Market moments, interesting ideas, and financial forecasts

From the desk of Dr. Garrett Smith:

This article is both an exciting and intimidating beginning to a years-long idea that is finally being put into action. As the title suggests, these writings will cover a variety of topics. I will present historical context and financial history, interesting ideas that I have come across in readings (both related to financial markets and not), and my personal expectations for what is to come. My excitement for sharing this knowledge comes from my joy of being a teacher. Many of the thoughts I wish to share (like all knowledge) are often not originally mine, but rather a synthesis of ideas with my own personal spin. The intimidating aspect comes from the financial forecasts which I will present. Perhaps the only thing I can share with you that I know to be 100% correct, is that I will be wrong more often than I would like to be. I can only hope that this humility will be well received. If anyone tells you that they can forecast any economic or financial event with both precision and accuracy, I will strongly recommend for the sake of your sanity and wallet to get up and run (or close the website) as fast as you are able.

As the saying goes in real estate “it’s all about location, location, location.” When it comes to the outcomes of investment decisions, most of the time it comes down to timing, timing, timing. The big problem here is that perfectly timing the market is impossible for anyone, or even any machine. Without perfect timing, it is impossible to have perfect forecasts. As I share with you my thoughts and expectations, I am highly confident in what should happen, I just don’t know when it will happen. The real frustration is that being too early or too late is indistinguishable from being 100% wrong. Hence the reason that just about any asset manager will talk about “time in the market, as opposed to timing the market.” I agree with the sentiment, but not the execution; it feels a little lazy to me. In short, I don’t expect my ideas to win every time – I am going to be wrong – but I steal this from well-known hedge fund manager, Cliff Asness, “I expect to win over time.” As time goes on I sincerely hope that my knowledge and perhaps more importantly, humility, will be valuable to you.

Here are a few guiding principles when it comes to economic forecasting. Long term forecasting is a fool’s game, but much like meteorologists, economists can, to some degree, forecast economic conditions in the near term (Sometimes – more on this as we continue our journey together). In both cases, a forecast is not really being made. Instead, it is a dependency on understanding the current situation, often called initial conditions. The better we understand the present situation, the more accurate the forecast will appear. We are depending on economic cause and effect. Generally, one thing leads to another, but sometimes not. Rather, as already mentioned, no one knows when the cause will “make the effect.”

It is sometimes said that economists have physics envy. Economic models often resemble physical models, and in some cases, just physical models repurposed. Once we know how a particle behaves, it will always follow the rules of the physical world that we have found. The problem is that markets are built upon people, not particles, and unfortunately, people do not behave the same way at any time. I will end today with a quote by Sir. Isaac Newton from 1720, “I can calculate the motions of heavenly bodies, but not the madness of people.”

Thank you for your time today. I look forward sharing more of my thoughts with you in the future.

Sincerely,

Dr. Garrett Smith, Ph.D.

Chief Investment Officer

Three Pillars Wealth Management