While indulging in a most delicious barbecued steak washed down by a lovely South African red a couple weeks ago a friend was telling me about a recent seminar he attended. As a senior executive at a Swiss private bank he regularly attends these things.

The topic. “How to invest in a volatile market.”

The suggestion: Buy USD, CHF and JPY.

The kid (he was in his 20’s) who was delivering this presentation to a room full of bankers proved his point by showing his analysis…going all the way back a whopping 10 years which lends itself particularly well to recency bias.

The reasons that these three currencies have rallied in the past are for a number of different reasons. All different from each other. It’s best therefore to understand what those reasons are. Simply looking in the rearview mirror and saying..oh “well it happened last time” may work out…but then again…maybe not.

How It’s Dangerous to Investors

Now let me show how dangerous recency bias really is. You’re gonna like this.

At the beginning of every decade there is a prevailing narrative that amounts to looking in the rearview mirror in order to determine the future. Recency bias.

Remember the beginning of the 90’s?

Every man, the taxi driver and even that cute intern with the lazy eye was long Japan. You HAD to be in the Japanese “economic miracle”. It was like duh of course!

All the round eyes had decided that was it. Those crafty buggers in the land of the rising sun had this isht sussed. Japan you will remember was taking over the world and housewives from NY to London were booking their little Johnny and Suzy Snotnose into Japanese lessons. You had to be long Japan…especially banking stocks.

Except you shouldn’t have.

Side note: Soros was short from 87 and had to wait 3 years. He was right of course and made out like a third world dictator….but could you have waited for 3 years for your ship to come into port? Most can’t…which is why they’re not Soros.

What Came Next? US Tech

The start of the 2000s was all about owning TMT, US tech in particular. If you didn’t own Microsoft, Cisco, Lucent Technologies and Intel your cocktail party invites were falling with the popularity of Harvey Weinstein.

And so you had to be long. What could go wrong?

Everything. You should have avoided them like a politician avoids truth.

China is Taking Over the World. Or Not

Moving right along after the GFC and thanks in no small part to China literally flooding the world with credit the first to recover was China which played well into the “China is going to rule the world” narrative. That was the early 2010 story. And everyone believed it.

But the truth was that since trade had collapsed in 08 China had a problem. Actually they had two. Both related. Exports had been around 35% of GDP in 07 and these collapsed to under 25% in 09. In other words China’s “growth” story was in jeopardy. More importantly the CCP couldn’t afford widespread unemployment and the political unrest that would certainly bring. So they did what any pointy shoes clutching to power would do. They unleashed a stimulus package. Now I know most westerners keep banging on about how bad the Americans were at this. What with Obama’s cash for clunkers and a stimulus package amounting to 5% of GDP.

China looked at this, scoffed and opened the firehose. Stimulus equating to 13-14% of GDP (depending on who’s figures we rely on).

No wonder Chinese equities rallied first and strongest. Which led the whole “China’s taking over the world” nonsense.

And that brings us to the present where Google, Amazon, Facebook, Apple, and let’s not forget the giant fraud that is Alibaba are “must own” stocks.

What comes next?

Jeez do I have to do all the work myself?

You tell me.

-Chris

“The share market’s role is to make the majority of investors wrong.” — Ned Davis