Fog of War

“Man proceeds in the fog…. Looking back, he sees the path, he sees the people proceeding, he sees their mistakes, but not the fog.” – Milan Kundera, Testaments Betrayed: An Essay in Nine Parts

Dear Clients and Friends,

If you listen to the ‘experts’, you will find there is roughly a 10 – 80% chance of a recession in the next 12 months. This wide range of variability is the “fog”, similar to the phrase “fog of war”, (coined by Prussian military analyst Carl von Clausewitz), which has become an expression that describes the uncertainty surrounding an imminent event.  While it is often used prior to military conflict, it translates well into athletic events, foreign relations and yes, it can be aptly applied to our stock market. When operating in the ‘fog of war’ there are some things you can’t know. What if the proverbial ‘fog’ can also be applied to the way we read our markets history?

We survived, and some might argue, thrived in a multi-year period of extremely low rates brought on by Fed action during the 2008 Financial Crises.  I often wonder if Chairman Bernanke envisioned a 14-year period of near zero interest rates during the fog of the Credit Crises? What about Paul Volker? As Chairman of the Fed, he decided to raise interest rates to 20% in June of 1981. Did he fully understand it would lead to 10% unemployment and a short but deep recession?  Some historians consider Volker’s actions a mistake, but was it a mistake given the impotence of the half measures promulgated by both the Fed and Congress that had only stoked inflation over the prior 2 decades?  Volker was operating with a mandate – Bring down inflation at all costs! Today, Chairman Powell is dealing with the same type of “fog” that Volker had once dealt with. Does Chairman Powell have any idea of what the optimal rate for our economy should be going forward? His message as stated in a congressional testimony, “without price stability, the economy does not work for anyone”, appears to be similar to that of Volker. Meaning: inflation will come down on his watch regardless of the consequences.

The lessons we take from our financial history must to be communicated in context, and that context helps the reader identify with the decisions and consequences of past decisions. Even the most judicious investor has to be humbled by the thought that regardless of their knowledge, there will be times when we operate with ‘known unknowns’. If you had to predict an outcome, you might throw your hands and say, “50/50”. But investors don’t want uncertainty in the face of dire potential outcomes. So, we look through the fog, and ask ourselves, “what can we control today that will mitigate uncertainty going forward?”.  Just as a prudent driver slows down when entering a foggy stretch of road, so too must an investor pull back from aggressive speculation and begin to ‘pump the brakes’ by taking on less risk.

In addition, the risk tends to be amplified in the fog, as other drivers, animals and unseen road hazards are harder to see and more difficult to interpret.  The same is true for our markets, where the risks that are ever-present in our markets are suddenly amplified by the Feds actions to slow the financial system. Later, the fog lifts and we know the events as historians tell us, but the fog surrounding the real-time events is lost in the pages of history. As interest rates ascend, so does the risk of an accident.  When the history of this rate cycle is written there will be many things that appear certain in the writing; yet were simply unknowable at the time of the events. What the investor needs today is to check their risk, pump on the brakes [if necessary] then take advantage of the opportunity set that the fog creates.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risks including loss of principal. No strategy assures success or protects against losses.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.


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