By Jawad Mian of Q Invest
In Greek mythology, Cassandra was a princess of the legendary city of Troy, and the most beautiful of King Priam’s daughters. She was seduced by Apollo, who gave her the ability to predict the future. But when she refused herself to him, he cursed her by making people disbelieve her predictions. So she went around knowing and predicting the future, telling people what was going to happen, but no one ever believed her. She foresaw the fall of Troy, but couldn’t prevent it. Cassandra is a figure both of sagacity and of tragedy, where her combination of deep understanding and powerlessness exemplify the tragic condition of humankind.
I find the mythic origins of the Greek prophetess and the metaphorical application intriguing in so far as it relates to financial markets. What Cassandra sees is something dark and painful that may not be apparent on the surface of things or that objective facts do not corroborate. She may envision a negative or unexpected outcome; or a truth which others, especially authority figures, would not accept. In her frightened, ego-less state, she may blurt out what she sees, perhaps with the unconscious hope that others might be able to make some sense of it. But to them, her words sound meaningless, disconnected and blown out of all proportion.
The stock market will soon start a steady erosion that will scar the life of anyone invested on the wrong side. Profit-taking, profit-taking the savants will say. Do not listen. Markets are very Darwinian, and their tendency will be to deliver an outcome that would make a greater fool of the investing majority. The sentiment amongst equity mutual fund managers clearly illustrates that the consensus is fully invested today. Mutual funds’ cash holdings have reached a record low of 3.4%, the lowest reading in the 60 year history of the indicator. That means investors are even more fully invested than they were in 2000 and 2007, despite having been through two merciless bear markets in the previous decade.
Changing viewpoints is a gradual process. Flipping from bullish to bearish, and vice versa is difficult. We remember what most recently rewarded us, and internalize that. After a period of economic expansion, we are slow to grasp the change for the worse. Consensus earnings estimates for 2011 and 2012 are still greater than $95 and $108, respectively, at the same time that GDP estimates are plummeting. To put these figures into perspective, analysts were forecasting a near 20 percent decline in earnings at the market’s trough. Today, expectations are for 22 percent growth in the year ahead. Following that idea, the analyst community is typically too bullish at tops and too bearish at bottoms. Hence, they miss the inflection points. We are right on the cusp of falling forward earnings.
It is not that the price level of the market is unsoundly high. The fall in the market is going to be very largely due to the psychology by which it is going down because it is going down. The psychology of panic will then permeate social and economic interactions, influencing consumption of goods and assumption of debt as well as smaller everyday decisions that are difficult to measure, but which add up to a decreased sense of well-being. In due course, it will also serve to tip us into another economic recession. The weight of the evidence clearly points to a double dip. Those that can’t see this simply don’t want to.
Cassandra has become the archetype for many prophetic characters who are either ignored or cannot be comprehended until after an event has occurred. Our catastrophic failure to heed caution has much to do with our preference to look at the surface rather than what underlies appearances. Sometimes illusions are far more comfortable than reality. That may explain the unchecked investor optimism and the market’s deluded state of mind. Make no mistake - the current rally is a myth. From the standpoint of the Greek philosopher Solon: ‘Observing the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments. For the uncertain future has yet to come, with every possible variety of fortune.’