What a Fool Believes
Michael McDonald & Kenny Loggins (1978)[1]
Growing up in the 70’s, The Doobie Brothers’ music was always on in our house, and the song, “What a Fool Believes,” was one of their biggest hits. Futile belief, regardless of facts right in front of us, is foolish, and is what this song tells us.
This “fool” runs into his former flame and sees only what he wants to see – that he somehow thinks she still cares about him, or ever did. He is indeed a fool, and regardless of the information, or even his own instinct, he believes in something that is clearly not true.
When it comes to investing, very often we choose the narrative we believe, whether bullish or bearish, and regardless of the facts, we can even choose to see whatever we want. Magnificent 7, Artificial Intelligence, and a Fed cut all feed the bullish narrative; election results, high P/E’s, and recession fears feed the bearish narrative.
He came from somewhere back in her long ago
The sentimental fool don’t see
Tryin’ hard to recreate what had yet to be recreated once in her life
She musters a smile for his nostalgic tale
Never coming near what he wanted to say
Only to realize it never really was
She had a place in his life
He never made her think twice
As he rises to her apology
Anybody else would surely know
He’s watching her go
But what a fool believes, he sees
No wise man has the power to reason away
What seems to be is always better than nothing
Than nothing at all
“Anybody else would surely know” – This man is clearly in denial and can’t (or won’t) see what is right in front of him, even as she “musters a smile.” He is trying to create “what had yet to be created.” Investing is like this as well, as we all are trying to determine future outcomes. But let’s be clear: the fool isn’t the one who determined future outcomes incorrectly. The fool is the one who ignores the facts staring them in the face.
Data First: What facts do we see in front of us that shouldn’t be ignored?
Growing up in Chicago, Euchre was also a big part of our home life, with many life lessons learned at the card table. One of the more important lessons: if you don’t know who the sucker is, it’s probably you. There is a sucker in this market, and one day we will all see who it is (and it might be me, so here we go).
My mind goes back to 2008 or 1998 right about now, and what the narrative was in those environments. I realize the financial entertainment media says it’s different this time, but let’s compare anyway.
“Tryin’ hard to recreate what had yet to be created” is almost as dangerous as trying to pretend that something that has been created isn’t being recreated. Does this mean that PE ratios can’t go higher? No. They did in ’99 as well as ’21.
The Shiller P/E 10 ratio (right) is also back in territory rarely seen before. Now that we are hitting new highs in the stock market, it should temper anyone who may get overly enthusiastic about leaning too much on returns going forward.
“Anybody else would surely know” - This chart shows the Shiller P/E 10 ratio at 36, over double the mean, and however you view this, it looks high.
Instinct: What do we see that “the sentimental fool don’t see”?
The dangers of performance concentration, towering national debt, election year uncertainty, demographic stress, and of course, the Fed, all seem to be narratives that are easily ignored.
First, let’s look at the national debt. Ever since TARP (Troubled Asset Relief Programs) rescue plans from 2009 (remember when we just HAD to save AIG and the auto industry?), the debt has gone up and up. COVID was just another chapter, as we saw COVID stimulus checks and then the Inflation Reduction Act.
Can we handle the next chapter, or does this need for government to save the economy need to end?
And speaking of saving the economy, the Fed continues to be another government character masquerading as the savior of capitalism. Even though rates came down quickly in 2000 and 2008, the stock market didn’t seem to get the memo and fell sharply each time. It was September 18, 2007 and September 18, 2024 when the Fed cut rates by 50 basis points. Ben Bernanke, like Jay Powell today, assured us that they are simply providing liquidity. Housing was the bubble issue then. Is Artificial Intelligence pricing the bubble now?
The arrows tell the story of a Federal Reserve, like the great and powerful Wizard of Oz, that once you pull back the curtain, doesn’t have any special insight or knowledge. In other words, there is no smoothness to this line, and no real ability to steer the economy. So maybe it’s time to change the phrase form “Don’t fight the Fed” to “Don’t believe the Fed” because…
But what a fool believes, he sees
No wise man has the power to reason away
What seems to be is always better than nothing
Than nothing at all
[1] Kenny Loggins & Michael McDonald. (1978). What a Fool Believes [Song]. On Nightwatch. Columbia Records.
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