| The great Yogi Berra reportedly once said "If you don't know where you are going, you'll end up someplace else." Well, we don't really know where we're going right now, do we? For one, there's the employment issue where we now have 1.7 job openings in America for every person looking for employment. That's bound to put such upward pressure on wages and spending that it's very difficult to say how well the Fed's bitter rate hike medicine will work to slow the economy. At the same time, if the Fed does slow the economy, it's also hard to know where inflation will be when the economy reaccelerates and how the Fed will react as a result. In the 1970s, for example, after a brutal recession ended in 1975, inflation didn't bottom until 1976. And when it did, it was still almost 5%. So the economy accelerated from there, taking inflation upward in tow. Having inflation re-emerge from a high base is a big risk now given how tight the labor market is. And then, there's the stock market. Shares are still highly valued by most traditional metrics. This would suggest there is more pain to come in 2023 before there's an attractive base from which asset prices can build gains. But if the economy remains resilient and the Fed pauses for an extended period to assess whether its rate hikes have slowed the economy, you could actually see gains in the stock market. I still want to predict something though. And my thoughts are predicated on the concept that stock market cycles are built on the variability in "suspension of disbelief." It's a bit like going to the movies. You know full well what you're seeing is a bunch of professional actors in a make-believe story. Enjoying a film requires you to willingly suspend disbelief for a couple of hours and immerse yourself in the tale they weave. And if the screenplay is good and the actors credible, you leave the cinema smiling after your two-hour rendezvous with make-believe. In the stock market, it's not so much a question of make-believe storytelling but of tales of plausible future outcomes for the companies you are investing in. Bond markets are different. As my colleague Sonali Basak recently observed in her homage to the recently departed Scott Minerd: The big idea is not to lose money wherever possible. That's why optimism would fail you. A bond investor's secret is to see every possible way a bet can go wrong, and when Minerd knew the risk, he was ready to make a bold call.
In equities, it's all about dreaming big because that's how you make money. Tesla CEO Elon Musk is the best case in point. On his last earnings call two months ago, he said that: "several years ago, I said I thought it was possible for Tesla be worth more than Apple, which was then the highest [capitalization] company I think on the market at the time...Now I have the opinion that we can far exceed Apple's current market cap. In fact, I see a potential path which has us [Tesla] to be worth more than Apple and Saudi Aramco combined."
OK. But that requires Tesla to jump by tenfold from present levels. For Tesla shareholders to believe in this potential future outcome requires an extraordinary suspension of disbelief. I'm not saying it's impossible. But given the market dynamics today, only the most diehard Tesla fans will believe this is possible. I just suggested to you last week that increased competition and a 2023 downturn alone assure us that Tesla will struggle. Even if we avoid a recession in 2023, the pummeling risky assets have already taken is severe enough that this kind of magical thinking won't resonate. After having your investment in the likes of Tesla whacked by 75% — and when bank certificates of deposit and savings accounts are giving you 3, 4 or 5% interest — you'd rather run with the sure thing than believe pie in the sky predictions about future growth. What got me writing today was a look at the relative performance of US stock market indexes. You've got the staid Dow Jones Industrial Average losing about 10% over the last year. But that beats the S&P 500 which had dropped 20% through today's open. And pulling up the rear is the tech-heavy Nasdaq 100, down 30% in the last 52 weeks. That's the beginning of a trend. Suspension of disbelief is out and value investing is in. If 2022 was the year of the inflation surprise, I think 2023 will be the year of the consolidation of the fruits of that surprise: permanently higher interest rates, better returns from risk-free assets like savings accounts and investment-grade corporate bonds and a diminution in the value of future promises. This inflationary scare has changed investor psychology for the long term. And that means people value profits in the here and now. Expect continued outperformance from consumer staples, energy, utilities and anything throwing off lots of present-day cash flows. If, as I suspect, the US economy does indeed turn down, that out-performance will be even greater. Let me leave you with an anecdote. Back when I was in college, Kevin Costner was starring in a spy thriller set in Washington DC called "No Way Out." I was excited to see my hometown on celluloid and sat down to watch the film, popcorn in hand one hand, giant coke in the other, in full suspension-of-disbelief mode. It was a great movie until the scene when Costner, looking to escape his pursuers, spied the sign for the Georgetown Metro stop and descended into the DC subway system. You see, there is no Georgetown Metro stop. And that has always been the subject of serious controversy in DC. What's more, once Costner got down to the subway platform, it looked absolutely nothing like the DC Metro system. It was jarring -- like someone slapping me in the face and telling me the whole thing was fake. That's what I think 2022 has done for investors in high risk assets like crypto, technology companies and meme stocks. 2022, with the normalization of monetary policy, slapped us across the face with reality. And that's a long-term headwind for Field of Dream companies. For them, 2023 offers more pain to come. | 
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