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The 'Sisyphean' Hope Of Succeeding And The Brevity Of Financial Memory

Tyler Durden's picture




 

Excerpted from John Hussman's Weekly Comment,

“The gods had condemned Sisyphus to ceaselessly roll a stone to the top of a mountain, whence the stone would fall back of its own weight. At the very end of his effort measured by skyless space and time without depth, the purpose is achieved. Then Sisyphus watches the stone rush down in a few moments toward that lower world whence he will have to push it up again toward the summit. If this myth is tragic, that is because its hero is conscious. Where would his torture be, indeed, if at every step the hope of succeeding upheld him? … Sisyphus, proletarian of the gods, powerless and rebellious, knows the extent of his wretched condition: it is what he thinks of during his descent.”

 

Albert Camus

After little more than a year of legitimate revaluation of equities following the 2007-2009 credit crisis, and more than three years of what will likely turn out to be wholly impermanent – if dazzling – Fed-induced speculation, investors have again pushed the stone to the top of the mountain. Despite the devastating losses of half the market’s value in 2000-2002 and 2007-2009, investors experience no fear – no suffering as a result of present market extremes. There is no suffering because at every step, as Camus might have observed, “the hope of succeeding” upholds them.  

As we discussed several months ago, that hope of succeeding rests on what economist J.K. Galbraith called “the extreme brevity of the financial memory.” Part of that brevity rests on ignoring the forest for the trees, and failing to consider movements further up the mountain in the context of how far the stone typically falls once it gets loose. It bears repeating that the average, run-of-the-mill bear market decline wipes out more than half of the preceding bull market advance, making the April 2010 S&P 500 level in the 1200’s a fairly pedestrian expectation for the index over the completion of the current market cycle. A decline of that extent wouldn’t bring valuations close to historical norms, and certainly not to levels that would historically represent “undervaluation.” But consider that a baseline expectation, and don’t be particularly surprised if the market loses closer to 38% - which is the average cyclical bear market loss during a secular bear market period. A market loss of about 50% would put historically reliable valuation metrics at their historical norms, though short-term rates near zero would seem inconsistent with a move to historically normal valuations with typical (~10% annual) expected total returns, absent other disruptions.

The simple fact is that the completion of the present market cycle might be better, or it might be worse than historic norms. We know that we don’t want to speculate here in any event, but neither a severe market loss nor a move to “undervaluation” is a requirement for us to encourage market exposure. For our part, we would expect to shift to a significantly constructive position on a meaningful retreat in valuations – even if to still-overvalued levels – coupled with an early improvement in key measures of market internals.

The charts below display various journeys of Sisyphus - a chronicle of multi-year, increasingly speculative market advances that terminated in the same set of conditions that we presently observe. The charts show only the advance to the highs. So for example, the chart below of the advance to the 1929 high does not feature the 85% market plunge that followed, the chart for 1987 does not feature the subsequent crash, and the charts ending in 1972, 2000 and 2007 do not feature the 50% market plunges that followed. Then of course, there is the chart through last week which, we are assured, is entirely different from the others.

Examine these charts carefully, and ask yourself if you would have had any less confidence in the “strength” and “resilience” of the market at these pinnacles than investors appear to have today.

We can view the journeys of Sisyphus in these charts with an understanding of why investors felt no discomfort, despite the fact that they were about to lose a significant fraction of their assets. As Camus asked, “Where would his torture be, indeed, if at every step the hope of succeeding upheld him?”

 

Is this time materially different from 1929, 1972, 1987, 2000, or 2007? We doubt it. In the chart of overvalued, overbought, overbullish extremes below, I’ve replaced the Shiller P/E (which is a lightning rod) with a variant that I introduced in the 1990’s, basing the P/E multiple on the highest level of trailing earnings observed to-date – surely an optimistic and forgiving measure today given that profit margins are about 70% above historical norms, but one that signals rich valuation regardless. We certainly can’t rule out movements further up the mountain (though to us, 2013 was largely a replay of 1999), but those movements are likely to appear small in the context of what will be erased over the completion of the cycle.

 

 

Despite the inevitability of the descent of Sisyphus’ stone following these peaks, that inevitability should be the source of great optimism – not for current opportunities, but for future ones. Those with fidelity to informed discipline need only remain in the present moment, responding to the evidence as it changes, without needing to judge advances or declines as fortunate or unfortunate. The benefits of that discipline emerge over the course of the cycle even if some events seem unwelcome. Likewise, the existentialist Camus understood the cycle of things, and properly recognized the value of even the descent, without needing to judge it as tragic:

“If the descent is thus sometimes performed in sorrow, it can also take place in joy. There is no sun without shadow, and it is essential to know the night. I leave Sisyphus at the foot of the mountain! One always finds one’s burden again. But Sisyphus teaches the higher fidelity that negates the gods and raises rocks. The struggle again toward the heights is enough to fill a man’s heart. One must imagine Sisyphus happy.”

 

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Mon, 05/19/2014 - 14:24 | 4774593 Grande Tetons
Grande Tetons's picture

The market is basically behaving like we can invest without insurance. Hmmmm...that is like bungy jumiping without a cord....no? 

 

Mon, 05/19/2014 - 14:28 | 4774600 1stepcloser
1stepcloser's picture

who needs insurance, when you have a lender of last resort...

Mon, 05/19/2014 - 14:31 | 4774604 Grande Tetons
Grande Tetons's picture

All of the clients of Pompeii Savings and Loan. 

Mon, 05/19/2014 - 14:43 | 4774631 centerline
centerline's picture

lol.  Almost cost me a keyboard.

Mon, 05/19/2014 - 17:34 | 4775087 TheSecondLaw
TheSecondLaw's picture

LOL! Fell off my chair.  

Mon, 05/19/2014 - 14:44 | 4774636 Dr. Destructo
Dr. Destructo's picture

Or stage diving in a crowd of taxpayers that subsidized one's losses.

All we gotta do is let them fall through but it takes the cooperation of the vast majority to make it work.

Mon, 05/19/2014 - 16:05 | 4774857 TheRideNeverEnds
TheRideNeverEnds's picture

Thats because downside risk from here is negligible, we have broken out and reaffirmed generational lows.  Look at a long term chart.  

Triple top breakout = generational lows; the Dow will never again trade below 14000, you can basically buy with reckless abandon because your risk is down to 14000 and upside is infinity.  The risk reward favors buying everything.  

Mon, 05/19/2014 - 14:30 | 4774606 dontgoforit
dontgoforit's picture

Only in our time can we make the myth fact.

Mon, 05/19/2014 - 14:39 | 4774620 gdiamond22
gdiamond22's picture

As a younger man playing high school basketball, our coach would routinely quote this about the 'struggle itself towards the heights is enough to fill a man's heart'. I have found myself uttering that same line since that time as we all have a rock to push up a mountain in our own lives. Generally, the struggle is worth reflection and can indeed statisfy. What is of much more concern is the rock our society is pushing up a mountain - the Framers of this great nation didn't curse us with a rock to push, the blessed us with a rock of our own - now this rock is owned, controlled, and used by a leviathan government, guarded by major media, inflated by central banks and when that rock gets to the top it falls back on the rest of us.

Mon, 05/19/2014 - 14:42 | 4774630 agstacks
agstacks's picture

No Plan B for the S&P500. 

Mon, 05/19/2014 - 15:06 | 4774700 spekulatn
spekulatn's picture

No worries. The PTB have a Plan Z.

8)

Mon, 05/19/2014 - 15:13 | 4774707 HardlyZero
HardlyZero's picture

Plan B was QExyz...  didn't work out that way.   end of the road.   Shrinkage (deflation) to follow, if the bond rates keep crashing lower that means everyone is leaving stocks and using the only legal means to invest retirement plans, municipalities, plans, planners, etc.  If the bond rates continue there decline then stocks are getting hollowed out.

 

The long-term S&P looks like a triple-top so far from 2000 to now.

Mon, 05/19/2014 - 15:24 | 4774741 agstacks
agstacks's picture

So we just mandate people own stocks, you know, for National Security reasons...

Mon, 05/19/2014 - 14:45 | 4774641 tommylicious
tommylicious's picture

We're chanelling Camus-- the top must be near.

Mon, 05/19/2014 - 15:30 | 4774768 dontgoforit
dontgoforit's picture

"Mother died today." 

Mon, 05/19/2014 - 14:55 | 4774667 what's that smell
what's that smell's picture

whattya get when you mix a kamoo and sissy pus?

a bullish spooz.

 

Mon, 05/19/2014 - 15:14 | 4774712 Al Huxley
Al Huxley's picture

Well, first, compared to 29 and 87 we're clearly well short of the parabolic phase, so 'party on'. 

Second, MAYBE this time the market finally achieves escape velocity and keeps shooting straight up on an exponential asymtote.  Do you REALLY want to risk not being in the market when it goes to infinity, just because you're afraid it will do what it's always done and crash from an exponential spike? 

Can you afford to be so recklessly conservative that you miss the 'once in a life of the universe' time to be in the only market that ever just goes straight up forever? 

Think about it - the bold and the brave who hang on through the dizzying exponential rise to infinity will own the world - masters of the universe, demigods amongst mortals, and you, who cowardly sold out in fear of a correction will sit in your dirt hut and imagine what might have been if only you too had been courageous enough to dream the impossible dream.

Mon, 05/19/2014 - 15:32 | 4774774 dontgoforit
dontgoforit's picture

Mud hut, mud hut.

Mon, 05/19/2014 - 15:44 | 4774807 kolya111
kolya111's picture

Hussman Strategic Growth Fund, 5-year CAGR:  -5.15%

In his defense, Hussman offers:  "the more you dislike my work, and particularly if you are nasty about it, I have no objection to you accumulating – perhaps on margin – as much stock from other investors as possible."

Terrible performance from a mean-spirited man.

Mon, 05/19/2014 - 16:08 | 4774856 Quus Ant
Quus Ant's picture

"If this myth is tragic, that is because its hero is conscious. Where would his torture be, indeed, if at every step the hope of succeeding upheld him?"

And what, precisely, would success look like? Retirement?  A fat wallet?  How fat exactly?  We have enough houses to home our population.  Held off the market... why?  We have enough cars to give out Oprah style rotting on the sidelines.  We already won.  The rock is at the top.  Now this is self flagellation.  auto-erotic asphyxiation.  shits and giggles. 

tragic.  success is relative to the failure of others.


Mon, 05/19/2014 - 17:56 | 4775148 Bear
Bear's picture

Oh, but this time it's different

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