can no longer make sense of it all.
Take yesterday, for example. Just imagine the challenge of paying close attention to Fed Chairman Jay Powell’s testimony to Congress amid a live tweet-stream from the President on the market’s reaction to Mr. Powell’s own testimony.
Dog became tail and tail then dog with investors running in circles.
To be clear, I am not blaming the President. Mania is reflexive.
But mania is also exhausting. Attention requires glucose and with so many things popping at once, and with Twitter and TikTok turned up to "11" 24/7, there isn’t enough Gatorade in the world for investors to keep up. So rather than even try to focus at this point, they simply move on to the next big thing that hits.
Here, though, is where the President’s own impulsive decision-making matters and where investors’ greatest risk rests.
There are two fundamental qualities that transcend the President’s behavior. Love them or hate them, Mr. Trump’s policies are discretionary and transitory. Control and certainty – the two requirements for confidence – rest entirely with him.
With the President’s obsession with the financial markets on full and frequent display, investors have come to believe that while discretionary and transitory, all Trump policies ultimately favor their interests. When pressed, the President won’t do anything to jeopardize stock valuations.
While that may be, his decision-making behavior is inherently confidence-reducing. Businesses can’t plan amid policymaking that is discretionary and transitory, nor can investors allocate capital strategically. The net result is that below the surface of our all-time records, we now have financial markets and an economy operating in full “me here now” mode.
Dog is tail and tail is dog with everyone running in circles.
Right now, investors view those circles as a virtuous cycle, but I would caution that with everyone in “me here now” mode, that can easily turn into a far faster vicious spiral. As I offered above, beyond the President, perceptions of certainty and control don’t exist today.
Last week, I offered that the sudden flash mob at Tesla cautions that even our manias have become manic. Speed is at an all-time high, with scrutiny and focus at a minimum.
Cognitively it feels like we rapidly approaching exhaustion. It isn’t that investors don’t want to pay attention, it is that cognitively they no longer can, especially to concepts as abstract as pandemics. So, instead, they move on, hoping that as with every other scare, their luck doesn’t run out. (And not to dive too deeply into American politics, but the same can be said for Washington.)
Not to be shrill, but it feels like we’re rapidly reaching the point of cognitive overload.
I don’t know what the tipping point will be, but history suggests that shared cognitive overload is inevitably followed by panic. When things don’t make sense to everyone at once, the crowd moves violently. We flash mob seeking certainty and control for ourselves.
Unless the pace unexpectedly slows down here, a major flash mob now seems inevitable.
Editor's Note
This is a Hedgeye Guest Contributor note written by Peter Atwater, founder and president of Financial Insyghts. He previously ran JPMorgan’s asset-backed securities business. He is also the author of the book Moods and Markets (FT Press, 2012) which details how investors can improve returns by using non-market indicators of confidence. This piece does not necessarily reflect the opinion of Hedgeye.
