Avoid Hyperbolic Alarmism (AHA)

The main investing lesson from the past two years is to avoid alarmist hyperbole

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I’ve been thinking about what lessons there are for investing from the past two years. The first - and by far the most important in my view - is to ignore alarmist hyperbole. Just think back to this time last year when the US losing reserve currency status was hotly debated. No one’s talking about that now and - more importantly - no one takes this topic seriously these days. It’s similar with the $200 oil crowd that was so vocal in March and April. The war with Iran continues to fester and tanker traffic through the Strait of Hormuz is far from normal, but no one takes $200 oil seriously any more. The second is that coverage of the Trump administration - in the media and in the broader discussion - tends to be too negative because it’s politically motivated. I don’t want to sound like I’m defending this administration, but not everything it does is awful. Just think of its Russia sanctions, which have been very impactful, something that always gets omitted from stories about how Trump is beholden to Russia. Or think of recent coverage of the Fed under Warsh, where a lot of the criticism feels political.

The reason this stuff matters is because there’s money on the table. Leaning the other way from the hyperbole means you don’t chase momentum but are a contrarian. You were shorting oil back in March and April and were long the Dollar this time last year. Both things would have made you money. If you tune out the negative coverage of this administration, it’ll be harder to miss that the economy looks reasonably healthy, even after yesterday’s weak retail sales report. You’ll be less inclined to cash out of the S&P 500 and miss what’s been an eye-watering rally. Again, none of this is about defending the administration. It’s about filtering out noise that’s politically motivated.

Let me start with hyperbolic alarmism. There’s no question many of the things this administration does are unorthodox and - sometimes - poorly executed. But the global economy and the position of the US within it are incredibly resilient. That’s the lesson we’ve learned from the past two years.

• Loss of US reserve currency status: the Dollar fell sharply after what can only be described as a chaotic rollout of reciprocal tariffs, but it’s been much more stable since last summer as the chart above shows. More importantly, reserve managers haven’t piled out of the Dollar. Their allocations to the US have been unchanged from before Trump took office as the chart below shows. This isn’t to say current policies aren’t doing damage. They surely are, but in a very incremental fashion. I should add that I’m a Dollar bear and expect the Dollar to fall around ten percent this year. That’s a cyclical view reflecting my firm belief that the Fed won’t hike and therefore has nothing to do with reserve currency status.

• $200 oil: there’s two big lessons from oil not going to $200. The first is that the price elasticity of demand is bigger than most people expected, so there was more demand destruction for a given rise in prices. The second is that supply chains are way more robust than $200 gave them credit for. Countries across Asia pivoted to import oil from Canada and other places, which helped keep their manufacturing going. This spread out globally what would otherwise have been a very localized shock with way more disruption. The fact that $200 didn’t happen makes markets now reluctant to push oil prices higher. That opens the door to complacency and an insufficient risk premium.

Coverage of the Trump administration is unrelentingly negative. I’m not a fan of many things that are happening either, but not everything is bad. It’s important to look through the political and insider bias that pervades much of the coverage.

• Biased coverage: yesterday’s weak retail sales are a great example how biased things have gotten. The chart above shows retail sales volumes. These did fall in yesterday’s data point for July, but that was after a massive rise in prior months. The truth is that the activity picture in the US is totally fine. Another example is Russia, where the administration’s sanctions on Lukoil and Rosneft in October of last year pushed down sharply the price of Urals versus Brent as the chart below shows. This gets conveniently omitted from coverage of Trump and Russia. The bottom line is that data and actions speak louder than words. Things aren’t nearly as bad as some of the headlines you see.

• Kevin Warsh: the issue of biased coverage is especially live for the Fed, where it feels like markets see Warsh as someone who promised cuts to Trump and are therefore determined to push him into hiking. That’s a terrible thing for markets to do, because data will always override conspiracy theories. This played out this week with two dovish inflation readings and weak retail sales and - as the chart below shows - markets are starting to pull back on their expectations for hikes.

The bottom line is that the middle of the road is a good place for investors. Ignore hyperbolic alarmism when it comes along and - one thing we can be sure of - there’ll be more of that ahead. Bear in mind also that a lot of chatter on this administration skews too negative. That’s not to say everything that’s happening is great. It definitely isn’t. But many things aren’t quite as bad as they seem or - sometimes - actually better than meets the eye. Just focus on the data and ignore the chatter.