Timing the Comeuppance
The chaff between variant views is where true education is found.
Editors Note: The following conversation took place between Minyan Frank and Todd Harrison. Minyan Frank's comments are italicized for your convenience.
As I’ve read your work since 2000, and you saved me much coin, I'd like to thank you. The thoughts that I’m currently wrestling with are as follows:
Guys like you who were correct 10 years ago about the coming malaise/depression/recession (whatever you want to call it) for the most part are still negative on the macro. You may still be correct that we have a long way to go, but at some point we should begin to heal ourselves and progress forward. That point could be now, unless you believe our system is broken beyond repair and our progress as a society has peaked; something that many of us don’t want to believe, and something I don't believe.
With a conscience nod to the path we take over the destination we arrive at, I sense this juncture will be viewed much like 2006-ish with the benefit of hindsight. I was branded a bear for most of the last ten years. Given the last decade was the worst financial performance in history, I believe that speaks for itself. I would also (humbly, and for perspective) note I was bullish on energy and metals for most of that stretch.
Do I think we're broken beyond repair? No; I think there will be massive opportunities on the other side once we take the medicine of debt destruction. Could we “echo” higher before that happens? Sure; these aren't "natural" markets anymore and nothing would surprise me. Are we up, up, and away on a secular bull market tear? I don't believe so, and would draw your attention to the chart we featured courtesy of David Rosenberg a while back, which nicely summed up "why?"
I will venture to say that everyone in this business at one time or another has looked to others to help form an opinion about the economy or markets. That’s what you’re doing at Minyanville. You are sharing ideas that could help us navigate the markets. By doing this, you are admitting it is worthwhile to read and research what other smart people are saying/doing in regards to investing.
In this regard, I will bring up Warren Buffett. I’ve read much about him, and read through all his annual reports. I will say this with the caveat that nobody is bigger than the markets. He is 80 years old, and has seen more than you or I have seen; probably more than anybody who writes daily blogs, newsletters and subscription websites has seen. All these writers want to profit off of others who are looking for help. He has only commented four times in public about the general market (less is more), the other 3 times were correct (1974, 1979, and 1999). Now he’s saying for the next 10 years equities will perform better than cash and fixed income. Talking his book? Yeah I guess. All throughout the 2000’s he commented repeatedly in his annual report that he didn’t like equities...now he does.
I won't debate Warren Buffett is a wise bird; he's seen a lot through the years and experience is the breeding ground of perspective. Unless I'm wrong, however, he's not saying the markets will enjoy a straight-shot higher. In that regard, we may be more aligned than meets the eye.
I don't have a crystal ball but I'll offer we've got another 5-7 years of tough sledding. A lot depends on how we navigate this multi-linear dynamic. A lot depends on the dollar, the euro, debt, derivatives, social mood, credit, geopolitics -- you know the drill.
Let's assume, for arguments sake, the comeuppance doesn't arrive until 2012 and we deep-dive back towards the lows. From there, we begin the rebuilding process; from there, we've got eight years to climb higher. I'm not saying that happens. I'm simply illustrating there are a few ways to arrive at his conclusion that don't necessarily conflict with my view.
I would bet that dollar cost averaging into the SPX over the next 10 years will yield decent results. Simple, easy, and it doesn’t require subscribing to any websites.
Where you stand is a function of where you sit; your time horizon and risk profile. It would certainly be less stressful. It would certainly allow one to enjoy the journey of life. Remember back in 2004 or so when I said I should get long energy and metals, short tech and financials and open a taco stand in Costa Rica? I would be tan, taught, happy and wealthy if I followed my own advice; perhaps you should do the same (while maintaining your Minyanship, of course ;).
One more comment about Warren Buffet. How many 80-year olds do you know who say things like, “America’s best days lay ahead?” Most 80-year olds I know complain, and look to the past with fond memories. They often say how the whole entire world has gone to pot.
Hey, I'm an 'optimistic realist' -- I love March Madness, apple pie, and America and very much want to leave a better world for our children. I'm also unsure if the state of our union is really 'that' screwed up or if I'm just getting old enough to understand how things operate. I'm sure those who lived through WWII or Watergate might have more seasoned perspective.
In the interest of full disclosure and complete transparency, I'll share that when I watched Shock & Awe on CNN, the first thought to pass through my mind was, 'This is a tipping point through a historical lens; this could very well be a shift in the global balance of powers not unlike the fall of the Roman empire.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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