Ripples in the Pond
Next time you encounter a calm pond or lake with a nice, smooth surface, pick up a rock and toss it into the water. The result will be very predictable: concentric rings will expand out from where the mass disrupts the calm surface.
This is how models depict the economy.
Once the surface settles down, repeat the exercise. Only this time, have 10 of your friends grab big scoops of rocks of various sizes, from pebbles to boulders, and randomly throw them into the water over minutes, hours, and days.
This is how the economy actually behaves.
Each stone’s effect creates waves, which then interact with other waves and ripples until the complexity reaches a point where you cannot tell where each wave came from or where it is going. Boulders can disrupt the system, and smaller rocks get subsumed by what appears to be random motion.
I think about that calm pond this time of year when the annual Wall Street forecasts for markets and the economy get released. These reports are aggressive acts of arrogance.
Look no further than the track records they have amassed: Some people are occasionally correct, few consistently, none in the fullness of time. Hey, someone’s dart will come closest to the target, but I defy you to identify in advance whose dart it will be.
We rarely understand fully how each new event will impact all of the others that came before it and how the next events in time will affect what preceded it. And, we never know when that Boulder, which disrupts everything, will come along.
Investors should consider this when they create a portfolio. It should contain enough risk assets—primarily stocks—to benefit from the expansion of the economy and gains in corporate earnings. However, it should not be so risky as to be problematic. It should be both robust and boulder-proof.
I think about this when I see the torrent of forecasts this time of year: Price targets for the S&P, inflation forecasts, and most LOL of all, NRF Black Friday retail predictions.
Never confuse opinion marketing with actual, useful information.
~~~
Give thanks this weekend! Celebrate with family and friends. Count your blessings. And have a safe and happy holiday.
The post Ripples in the Pond appeared first on The Big Picture.
