3 Things I Think I Think

1)  What an amazing year in the stock market.  Just how good has it been?  Well, the historical standard deviation of the S&P 500 index is about 19.5 going back to 1928.    This year the standard deviation is a little under 10.  That means we’re seeing half of the variance that we normally see in the market.  If you’ve had ANY overweight in stocks this year your risk adjusted returns likely look pretty good.

Even more amazing is the relative performance.  With gold and silver down about -30% this year the S&P 500 has outperformed a 50/50 gold silver portfolio by almost 60%.  And the long bond is almost as bad with a relative performance of -40%.  Unbelievable stuff.  We probably won’t see a year with this kind of divergence for a long long time.

2) Margin debt hit a new high in October.  I know, I know.  Margin debt doesn’t matter.  Hear me out.  I track margin debt because I think it’s a sign of potential growing imbalances.  It is a clear sign that more people are using debt for unproductive purposes.  And it’s also a clear sign of risk appetite.  I wouldn’t call this “bullish” or “bearish”, but it does give a pretty good idea of risk preferences and contrary to popular opinion, market risks actually tend to rise as prices rise, not as they fall.  When combined in a broader macro view this is just one of many indicators that can be used to gauge where we are in the cycle.

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3)  Market practitioners and economists should collaborate more.  In a recent post at his website, Paul Krugman says “We don’t seem to need different economics as much as we need different economists.”   We don’t need new economists.  We need economists who are willing to try to really understand the real world of economics.  To me, this means we need more overlap between market practitioners and economists.

Economists who don’t understand banking, accounting, financial markets, etc are not going to have a good grasp on the modern macroeconomic landscape.  They just can’t.  The banking system, financial system and the economy are tied at the hip.  To understand one you have to understand the other.  It’s time for more overlap and collaboration between those who work in the trenches (the practitioners) and those who write the textbooks (the economists).  Otherwise, the economics profession is destined to remain dismal as the economists theorize about things that don’t actually apply to the real economy and young economists just regurgitate the same old myths that have been filling up textbooks for the last 50 years.

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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