Theories of Market Relativity
Five helpful tips into year-end.
"Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted." --Albert Einstein
We often say time and price are the arbiters of our financial fate and 2009 has proved that in spades.
A year that began with investors curled in a fetal position and fund managers wearing "CASH" across their chests like badges of honor morphed into a race to the upside and a chase for performance. If hindsight is 20/20, blindly betting into the March crevasse and riding the tide higher was crystal clear and extremely profitable.
A few weeks ago, I broke from my screens and sat with Steve Forbes for a thirty-minute segment. Among the topics of discussion were the state of the union and the fate of the tape. As I shared my sense that we're witnessing a cyclical bull nestled within a secular bear, I couldn't help but feel very much in the minority.
I recently touched on the litany of pundits, presidents, policymakers, oracles, corporate chieftains, and hedge fund honchos that have officially endorsed this rally. The roll call was a "who's who" with a market view, a collection of opinions assuring the public that it's again safe to jump back in the water.
I'm a humble guy, particularly in an industry where humility is viewed as a weakness, and pride myself in adapting -- but not conforming -- to the fluid landscape of global financial markets. While I'm relatively young in years, I'm confident history has never before dealt capitalism the hand currently being played by investors around the world.
We asked last week whether this was another bubble or deep trouble, quoting the wicked smart Fred Hickey who said, "we may be seeing early signs of the next bubble(s)," while offering, "it will be even more difficult to take short positions against stocks than it was leading up to the market tops in 2000 and 2007 -- as hard as that may be to believe." See also October 2007 Shows Us How This Rally Ends.
A few weeks prior, James Grant, perhaps one of the greatest market minds of our generation with a reputation for challenging conventional wisdom, penned a high-profile piece in the Wall Street Journal making the case for further upside. "The deeper the slump, the zippier the recovery," he said, citing the past as a prologue to the future.
As Minyanville readers know, I'm a big believer that 'excess breeds excess." That was our calling cry as the market climbed higher in the middle innings of this decade and we've seen a microcosm of that dynamic this year, only in reverse. Through it all, the word "cumulative" was -- and continues to be -- meaningful with regard to the consumer, debt levels, derivatives, and the ever-steady dollar devaluation. More on dollar devaluation in Does the US Want a Devalued Dollar?
Albert Einstein famously said, "Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are even incapable of forming such opinions." As an extension of that, I'll offer that when it comes to financial markets, the popular opinion is rarely the profitable one.
I don't claim to be as smart as those mentioned above and understand our ultimate destination pales in comparison to the path we take to get there. What I will share, through the lens of seeing both sides, is that the DNA of the global marketplace is vastly different than what it was when secular bull markets of periods past began to germinate.
FDR didn't know what a derivative was, nor were more than 60% of Americans invested in equities. I would further note we're coming out of a prolonged period of societal largess where many lived beyond their means. Excess breeds excess may apply to the depth of despondency but I would also argue it applies to the duration of the attendant hangover.
With a conscious nod to the credit markets -- which are seemingly pointing to an echo bubble created by the elasticity of government debt -- I will again offer that risk management trumps reward chasing despite what promises to be pervasive performance anxiety into year-end.
We don't "do" blanket advice in Minyanville as we don't know your time horizon and risk profile. We do, however, pride ourselves on truth and trust and will ask you to remember the following vibes as we edge our way through this historically significant fray:
Exercise independent thought, as you'll shoulder the responsibility of your decisions.
Always ask "why" rather than "what?"
Running with the herd may prove profitable but it often obscures the edge of the cliff.
Size matters in more ways than one; if you're staring at every tick, you're likely out-sized in your positions.
I'll also remind you that it's extremely difficult out there and there's no shame in admitting so, there's only shame in pretending it's not.
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