This week I’d like to coddiwomple through central bankers, their flawed process for making policy decisions and the mistake the ECB just made, writes Landon Whaley Tuesday. He's presenting at MoneyShow Orlando Feb. 9.
“Coddiwomple” is not a word many people are familiar; it means to travel in a purposeful manner towards a vague destination. I can’t think of a single word that better describes investing in financial markets.
Markets are headed toward vague destinations, we don’t know where they’re headed. Despite this reality, if we want to be successful investors, you and I must remain purposeful in the way we approach markets as they move towards their vague destination.
If you want to accomplish anything exceptional in life, you need to follow a great process. If you want to be physically fit, you require a great process that includes proper nutrition and exercise that targets the heart and muscles. If you want to have healthy relationships, you require a great process of selflessness, forgiveness and genuine interest in the lives of others.
If you want to be a consistently successful investor, you need a great process that is time-tested and rooted in being data dependent and risk conscious.
The antithesis of great process is the way central bankers go about making policy decisions. Their process involves evaluating heavily lagged data that is prone to significant revisions. Further, they focus almost exclusively on the “levels” of that data rather than the far more important slope (rate of change) of the data.
I’ve been watching this central bank nonsense for almost two decades, and it makes me feel like I’m taking crazy pills! Why are these guys and gals content to make the same policy mistakes over and over again?!
On November 20, 2018, Ewald Nowotny, a member of the ECB’s governing council, apparently said he “sees no reason to deviate from the current growth forecast.” This statement comes in the wake of approximately 11 months of growth-slowing data across the eurozone’s core and periphery economies.
Fast forward to this past Thursday, when the ECB confirmed it would end its asset purchases this month, despite acknowledging the eurozone’s Fundamental Gravity #4 environment by revising its growth and inflation forecasts lower.
The real kicker was Mario Draghi saying, “Risks surrounding the euro area growth outlook can still be assessed as broadly balanced. However, the balance of risks [to the growth outlook] is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.”
At a speech on November 16, Draghi blamed the weather and sickness as catalysts for what he deemed was a “soft patch” in the eurozone economy.
Thursday he blamed geopolitics, emerging markets and financial market volatility, saying that risks are “moving to the downside.” Holy crap, Mario, eurozone economic risks have already moved to the downside, set up camp and been living there for months now.
On Friday, the flash PMI data for December was released and it was an absolute train wreck. The eurozone composite PMI for the eurozone slowed again, meaning it has now slowed four months in a row and for nine of the last twelve months, down to a cycle low. Germany’s Composite PMI slowed again, as did Italy’s, and France’s Composite is in outright contraction at 49.3.
And if that wasn’t enough, on a quarterly basis Germany’s economy just contracted in Q3, putting it a mere one quarter away from a recession.
Super Mario is driving the monetary policy for the second largest economy on Earth and appears to be completely ignoring the economic data.
Historically speaking, there has never been a single occurrence of a central bank tightening monetary conditions against a backdrop of slowing growth without causing a recession—not one.
The ECB is using stereotypically bad central bank process, and unless it reverses course quickly and gets its dovish groove on, it’s all but ensured a eurozone-wide recession. The ECB isn’t the only central bank using a bad process that’s likely to lead to a recession … we’ll discuss the other central bank on the verge of a policy mistake in “The Playbook” in the next Gravitational Edge.
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Watch Landon Whaley’s 3 Ideas for Investing and the meaning of coddiwomple in a short video here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:42.
Watch Landon Whaley discuss When Markets Cycle in a short video here.
Landon Whaley: We have a generation of investors and asset managers who know only one market. The reality is markets and economies cycle and catch people off guard.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:51.
Landon Whaley interviews Adrian Manz: How I approach stocks here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 7:48.
Landon Whaley interviews trader Jackie Ann Patterson: How I got started trading and how I approach it with my Truth about ETF Rotation here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:14.
Landon Whaley interviews John Carter: How I started trading here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:37.
