“Those who cannot remember the past are condemned to repeat it.”

George Santayana (The Life of Reason – 1905)

At yesterday’s press conference Fed Chair Janet Yellen admitted what many suspect – the U.S. economy will not soon return to normal.

For years The Fed’s projections have been overly optimistic. In-house economists predicted economic activity would quickly return to levels of growth experienced prior to the credit crisis of 2008. Those projections, of course, never materialized resulting in The Fed lowering its projections and hinting monetary policy alone can’t do the job.

(Hello, legislative branch? This is the economy calling. We need smart fiscal policy. Oh, it’s an election year? Never mind. Bye.)

Here are The Fed’s projections from three years ago and three month’s ago. Notice anything different? It’s taken The Fed three years to reduce their long-term economic growth rate a full 100 basis points. In the last three months they’ve reduced it by 30 basis points.

Here’s where it gets tricky for investors. Economic reality is that securities prices (stocks, bonds, etc.) follow economic fundamentals. Financial reality is that securities prices can and often deviate from economic fundamentals.

Prices in March 2009 reflected investor pessimism – not economic reality – resulting in artificially low prices. Witness the 211% rise in the S&P 500 in the time since.

Today’s prices are equally distorted. They’re artificially high fueled by low interest rates, corporations taking on debt to fund stock buybacks and cost cuts at the expense of revenue growth.

Make no mistake – corporations are not growing profits. There’s a disconnect between economic activity and securities prices. That can’t last forever.

Yet what are investors doing? They’re doing what they always do – being their own worst enemies. Investors bought into overvalued markets in the halcyon days of the late 1990s dot-com era. They sat on the sidelines while markets recovered. Investors bought into overvalued markets prior to 2008. They sat on the sidelines during the latest recovery.

We know what you’re thinking. That’s other people, right? Not me. I don’t invest that way. Well, we call BS on that.

Within the past week we’ve had clients (whom we assumed drank enough of the Apollo Kool-Aid) ask rather dangerous questions. One client wants to abandon a balanced multi-year plan designed to succeed over the length of a business cycle because “my investments haven’t kept pace with the (speculative) market over the last 18 months.” Another client wants to know “how long we’ll be conservative since markets keep going up.”

Once again investors fail victim to the trap.  Instead of comparing their returns to their individual and unique needs they compare them to arbitrary benchmarks or how well others are doing.

If informed investors can be ravaged by the disease of FOMO what will happen to the typical investor?

“It’s no surprise to me I am my own worst enemy.”

Lit

The handwriting is on the wall. Do we have the courage to read it?