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The Raven of Zurich

The danger comes when the authorities interfere with interest rates, he said.

The crash will come from the gap between appearances and reality, he said.

He wasn't talking about the Great Financial Crisis (2007-08). Nor was he talking about Covid-19 market disruptions (2020), or the worst year in history for bonds (2022). But it seems plausible that he could have been describing any such times. He's not Warren Buffet, Cathie Wood, or Ray Dalio. You've likely never heard of him.

He's Felix Somary.

He was the Raven of Zurich, and has been dead for 60 years.

And John Maynard Keynes, a famous British economist, met with Somary, this lesser known, ominously nicknamed (and foppishly dressed) Swiss banker with a reputation for gloomy stock market outlooks, in 1928. It was the year before the most devastating and influential Wall Street crash in history (on October 24, 1929, Black Tuesday, stocks lost 12% in a single day!).

Keynes — a highly recognized economic thinker, who has influenced global government policies and macroeconomic schools of thought — was, on this day, not talking economics.

He was pumping up his stock strategy. Keynes told Somary:

I think the market is very appealing, and prices are low. And where is the crash coming from in any case?

The Raven responded, from the gap between appearances and reality.

It may seem commonplace that someone with Keynes's economic reputation might wade into stock market forecasting. After all, the stock market is a collection of companies, and these companies drive the economy.

Last week, I joined my friends Peter Lazaroff and Phil Huber on Peter's podcast. Peter asked, "What's one thing people misunderstand about our roles as Chief Investment Officers?"

That I'm not an economist.

And I don't try to fake it. If you call something Malthusian or Hayekian, or cite Tobin or Reinhart — I'll need to look it up. I may have taken a test on these people at some point, but I'm not continuously immersing myself in economic theories, because they won't likely influence how I allocate portfolios. It's not a great use of my professional time and duty to clients.

The economy is not the market. The market is not the economy.

They are related, of course, but not on a timeline that justifies turning economic forecasts into investment forecasts. Even if your economic opinions are vaguely correct, it's not enough. Investment prices are forward-looking decades into the future, while economic forecasts typically focus on near-term inflation, near-term employment, near-term output, etc.

They're not congruent.

So the economy and the market are related, but your portfolio doesn't need revisions to new economic data because of it. Your portfolio should just be related to you, your family's current and future needs, desires, and risk tolerances — and be unrelated to your opinions about the economy.

It's been 18 trading days since 2023 started, and already we've seen extensive job layoffs at Google, Amazon, Meta, Microsoft, Goldman Sachs, IBM, Spotify, Blackrock, and more.

Not a great economic backdrop...

Yet the global stock market is off to one of its best starts ever.

In 1928, Keynes couldn't have been more wrong about stocks in the short-run.

But Keynes prediction was right about stocks in the long-run, where wealth is built despite years like 1929, and including days like Black Tuesday. When Somary told Keynes he didn't share his current bullishness, and that the crash will come from the gap between appearances and reality, he was describing his own bearishness, but to me he described the true connection between economics and the stock market:

Things appear a certain way to all of us, and that informs our expectations. It appears to me that humans are productive, innovative, and resilient, and so I expect companies to be resourceful, create profits, and thus for stock markets to go up every year. At the same time, history tells me that markets have only risen a little more than half of all years.

It doesn't change my expectation for stocks, I just also expect to be wrong sometimes.

It doesn't change my expectation for stocks, but I must design and implement client portfolios so that success doesn't require being correct over short periods.

Reality can defy expectations.

Engineering portfolio outcomes within this context is a great use of my professional time and duty to clients. Many people want to forecast the direction of the stock market, and Keynes was seemingly no exception.

But the stock market is brashly indifferent to our opinions. It doesn't know we exist, nor seek to accommodate our time horizons. It doesn't pay bail if we're wrong. I don't blame Keynes. 95 years ago, trying to forecast the market was as seductive to investors as it is today. But he didn't have the evidence we know now, which is how unsuccessful he was likely to be.

Putting myself in his shoes, back in 1928, I can fathom why he missed the impending market crash. Why should he have seen it coming?

He was just an economist.


𓄿 𓄿 𓄿 𓄿 𓄿 𓄿 𓄿


The Price of Time, by Edward Chancellor

The Raven of Zurich, by Felix Somary


My blog posts are informational only and should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in my posts will come to pass. They are not intended to supply tax or legal advice and there is no solicitation to buy or sell securities or engage in a particular investment strategy.

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