The goat is gone

The buoyancy and the optimism of the equity markets are now looking like a serious anomaly at the heart of the economic and business impact of the Covid lockdowns. Why are the markets so excited? Maybe because the goat is no longer in the room.

Let me explain what happens when the goat is no longer in the room. In a certain village, there is a very large and poor family who are living in a cramped room. One day, the head of the family goes to a wise old grandmother of the village and asks for some advice. "There are 12 of us in this tiny room," he says. "It's so dirty and cramped, everyone is always fighting, the children are crying, and there is no place for anyone to even lie down. What should I do?"

The wise old woman says, "Keep your goat also in the room." The man says, "Are you mad? The goat will make things worse."

"Just do it", says the old woman. The man comes back a few days later and tells her that now, life is absolute hell. "The goat is smelly and there are droppings all over and it kicks everyone and bleats loudly all the time." The old woman says "OK, fine, if it's so bad then keep the goat outside". Now the man comes back after a few days, looking pleased and happy. "It's wonderful, he says. It's just the 12 of us and we have the whole room to ourselves! No goat!"

As far as I can figure out, that's the explanation why punters are happy and the equity markets are zooming. The goat has gone out of the room. There's still going to be a business and economic disaster, but given some indicators that are now visible, they have built up hope that the disaster will be slightly less disastrous than what it looked like a couple of months back.

Maybe they are right, or maybe they are wrong. The fact is that visibility into the future is just as bad today as it has been at any point since about mid-March. One month ago, I wrote this: A month ago, when the immediate crash in equities was the deepest, I did not expect that by the beginning of May, I would be writing warnings to investors against getting too optimistic and enthusiastic. Over the decades, I have seen the equity markets do many weird things but the rise in stock prices during the month of April is probably the strangest. It's pointless to say that the March crash was overdone and therefore the April rally was due. My answer to all such logic is to ask the counterquestion, "How would anyone know?" By now, it's utterly self-evident that we are in completely uncharted waters at every level from a small neighbourhood business all the way up to the global economy.

Since then, we have gone through yet another cycle of hope and despair and then hope again. If you are a morning-to-evening punter, then your problems are different but for anyone whose goal is to grow and nurture the savings that they have deployed in the equity, it does not make sense to act one way or the other on marginal and questionable evidence. When one acts in haste, the chances of an overreaction is higher than that of stumbling upon some course of action that may prove to be better than the current one.

Right from day one, when the disease was limited to its mother country, there has been no shortage of people who have pretended to know what will happen, starting with Goldman Sachs' laughable prediction that global impact would be limited to companies with significant China exposure. The alternating waves of despair and hope that are washing over the equity markets will eventually fall in the same category.

If you were satisfied with the asset allocation and the quality level of your investment portfolio in February, then there is no reason to be dissatisfied now. If there ever was an 'act in haste, repent at leisure' moment in investing, then this is it.