“He who learns but does not think is lost. He who thinks but does not learn is in great danger.”--Confucius
A Chinese philosopher said that when it’s obvious goals cannot be reached, don’t adjust the goals—adjust the action steps. Global central banks have taken those lessons to heart.
The construct of capitalism has forever changed and investors are spinning from the insane volatility gripping financial markets. 20% moves in major market averages—session over session—are tough to stomach regardless of your directional bias.
One year ago, when the writing was on the wall as the Dow Jones Industrial Average probed all-time highs, pundits confidently proclaimed there was clear sailing ahead.
Last week, as perception caught up with the daunting reality of debt and derivatives that we’ve been warned of for years, depression was debated across mainstream America.
You can’t blame folks for being confused. We’re past the point where bulls and bears profit or lose. We’ve entered a new world order, a scary stretch where politicians rewrite history on a daily basis in an attempt to escape the devil of deflation.
There are certain things we know for sure. Universal truths, if you will, that can provide clarity amid the confusion. We’ll tackle five themes today with hopes that we’ll shed some light as we together find our way.
Two trading dynamics considered gospel for many years have effectively been debunked. The first was that lower crude would serve as a positive equity catalyst and the second was that a higher dollar would bode well for stocks.
We live in a Wishbone World with dollar-denominated assets on one side and the greenback on the other. One of two things must occur: either the world reserve currency will debase, paving the way towards hyperinflation, or the dollar will strengthen as debt destruction continues it’s natural course.
The U.S. government is attempting to buy the cancer and sell the car crash. The mere perception of “success”—a whiff, if you will—should be enough to shift psychology to the other side of the ride, damaging the dollar and propping stocks higher for a trade.
The hedge fund bubble popped this year and the carnage has been pervasive. On top of regulatory scrutiny and operational restrictions, the correlation of strategies has buried the best in breed well below their high water mark.
An obvious concern is the potential for continued redemptions and forced selling. Many macro portfolios are laced with derivatives and won’t be bailed out by the U.S. government umbrella, introducing the specter of further systemic risk.
Nobody is smarter than the market and I’ve long ago learned that if you don’t stay humble, the market will do it for you. What I’ll say with confidence is that the market tends to follow the path of maximum frustration and rarely rewards herds running aimlessly towards a cliff.
While the process of price discovery is fluid—dependent on a multitude of variables including credit, the dollar and geopolitical strife—it’s my opinion that we’ll look back at last week as the 2008 trading low (not to be confused with a market bottom) before a harsher downside comeuppance arrives next year.
There are two natural paths for financial markets—time and price—and an unenviable destination, that of debt destruction. The sooner we’re allowed to take our medicine rather than being given drugs to mask the disease, the quicker we’ll arrive at a stable foundation for legitimate economic expansion.
We will cycle through this period and arrive at better days and easier trades, although it will take some time. Just as the Internet prophecy proved true—albeit not before the tech crash—so too will the golden age of globalization once debt destruction fully manifests.
The recovery will be led by China, India and other emerging markets and profoundly reward those proactively positioned. Our goal—as investors and as a human race—is to get there in one piece while being kind to each other during the journey.
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