Mistakes are made often. The key, of course, is to figure out the mistake, and then to correct it. It sounds relatively simple. It is not.
The vast majority of investors show up with their prejudices sparkling on their sleeves and it is difficult to get rid of them. Prejudices are like a bad cold. They hang around and wear you down. So, even when you finally realize that you have erred in judgment, you can't quite seem to let go, or change course, because you don't want to believe what you have discovered.
You may think I am making a philosophical comment. I am not. As the chief strategist for my firm, I watch these occurrences daily. Many investors cannot let go of what they "think" should be happening and so their definition of the future, of what is about to take place, is flawed from the moment of inception.
"Never interrupt your enemy when he is making a mistake." - Napoleon Bonaparte
My observation is being born out in the markets in a number of ways. First, I point to the Federal Reserve and the assumption that the Fed of today is going to be the Fed of tomorrow.
President Donald Trump is about to appoint four new Fed officials, after Jeffrey Lacker's rather striking resignation, and the past cannot be used to judge the future given the pending appointments. We are going to get business people on the Fed and all of the academic superlatives will get quashed with the first appointment. The fanciful notion of multiple interest-rate increases will also get quashed as the new appointees, reflecting both a business posture and the new Trump administration, will cancel or curtail any new hikes so that Mr. Trump's agenda can be financed as cheaply as possible.
"Normalization" will be out. "Pragmatism" will be in.
The issue concerning the balance sheet is one that should have been dealt with long ago. The Fed claimed it was maintaining their $4.5-trillion position to "stabilize" the markets. I believe they were maintaining it to "control" the markets as they could utilize their choice of securities and maturities to shape the yield curve and interest rates. They set the standards and bond investors made decisions that were not based upon the economy, but upon every nuance that someone muttered at the Fed.
Consequently, if the 900-pound gorilla actually goes on a diet, then the attention will turn back to the economy and it will not be so focused on some Fed governor's utterances. "Normalization" will return. It just won't be the Fed's definition. The Fed will return to being America's central bank and not the central bank for the world.
"America First" is not devoid of meaning.
Another "Big Mistake" is found in the assumption in the energy markets. OPEC is a "dead man walking." They, and their friends, used to control energy markets and America, along with other western nations, were held hostage as a result. This was great for them and bad for us.
American technology has changed and will continue to change this paradigm. The U.S. now has the largest oil reserves in the world, all because of fracking, re-fracking and horizontal drilling which continues to not only provide more oil and natural gas, but to bring down the cost of production.
OPEC has lost control. America has gained control and it is a "Big Mistake" to think otherwise. Here is another example of faulty thinking as the markets just can't quite believe this has taken place. Old prejudices die hard and yet deductive reasoning only allows you to go in one direction.
I also point to the political process here as I expect, sometime soon, the U.S. to tax the importation of foreign oil and natural gas and to provide tax credits for their exportation. This one act would have a tremendous impact upon the U.S. and provide a new, and huge, income stream as American oil company revenues and profits grow dramatically, and pay American taxes in the process.
"America First" means "Them Second" and in the case of OPEC, it is likely to mean a gradual disappearance of their importance on the world's stage. This is likely to lead to political destabilization in these countries, but they will get what they finally deserve.
The Trump administration brings many challenges. I have spoken of just two issues today. The point is that we have broken with the past and the future cannot be extrapolated from the past any longer. Whether it is politics or technology, the game has changed, and it is a "Big Mistake," a capital mistake, to think otherwise.
"It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts." - Sherlock Holmes
Mark Grant is a managing director and chief strategist at Hilltop Securities.