Why today's markets still don’t get that economic change takes years, not tweets.
KEY TAKEAWAYS
MY HOT TAKES
La Conquête du Monde. All right, let’s get something clear: I do not speak French, but this bit of French was a big part of my youth. Have you figured it out yet? You have to be a real enthusiast to know this one. That, my friends, is the original title of the board game Risk. If you couldn’t wait and simply asked Google to translate it for you, you would know that it translates into “The Conquest of the World.” The game's birth came a bit before mine in 1957, but it was still popular when I was old enough to spend hours playing it with my best friend from a few doors down. Yes, the very same friend who managed to throw his Cub Scout knife through my Converse sneaker and miss all my toes (hopefully you read my blogpost about playing chicken).
When I say “hours,” it was probably more like minutes. We were, after all, young boys hopped up on peanut butter and fluff sandwiches, chocolate chip cookies, and Kool-Aid. I am sure there were sliced apples and carrots, but those were mostly left uneaten. We had lots of energy and the wilds of our yards and exploration by bike were constantly calling. That said, we did our level best to follow the instructions and play the game through, but it took thought, and in retrospect, I am pretty sure that we missed the whole point of the game. Imagine fashioning a global empire in mere minutes.
Later on in life, I found myself beguiled by Alfred Eichner, renowned Keynesian economist–AND MY FRESHMAN PROFESSOR. I would learn about what the economy is made of and how it could be manipulated to perform well. It all seemed so simple to me, as he was a great speaker. I took many of his classes, including Marxian Economics, which at the time, during the cold war, was not exactly popular with its required reading of The Communist Manifesto. Many more classes in economics followed, theoretical, mathematical, statistical (econometrics), game theory, labor, international… a lot of classes.
When I went to Wall Street with all that knowledge, I brought with me a few nuggets of economic wisdom; here is a sample: the domestic macro economy is complex, global economies are yet more complex, companies/firms are rational, and the basic of all economic tenets, more is good.
On a Treasury trading desk in the 1980s/1990s, understanding economic indicators was paramount to any level of success, but it was not as simple as it seemed in the massive freshman lecture halls. How would I convert what came across the tape at 8:30 AM into profitable trading in the minutes that would follow the release? I tried desperately to simulate the markets with complex models built in spreadsheets (Lotus123 at the time) and Unix’s S language (the precursor to today’s R language and even a good portion of Python). Despite the herculean effort, I could not figure out how to get the leg up on my more seasoned (that is a nice way of saying older) colleagues and the superstar fund managers that were the clients of my firm. And then one day it came to me. 💡
I had the timing all wrong. Some indicators were lagging, and others (only a scant few) were leading. Then there was policy, fiscal and monetary. Mind you, I was having these epiphanies when Ronald Reagan was in the White House. Alan Greenspan ruled at the Fed, taking up the baton from Paul Volcker who used nosebleed interest rates to fight inflation. Reaganomics, another term for supply-side economics, was completely counter to the Keynesian theories that Professor Eichner professed. But it was fast times on Wall Street, and we embraced tax cuts, trickle-down economics, reduced government, and deregulation. These strategies relied on the markets to be successful. So, who was right? Eichner and Keynes, or Arthur Laffer and Ronald Reagan?
The reality is, we may never know. Why? Because economies take time to respond to stimuli. I realized as I sat on that frantic trading desk, that policies enacted in that year might take several years to play out, despite best efforts. In fact, it may even take more than the 4-year term of a President to show signs of success. Unfortunately, my success as a trader was measured month by month (or even minute by minute). As you may be realizing at this point, that moment is where I began to appreciate the long game.
Yes, the long game, which my regular readers know, is what I profess in most of my closing narratives. Today, in a world where board games collect dust in closets, we crave lightspeed feedback. It takes massive amounts of energy to apply patience to anything. Imagine a world where the US is fairly treated by its trading partners, where manufacturing returns to US soil, intellectual property is respected, and security is tight. Those are noble goals that can be embraced by all, regardless of political affiliation. But how can that be achieved? Can economic policy affect change? Of course it can. But here is the thing. IT CAN’T HAPPEN OVERNIGHT.
Unfortunately, that message must be heeded by not only policymakers who seek instant results, often abandoning strategies before they play out, but also by investors who are often too quick to respond to temporary market conditions. I was a bit concerned as I watched yesterday’s markets respond to the weekend’s reports that the Administration might limit the next wave of tariffs–the ones that were already tweaked several times–and it is still unclear what those tariffs will ultimately look like or how long they might last. Folks, this is a long game. If we want the results we seek, we need to remember that even the game Risk takes 2 to 5 hours. According to ChatGPT, an average game of Monopoly takes 1 ½ to 3 hours. The Game of Life 1 to 1 ½ hours. I lost track of who won more games, me, or my friend, but I did learn how to play the long game… eventually.
YESTERDAY’S MARKETS
Stocks rallied yesterday after weekend reports surfaced that Trump would offer a measure tariff approach on ‘Liberation Day,’ next week. Traders cheered pushing shares of beaten-up growth stocks higher. Snap Purchasing Managers Indexes showed strength in the services sector with a beat, while manufacturing sunk back into contraction, missing economists’ forecasts.
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