Nobody Knows (Yet Again)

Summary

• Lehman Brothers filed for bankruptcy on Monday, September 15, 2008, shortly after the New York Stock Exchange closed.
• The bankruptcy followed rescues or bankruptcies of Bear Stearns, Merrill Lynch, Wachovia, Washington Mutual, and AIG.
• Market participants concluded the U.S. financial sector was on the verge of melting down due to financial deregulation, a manic housing boom, unwise mortgage lending, high-rated tranched securities, highly levered bank investments, and counterparty risk from interconnectedness.
• A memo titled Nobody Knows was published four days after the Lehman filing, asserting that the future could not be predicted or analyzed.
• The author concluded that despite uncertainty, money should be invested in financial assets at highly discounted prices.
• $10 billion was deployed from Opportunities Fund VIIb into distressed debt due to available bargains & extraordinary yields.
• The author considers the phrase "analyze the future" an oxymoron because the future is subject to millions of complex, unquantifiable, & unknowable factors.
• In March 2020, the author reused the title Nobody Knows for a memo regarding the Covid-19 pandemic, citing a lack of applicable facts or analogous experiences.
• The author states there is no place for certainty in investing, especially during turning points & upheavals.
• The Trump administration is described as characterized by uncertainty, with thinking that is less predictable & subject to tactical application.
• President Trump has argued in support of tariffs since at least 1987 regarding U.S. treatment in world trade.
• No one anticipated the magnitude of tariff increases, & the markets had not priced them in.
• Large-scale decisions are being made without facts or prior experiences, as no large-scale trade wars have occurred in the modern era.
• Economists, investors, businesspeople, academics, & government leaders are not more likely to be right than the average intelligent observer regarding the current situation.
• Forecasts are less likely to prove correct than usual due to the vast number of unprecedented unknowns involved.
• Deciding not to act is an act in itself & should be scrutinized as critically as a decision to make changes.
• The negative developments that cause price declines often represent the best time to step up & buy.
• Everything is subject to change due to Trump's tactical focus, including tariff rates.
• Goals for enacting tariffs include supporting U.S. manufacturing, encouraging exports, discouraging imports, shrinking the trade deficit, making supply chains more secure, deterring unfair trade practices, forcing countries to the negotiating table, & generating revenue.
• Likely consequences of tariffs include retaliation by other countries, price increases, rising inflation, destruction of demand, recession, lost jobs, supply shortages, & a massive change in the world order.
• Tariffs are taxes on imports that are usually passed on to the ultimate purchaser, the consumer.
• There is insufficient manufacturing capacity in the U.S. to immediately replace imports, & new factories would take years to build.
• There are likely not enough skilled workers in the U.S. to replace workers in China & the developing world.
• Americans buy imports because they are cheaper, & U.S. products often do not justify higher selling prices.
• Higher prices are likely to result in declining standards of living unless wages rise as fast as prices.
• Higher prices are likely to result in lower unit sales & declining profit margins.
• Corporate profit margins are considered a leading indicator of recessions, as pressure on margins causes corporations to stop investments & engage in layoffs.
• Imposing tariffs on imported steel in 2018 saved 1,000 jobs in the U.S. steel industry but cost 75,000 jobs in U.S. steel-using industries.
• Economic activity is fed by animal spirits, which are a spontaneous urge to action rather than inaction.