Category Archives: Philosophising

I’m not ever touching Swedish money again

Dear Baruch,

My New Year’s resolution for 2013 is to not ever touch Swedish money again. I’ve found these past few months that I no longer need cash in Sweden, as practically every single transaction can be done electronically, no matter how small the amount. The advantages to me speeding along the arrival of a wholly cashless future are many:

  • Coins are heavy yet worth little. I already give far more to charity per day than the value of the coinage I would willingly keep to avoid being shortchanged in my transactions.
  • Bills weigh less, but are worth more, so if I lose them or have them stolen their value to me is forever destroyed. And when I travel abroad, they need to be exchanged before I can access their value. My debit card is better on both counts.
  • Transfers between Swedish bank accounts can be done online, and are instantaneous and free. Ask a Swede about cheques and they will draw a blank, figuratively.
  • All Swedish merchants I’ve used in the past year take bank cards, because all Swedish points of sale must report back to the tax authorities, so taking cash just to avoid paying taxes is a nonstarter (and frowned upon in any case — Swedes ask for the receipt). This is why Sweden is Sweden and Greece is Greece.
  • Security and identity fears have been effectively resolved with the recent nationwide introduction of the BankID and Mobile BankID system. I can now authorize and sign a whole range of interactions via a desktop app or a mobile app. BankID connects me securely to banks, pensions funds, insurance corporations, tax authorities and anyone else willing to join. These services are often available via mobile apps that connect seamlessly to the BankID app. (Here’s the state pension fund’s app; here’s the tax authority’s app.)
  • Innovative cardless payment solutions are evolving. Just in the past month, I’ve started using two:
    • Swish is an initiative by Swedish banks that lets you connect your bank account to your mobile phone number and then send to or receive money just by using phone numbers. There’s no more need to deal with bank account numbers. 
    • SEQR has just started being used by my local supermarket to allow payments via mobile phone. When the checkout chick presents me with my grocery bill, I tell him I want to pay with SEQR, and then scan that register’s unique QR code. While the register sends SEQR the payment amount, I send SEQR the QR code, which authorizes payment. It’s about twice as fast as paying with my debit card, because the service does not have to check with my bank to see if my account has money on it. Instead, it gives me a SEK 5,000 (USD 770) advance with which I can make purchases, and I get the bill at the end of the month. 

Both apps are getting glowing reviews, but we’re still short of the Holy Grail. SEQR and competitors will get even better when some form of near-field communication technology gets widely adopted in the next few years.

My New Year’s resolution is not for everyone. Right now, getting a BankID to work requires a few too many tech-savvy steps for old people to really get a hang of it. Either it will get easier, or cash will be around until they die off. One bank at least continues to see facilitating cash transactions as a service for this demographic.

As for other people in other countries, how soon they can follow Sweden’s example depends on a couple of national traits. Banks in Sweden are not averse to cooperation, in part because they are so well-regulated that they don’t have to operate in some kind of Hobbesian zero-sum scramble for customers. They tend to compete on services, but collaborate on platforms. Also, Swedes have a national genius for public trust in their government, and it is by and large justified. I’m not sure I’d be willing to give up the anonymous payment option that cash offers anywhere outside Scandinavia right now. In any case, anonymous cashless payment technologies are riding to the rescue.

[BONUS REASON I FORGOT TO MENTION: Banks like SkandiaBank have apps that let you datamine your own expenditures by type, establishment and even by individual component purchases. This certainly appeals to our inner geek but it can also more easily motivate behavior modification — for example, the micro-savings app lets you set savings goals by encouraging you to forgo small daily expenses.]

You don’t WANT to be making iPhones, really

Last week’s hairshirt NYT piece got a lot of attention — it was AR’s lead link on Sunday and pointed at by Josh, Reformed Broker,  — bemoaning “America’s inability” to manufacture or assemble iPhones and other electronic gizmos. However, it entirely missed the point, thinks Baruch. It is always en vogue to bemoan one’s own nation’s manufacturing competitiveness, in the case of Southern Europe, possibly fairly. But most of the time it ignores the great dynamic of economic development, that as economies increase in wealth, intellectual property and sophistication, pure manufacturing becomes less and less attractive an activity. America has the most sophisticated economy on the planet; the idea that it is bad that people who participate in it no longer fit bits of plastic together is a wrong one.

The other point that the article makes rings truer, that making iPhones isn’t much fun:

. . . Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

Assembling iPhones is a repetitive and gruelling manual job. It is hard on the eyes, on the stamina and probably on the spirit. The majority of the workers at the Foxconn (also known as Hon Hai) plant are young, resilient recent immigrants to the city, for whom the alternative to doing this is working on the family smallholding or some other menial job in the Chinese boondocks. They don’t need engineering degrees, though do need skills and motivations I and probably a lot of Americans don’t have, e.g. being able to put small parts together in exactly the same way, again and again for hours and hours all the while standing up, Don Rumsfeld like. Being in a position where you can be woken up at 12.30 am to do a 12 hour shift fortified only with a biscuit and a cup of tea is not something I would wish on my fellow countrymen — at least not all of them.

I don’t think the NYT seriously wants their fellow Americans to work like this either (and by the way, since when was a foreman’s job on an assembly line “middle class”?). It’s the sort of thing workers in developed countries stopped doing since the 1970s and 1980s, and trades unions have been fighting against for decades before. We shouldn’t go back.

Don’t get me wrong — I don’t disparage the necessity of mind-numbing manual work, I certainly don’t look down on those who do it, nor hate the bosses who oversee them. It is a fact of life. However, it has to be for something worthwhile, however, and in large part I think it is in the case of Foxconn and Apple. For the Turkish and Greek Gastarbeiter in Europe in the 1950s and 1960s factory manual labour was a stepping stone to better things, and similarly, one hopes the Chinese building iPhones will be able to save some money to take back home or stay in the city to start a business, get married and educate some (well, typically only one) kids, or, at worst, buy an xBox. You have to look at the alternatives open to the people doing the work; for a Chinese late teen or 20-something the more realistic alternative to the Foxconn plant is a life of rural toil, tedium and poverty. For the average US teen it would be college (and some debt) and/or relatively bearable job in a service industry, possibly cutting hair. The American shouldn’t have to compete with his Chinese counterpart — the menu of his or her life choices is so much richer.

The other idea implicit in the article I have a problem with is that iPhones and the physical location of the plants that supply them have disproportionally favoured the Chinese economy over the US. Well, when it comes to assembly, the amount that stays in China is an infinitesimal fraction of the total added value of an iPhone. Foxconn earns something like a 5% gross margin and a 2-3% EBIT margin on its assembly business and for business from Apple it might even be less. Indeed, some analysts think Foxconn only earns a positive margin because it can throw in a few components of its own into the deal. Its notable that no-one else has ever been able to take any of Apple’s assembly business from Foxconn. Many have tried and lost money, such are the competitive razor thin margin this business operates at.

Compare that to the 30% to 50% gross margins (and 20-30% EBIT) a semiconductor supplier earns selling a chip into the iPhone — almost all the semi content in the iPhone is from US companies, and by no means not all the chips are fabbed in China, although I agree with the article that many are. I’m not even talking about the great margins that a software company selling code into the iPhone foodchain makes, nor the insanely great margins Apple operates at, just the hardware foodchain. Which part of that foodchain does the NYT really want American companies to be at?

My final comment is that the article ignores the flipside of the equation, the dual nature of employees like Eric Saragoza, the mid-level Apple engineer who  got laid off in 2002. Scant comfort for him of course, but he is also a consumer. The huge benefit of the constant price down in technology is that consumers get to be able to buy amazing, life changing products at increasingly affordable prices, while incentivising the companies who make them with great margins. iPhones and iPads have changed my life moderately, but have transformed the lives of millions of people in a more profound way. This is what technology does, and I don’t know another way of ensuring that it happens. Very often the ability to make something new and useful for significantly less is just as impactful as the ability to make that new and useful thing in the first place — it opens the door to new business models, to new uses, to things the inventors may not have dreamed of. Look at Tim Berners-Lee and the internet*. Benefits like these are immeasurable and general to all, and you only notice what happened later on, while Eric Saragoza’s job loss was immediate, specific, and personal. It makes a good, heart rending story. “Everything is slowly getting better for most everyone” should make a good story too, but in practice will be less affecting, and get fewer links.

Baruch is not an American and the decline of the middle class there is not his uppermost concern; in fact he cares as much about the Chinese factory workers toiling away at Foxconn. He thinks the dynamics of what the NYT is writing about is actually fantastic for almost everyone, and actually strengthens the global middle class by adding more people to it, in China. This is wholly a Good Thing, for all the problems we actually should be concerned about, like war, poverty, the environment, healthcare, education and the personal outcomes of ourselves and our fellow humans, all these things are mitigated by expanding the middle class, because only people with some disposable wealth of time and income are able to think about them.

* You think he ever thought he would end up using his invention for finding Angry Birds cheats like the rest of us? Of course not.

 

 

The market as an analysis-free zone

Baruch has noted a curious thing about this results season, dear readers. Sell side analysts seem to have stopped doing as much research as they used to. I think it’s because, in the light of the SEC’s insider-trading investigation and a lack of certainty between what constitutes legitimate insight and illegal information, they are keeping a low profile. If it continues it could give great power to some of the market’s worst actors, and create a lot more single-stock volatility. Already this earnings season there seemed to be a lot more violent moves in stocks than usual. Hopefully Baruch is imagining it, and if he isn’t, let’s hope it is temporary.

It was most obvious when F5 blew up in late January. The print was merely in line, and the guidance, sin of sins, was weak. FFIV opened down 20% and stayed down. This sort of move off a quarter can happen in tech, and is not at all uncommon. What was vaguely unusual, however, was  the extent of the surprise: there was no warning. The company had made no hints it had seen any weakness, and none of the analysts covering it had done the usual checks with their sources. Worse, no-one really knew what everyone else was expecting. There were no “whisper” numbers out there. Frightened of being accused of insider trading , no one had done the work. Continue reading

Baruch: big in Japan

Imagine what Baruch found in his daily Abnormal Returns troll last thrusday, Bento! It seems 2 academic dudes, one Yuqing Xing and another Neal Detert at the Asian Development Bank Institute in Japan, took a look at the iPhone and the US-Chinese trade deficit, and realised that high tech products such as the iPhone, which are merely assembled in China, distorted the picture. Very little of the value of the iPhone comes from, or remains in China, yet the full value of the iPhone is counted as a Chinese export for the purposes of deficit calculation. The official numbers are wrong, therefore, and the “real” deficit is much lower.

All well and good, and jolly interesting too. So much so that it was picked up by the WSJ, Paul Kedrosky, and of course, Tadas at AR.

Baruch certainly found the article interesting, as these were thoughts very similar to those he set down over one year ago in a blogpost here called What’s an export? Seriously. In it, after examining the supply chain of the iPhone* in some detail, he concluded that high tech products which are merely assembled in China distorted the picture. Very little of the value of the iPhone comes from, or remains in China, yet the full value of the iPhone is counted as a Chinese export for the purposes of deficit calculation. He wrote

Presumably to work out the real trade balance in terms of where trade flows, or where the wealth generated by iPhones goes, classifiying it as a {Chinese} export for the purposes of assessing a trade balance is misleading . . . Where there are totally integrated global supply chains, I suspect that the definitions of “import” and “export” begin to lose meaning.

Baruch was confused: why did economists and politicians harp on about the trade deficits like this when it  assessing the true value of the deficit was so obviously problematic? The post ended with a plea:

If there are any professional economists left reading UB, please help.

“Help” in this case, did not mean “purloin my idea and publish it in your own name for the glorification of your career without so much as citing poor old Baruch.”

What do you think Bento? Can I sue?

*happily, Xing and Detert also make a hash of the foodchain of the iPhone. Toshiba does NOT make the touchscreen and display module of the iPhone, though may be implicated in the NAND memory; touch module is left to an obscure-ish Taiwanese company called TPK, the screen could come from a whole passel of suppliers, but probably not Tosh; the apps processor is only “fabbed” by Samsung but is a design owned by Apple, Infineon does not make the “camera module”, though does make the baseband and some other stuff. Etc etc.

Quantitative Queasing

So we have been having Quantitative Easing already, and Baruch doesn’t  like it.  The stockmarket is up (or was), the data seems to be improving; QE has done its work and for all we know it will continue. But there is a special unhealthy quality to it all. It feels like a “wrong” rally, like the cat from Pet Sematary was clearly a wrong kind of cat.

The problem as I see it is this: QE lowers overall interest rates and makes all the stocks go up when they wouldn’t have normally. It raises their valuations, which you can also express by saying it makes for higher PEs. This makes people feel richer. They will go and buy more stuff like LCD TVs, making the companies who make the stuff they buy richer too. They will invest more, and buy more stuff from companies who make stuff not for people, but for other companies. Eventually all the companies grow into their higher stock valuations, and we are all fine.

The key word here however, is “eventually”. What happens in the bit between the 2 points:  after all the stocks have gone up, and before the fundamentals improve to justify their new valuations? Because I think that’s where we are if stocks have stopped going up, or where we will soon be.

Now, my tech stocks aren’t exactly expensive. Lots of them are to be had for PE multiples in the low teens, which really isn’t bad. But there has been no fundamental improvement in their businesses since the summer, as far as Baruch can tell, and yet their stocks have absolutely zoomed to levels I frankly have difficulties buying them at, at least on the charts. Baruch was astonished last week to see that the NASDAQ 100 was basically back to its pre-crisis high!! You get that? That index is telling you that things are as good as they were before the Great Unwind.

I can’t short them either, at least not on past form. That’s been a mug’s game; the subtext of QE is “kill all the shorts” — another way of making sure stocks go up. Returns on short books have been pretty brutal, and most long short guys in the past couple of months have learned to be mostly long, or if they have to stay balanced, then long stocks, short indices.

So, now what? If stocks are now disassociated from their fundamental realities, however short a time that disassociation is supposed to last, non-fundamental realities are going to rule, and I have no idea what that means. Will we get stasis, a crunch in volatility and volumes? Will we have vast nauseating unexplainable swings in stocks, huge moves in the VIX? Will we crash? Will we carry on straight up? Will we pause and rally? Who can say? We’re in a period where anything is possible, as I’ve said before, a world of unintended consequences coming down the pipe. Some may be good, and some may be bad.

This is why in his darker moments that Baruch thinks a very good analogy for where we are right now is Pet Sematary. The people who buried their cat (and later their son) in the Indian burial ground to bring it back to life got something which looked ostensibly like a cat, but was so only on the outside. On the inside their little puddy tat  was really an undead homicidal zombie cat, as became clear through its increasingly odd behaviour. Unintended consequences followed (mayhem, murder, horror, the Wendigo — all that Stephen King stuff).

The Bernank is like the guy who buried his cat, but in this case instead of a resuscitated cat he wanted his rally back, a healthy stock market and the wealth effect that would bring. I worry we have got something else.

I’m not saying we’re in an undead homicidal zombie market, though we may be. But here’s an example of what the Pet Sematary market is capable of in terms of unintended consequences: QE inflates all asset prices, including commodities. This pressures the Chinese consumer, who we are relying on to pull us all out of this mess, who can suddenly not afford his new LCD TV because his Moo Shu pork is costing 20% more than it used to. Changes in commodity prices have a much greater impact on his consumption than Joe Schmoe in Idaho, with his low cost high fructose corn syrup and processed trans fat diet. The BoC has to raise rates to offset the inflation this is causing, hurting Chinese growth even more, and global GDP growth drops 50bp. Bravo the Bernank. With your Quantitative Easing you just killed off the only good thing in this market which was working naturally without outside interference.

OK, Baruch may be exaggerating, but a big part of today’s selloff is driven by fears of commodity prices in China and a collapsing Shanghai stockmarket. It’ll probably turn out to be nothing, a damp squib. But if it doesn’t, you heard it here first. I feel sure there is a wider point here to make about the bad things that happen when you mess with the signalling mechanism of the stockmarket. After all, the stockmarket does not exist solely to make us richer, does it? But that’s probably for another post.

Through the looking glass again

I’ve been catching up on my reading and dear Bento, if anyone tells you they have a clear view on what is going to happen to the econo-world from here, walk away briskly. As Ed Hyman of ISI* puts it, with the now imminent onset of QE2 we are in “scary times”, a world of “unintended consequences”.

The only intellectually honest position to take at this point, it seems, is to admit we haven’t a clue. Personally I, Baruch, am getting really confused. My default setting is that we will muddle through and everything will be OK. But the cone of potential outcomes that surround that base case is now as loose and flappy as a wizard’s sleeve.

Note also that even the “muddling through” scenario doesn’t presume any particular level of the S&P at the end of the next 12 months. Plus or minus 30% and in Baruch’s view we’d still be all right.

Where to start? Well, here’s a list of the factors that I think are going to make us move, in the form of a dialog in Baruch’s head. None or all of them could dominate. Maybe some are already priced in. Some of them I hope are  made up and will go away. There’s nothing particularly original here I admit, but I want, at this juncture, to sum up where we may be. Baruch’s future self might find it interesting. Here goes:

1) we are getting QE2! It will save us from Japanese-style deflation. Yayy!

2) Yes, but this is not necessarily a good thing. QE2 is the first move, the invasion of Poland if you like, in the coming currency war against everyone who is good at exporting, especially the Chinese. In the ensuing cycle of “bugger thy neighbour”, we will descend into massive disruption of trade and runaway inflation. Oh no!

3) But don’t worry. The Chinese are going to make structural reforms in their upcoming 5 Year Plan which will massively boost consumption over the next few years. The Yuan will rise anyway, no matter what the result of the horrible currency shenanigans, and their ensuing import boom will be the engine dragging the world out of debt-deflation! Yayy!

4) Hang on. I’ve just had some bad news. The financial system is insolvent again. All the mortgages securitised in the past X years stopped being asset backed, as they umm. . . lost the paperwork. The holders can’t foreclose, and the people who have been foreclosed on may have had their houses taken away illegally. Many may have to get their houses back. So stuff that the banks still own has to be written down again. Hell, even the people who can pay their mortgages have a big incentive not to any more. We’re totally fucked.

5) Don’t worry! All that crap’s been written off already or backed by the Feds! Isn’t it? They can’t be as stupid to have it still on their books, right? While we may have jeopardised a couple of banks, the Foreclosure Crisis may also have solved the US consumer debt problem! All the mortgages will be cancelled!! As long as a few banks can survive we still got QE2, massive Chinese consumption growth AND a reset to US private indebtedness. Those crazy Americans can now re-re-mortgage their houses and buy another round of LCD TVs for their McMansions, and reinstate the semi-annual holidays in Disney World! We can’t lose!!

6) Not so fast, cheeky monkey. The US banking system may be meta-fucked. Turns out the banks who securitised mortgages may have defrauded their customers and broken the law, because they secretly did in fact do some due diligence, and knew all the mortgages were rubbish. There is no better person to tell you about this than our old mate Felix; who says bloggers can’t do journalism? Good news: bankers may not be the total idiots we thought they were. Bad news: they were fraudulently criminal instead, and apparently may have to pay cash at par for all the stuff they all wrote down already, plus a bunch of extra fines.  Even if the SEC throws up its hands and the DoJ doesn’t want to prosecute, I imagine foreign prosecutors won’t be so shy if there’s a case to be heard. Certainly you would think a civil case would be worth a shot, and if proven, I can only imagine the settlements. I hope they remember to ask to have the checks made out in Yuan.

7) You poor sap. You ridiculous perma-bear. Bernanke has our backs! You don’t think he doesn’t know this stuff already? You were wondering why he was so keen to rush into QE2 despite the positive turn in the leading indicators, and pump us all up before the mid-terms. You got it now? We’re going to get the mother of all easings, bigger than the trillion dollars everyone’s expecting, something open-ended, maybe.

Anyway, that’s as far as I got. Any better ideas out there? Anything I missed? Is any of it wrong? Can you help poor old Baruch make sense of it all?

* ISI is the only macro strategist my team actually pays for, everyone else seems to offer their opinions for free

Myths about stockmarket myths that just won’t die

Baruch hasn’t stopped blogging. He’s just been busy at work. To be fair, there also hasn’t been that much he has wanted to write about.

That changes here! A recent and growing animus in the econoblogoverse to, of all things, equity markets, has woken him up. Baruch finds this fairly incredible. Equities, he is fairly convinced, are the asset class of the future. This anti-equities movement, led by jealous journalists and winking, cackling bond apologists with axes to grind, needs to be nipped in the bud, as it is dead wrong. The WSJ’s otherwise reasonable Brett Arends is Baruch’s immediate target among the evil-thinkers, for his (last week’s top read on Abnormal Returns) The Top 10 Stock Market Myths that Just Won’t Die. And that Felix Salmon is also guilty as sin in this, for many offences against shares committed over the past few years.

Myth 1: stocks don’t generally go up

Wronngggg! Try shorting for a living and see how long you last. I’ve tried it. It is *really* fricking hard. Actually this year my shorts have made me more money than my longs, but I am an investing genius, and you are probably not. To those bond apologists who claim that this “stocks for the long haul” stuff is bullshit, I urge you to actually count the number of 10 year periods since 1950 where stocks have not made you a net percentage gain. I can only see 1963-64 and 1999-2001 as periods with evident losses (check out the S&P log chart from 1950). So around 90% of the time in the past 50 years, stocks have made you money on a 10-year investment horizon.

It’s not like you lost lots of money when they did go down, either. At worst, if you had been unfortunate (or dumb) enough to invest in January 2000, by 2010 you had lost about 20%. You would have faced the same, a 20% loss,  in 1964 to 1974. Your upside risk, however, has been pretty assymetric, and in most 10 year periods you would at least have doubled your money, with triples, quintuples and zilliontuples common in the 10 year periods after 1980. That’s from a 60-year sample, which admittedly doesn’t include much in the way of catastrophe, revolution and property confiscation that has occurred in the stock market histories of other countries.  But still, equities look pretty good to me off this very basic analysis.

Clearly, just because in 90% of cases equities made you a positive 10 year return in the past is no guarantee it will continue in future periods. But I bet there were moaning minnies telling us stocks were dead at every point in this history. The onus has to be fairly put on the current stock-deniers to explain why they are right this time.

Myth 2: stocks and the economy are no longer linked

Brett Arends uses the Japanese example to illustrate this point: “since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters”. He was probably well aware that this is a thoroughly exceptional example. This was number 4 in his top 10 list of “myths”, and I think he was already beginning to panic that he had 6 more to come up with still.

To be fair, the linkage between stocks and economies, while direct, is complicated. Companies’ share of GDP can increase or decrease while economies are booming or stagnating. Valuation is an extremely important filter. Extremes in the entry and exit point of when you actually invest can determines most of the result of the investment; Brett here chooses the very peak of the stockmarket and real estate bubble in Japan as his entry point for his trade. Not, I think you’ll agree, an exercise immune from sample size error.

The rest of the time, filters aside, stock prices are based on company earnings. When a company announces a better than expected quarter (nota bene,  better than investors expected, not the sell side consensus), the stock tends to go up. In their massive, millionaire-creating stock ramps, Apple and Google and Microsoft all went up because we realised they were going to earn much more in period n+1 than we thought at period n.

Fact is, economies tend to grow, and in a country with stable population it is productivity gains, doing more with the same or less, which is responsible. In other words, innovation equals growth. The repository of innovation, the sharing of ideas and the investment to put them into practice is the private sector, in the vast R&D departments of major enterprises and fast moving startups. May I refer you to the cod Hayekian but still excellent work of fellow Collegiant Matt Ridley for a longer exposition of this. That’s what you buy when you buy equities, that’s what you incentivise when you ask for shares in an IPO. You are driving and partipating in economic growth. Economies grow, company earnings tend to go up, and shares tend to rise. Simple really. Don’t lose sight of the forest for the trees.

Myth 3. The Machines are in charge. The Humans should give up.

Algo-bots sort of rule. Machines dominate lots of daily flow, and make it weird. But they don’t determine the forward PE ratio of e.g. Cisco. We do, and by its own lights the reasoning behind stocks being where they are is sound — if we double-dip, CSCO and everyone else will see their earnings fall, and so stocks trade at lower PEs than their long-term growth track record implies they should. Consensus estimates, the denominator of the PE, do not include the possibility of another recession. The punters, who are not paid to be bullish, don’t trust the numbers and are partially pricing it in.

So we don’t need to blame the algos and high frequency traders for our long positions going wrong. Hedge fund dudes, market makers, and lots of people whose livelihood is exploiting the shorter term moves in the stock market, DO have potential grounds to complain. Their jobs have become harder because of the bots, whose job after all is to scalp the humans. But this is not a reason to give up on stock market mechanisms that still reward medium-term savvy investment decisions.

Listen: the markets are always hard. Its supposed to be like that. Oddly enough, rather than blaming themselves, people like to have someone else to pin it on when their investments go wrong. In the 1990s they used to blame daytraders for driving internet rubbish to great heights, then in the naughties the shadowy “Plunge Protection Team” was the scourge of the bears. These days the bots are the scapegoat. The bots will one day overreach — if they ever really “ran” the market they would very quickly stop making money; trying to scalp each other would not be a good idea. Relax, and learn to love the bots. Whatever bogeyman that replaces them may be much scarier.

Myth 4. Higher volatility = Sell your stocks. We are in a period of higher volatility

This is just SO VERY WRONG that Baruch has to bite his fist. Were it not the thesis behind Felix Salmon’s call to sell all stocks (backed up by some pointy-headed algebra) the midst of the sovereign debt bruhaha of not so very long ago, Baruch would merely have ignored it. To have Felix (Felix!) tell us this is like hearing someone you respect and admire tell you the moon landings were faked by the guy on the grassy knoll, that the US military invented AIDS and that people from Harvard Business School are capable of independent thought. You want to edge away, slowly.

Historically, higher volatility is actually the long investor’s friend. It is associated with stress, periods of fear and panic — in other words buying opportunities, not good points at which to sell. Similarly, low volatility is associated with periods of complacency and is often, but certainly not always, a good point to sell. It’s easy to act pro-cyclical. Buying “at the sound of cannons” is very hard when the cannons are actually going off. Selling is a much more natural reaction, and brings very quick relief. You can feel a very virtuous disgust at stocks, vow never to go near them again, and go and buy some 10 year T-bonds at a 2.4% yield.

Of course, this is a terrible mistake. All you have done is maximise your losses, and give up on the idea of ever making them back. No less an authority than Mrs Baruch, herself an accomplished investor, characterised selling at high volatilty and buying at low volatility a “catastrophic” idea when Baruch told her about it. In order to make money in equities you have to invoke the Costanza Doctrine, ie do The Opposite — the opposite of what you feel like doing, and the opposite of what everyone is telling you to do. The fact that very few people are actually clear-headed enough to do this is probably why equities as an asset class are increasingly unpopular.

Truth 1: everything else is screwed. If you need to invest, you will likely buy some stocks even if you don’t want to

The tragedy is, of course, that equities are the coming thing. No other asset class, at the moment, seems to have the same combination of great fundamentals and juicy valuation. Bonds while the 10-year yields you 3% in a period of heightened risk on sovereign solvency? Puh-leeze. Gold? Who the hell knows with the weirdos on either side of that trade. Commodities may be good, what do I know, but as an asset class they’re probably not suitable for more than 25% of your allocation. Real Estate? Maybe that’s not a bad idea either, but I refer to the answer I just gave on commodities. Also property tends to not be very liquid. Art? Wines? Antique cars? Be my guest. The dirty secret of alternative investments such as hedge funds and private equity is that most of them are disguised equity longs. Hedge funds generally feel much more comfortable being net owners of shares — Baruch has yet to see the multi-strat he works for go net short, for instance. Private equity needs healthy equity markets (and, if you ask me, naive ones) to make actual profits close to the otherwise fictional marks they carry on their books.

At the end of the day, however, it largely comes down to bonds versus stocks. You are going to be overweight stocks in the coming years. It might take some of you some time to actually bite the bullet, and you will do it at higher prices as a result, but you will do it. I look to no less an authority in this as the biggest, baddest bond investor in the world, PIMCO, who is getting into equities in a big way.

Right now, equity investors are being offered a win:don’t lose very much proposition. A double dip, the great fear of the equity markets, is at least partially priced in here, and the upside if we don’t double dip looks very good indeed. It’s a great moment for stocks.