There's a Bull Market in Macro Doom

I quickly identified the source of his information, and suggested he lay off the doom porn. He took offense, and I haven’t spoken to him since. The S&P 500 Index is up 250% since the end of 2011.

It’s unproductive to be monotonically bearish and thinking bad things are going to happen all the time. But it is good to be skeptical — and there is a difference. For example, I thought that good questions were being asked about the adverse effects of index investing a few years ago, and I was one of the people asking those questions.

I pointed out that flows into index funds concentrated ownership into a handful of mega-cap stocks, leading to a phenomenon where big stocks get even bigger and dominate the returns of the index, making it even harder for active managers to outperform — which is exactly what played out.

There were lots of skeptics of Cathie Wood’s investment strategy of buying the most expensive technology companies with promising technologies, and they were handsomely rewarded if they got the timing of the trade right.

Inherent in a skeptical argument is the knowledge that there is an imbalance or distortion, but it is probably going to continue because markets always correct. Being skeptical, rather than bearish, keeps you out of trouble.

To be sure, being monotonically bullish is slightly less dumb. Stocks go up over time with increasing earnings and economic growth, as everyone knows.

But there is no rule that stocks must go up. There was one period in history, from 1929 to 1946, when they went down for 17 years.

That’s a long time to ask an investor to dollar cost average their basis lower. Though with the knowledge that stocks usually do rise over time, it makes sense to be positioned for future gains along with a healthy dose of skepticism to help manage your risk.

The macro doom crowd is made up of very smart people, and they’re definitely fun to hang out with. Plus, it’s good to have a diversity of opinions that challenges established narratives. It’s no secret that the great trades usually start with some crazy person tweeting into the void, like Michael Burry of “The Big Short” fame.

Maybe the macro doom crowd will be proven right this time. It sure doesn’t seem like the current high inflation rates will be coming down anytime soon without drastic action by the Federal Reserve, which it seems hesitant to do.

Who am I kidding? Everything is going to be OK. Maybe.

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Jared Dillian is the editor and publisher of “The Daily Dirtnap,” an investment strategist at Mauldin Economics, and the author of “Street Freak” and “All the Evil of This World.” He may have a stake in the areas he writes about. He is on Twitter @dailydirtnap

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