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Every Time Is Different, And The Same
Submitted by Lance Roberts of STA Wealth Management,
Over the weekend, I read a very interesting article by Ryan Puplava discussing the fundamental backdrop of the financial markets. As he states:
"I've been hearing the pushback to the market's gains, there are a few that are louder than the rest. I guess if you say something enough times; it becomes the truth."
Ryan argues against a list of fundamental criticisms of the bull market as follows:
- Stocks are overvalued
- Stocks are up because of the Fed
- Earnings are growing only because of buybacks
- Stocks are in a bubble
While Ryan's analysis is correct when using a 20-year data set, I would argue that the dataset is too small for proper analysis. Over the last twenty years, we have seen witnessed three stock market elevations and two deflations. Each bubble and subsequent collapse were driven by excess liquidity, willful blindness to fundamental underpinnings, Federal Reserve interventions, Governmental deregulation and interventions, relaxation of accounting standards, leverage, suppression of interest rates and the rise of capital cronyism. Never before in history have so many artificial supports been singularly focused, both domestically and internationally, on the inflation of asset prices.
Most importantly, as I discussed this past weekend, while "this time is not different" it is also "not the same."
While Ryan argues the "fundamental" underpinnings of the financial markets; the problem is that market "bubbles" are "behavioral" in nature. As I stated:
"Now, let me throw you for a bit of a loop.
'Stock market bubbles have NOTHING to do with valuations or fundamentals.'
I know. I know. That statement borders on the verge of heresy but let me explain.
If stock market bubbles are driven by speculation, greed and emotional biases – the valuations and fundamentals are simply a reflection of those emotions.
In other words, bubbles can exist even at times when valuations and fundamentals might argue otherwise. Let me show you a very basic example of what I mean. The chart below is the long-term valuation of the S&P 500 going back to 1871.
"First, it is important to notice that with the exception of only 1929, 2000 and 2007, every other major market crash occurred with valuations at levels equal to, or lower, than they are currently. Secondly, all of these crashes have been the result of things unrelated to valuation levels such as liquidity issues, government actions, rising interest rates, recessions or inflationary spikes. However, those events were only a catalyst, or trigger, that started the “panic for the exits” by investors.
Market crashes are an “emotionally” driven imbalance in supply and demand. You will commonly hear that “for every buyer there must be a seller.” This is absolutely true to a point. However, what moves prices up and down, in a normal market environment, is the price level at which a buyer and seller complete a transaction.
In a market crash, however, the number of people wanting to “sell” vastly overwhelms the number of people willing to “buy.” It is at these moments that prices drop precipitously as “sellers” drop the levels at which they are willing to dump their shares in a desperate attempt to find a “buyer." This has nothing to do with fundamentals. It is strictly an emotional panic which is ultimately reflected by a sharp devaluation in market fundamentals."
(Note: this is also the danger of excessive margin debt in the financial markets. Margin debt is comprised of “loans” based on the value of a stock portfolio. As prices plunge, the drop in valuations trigger “calls” on margin loans which then requires more sells. The additional selling triggers more selling, and so on.)
In a highly complacent market environment, as we have currently, there is little attention paid to geopolitical tensions, economic or fundamental data or a variety of other relevant risks. The emotional “greed” to chase returns overrides the sense of logic. “Warnings” that do not immediately lead to a market correction are simply viewed as wrong. However, as investors, are we not repeatedly told to "buy when there is blood in the streets." Yet, in order to be able to buy in times of "panic," one would have needed to have "sold" into "exuberance."
The point is simple. Stock market crashes are triggered by an “emotional panic,” rather than a fundamental data point. While fundamentals are indeed important in determining the long-term (10 years or more) return on an investment, they are terrible at predicting "emotionally driven" turning points in market prices. Like a crowded theatre, no one worries when one or two people exit the building. However, the problem comes when someone yells "fire" and everyone tries to exit the building at the same time. The rush for the exits sends share prices plummeting regardless of the underlying fundamentals.
As I discussed recently in "5 Cognitive Biases That Are Killing Your Returns:"
"Though we are often unconscious of the action, humans tend to 'go with the crowd.' Much of this behavior relates back to 'confirmation' of our decisions but also the need for acceptance. The thought process is rooted in the belief that if 'everyone else' is doing something, then if I want to be accepted, I need to do it too.
In life, 'conforming' to the norm is socially accepted and in many ways expected. However, in the financial markets the 'herding' behavior is what drives market excesses during advances and declines. As Howard Marks once stated:
“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that 'being too far ahead of your time is indistinguishable from being wrong.)
Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian."
Moving against the 'herd' is where the most profits are generated by investors in the long term. The difficulty for most individuals, unfortunately, is knowing when to 'bet' against the stampede."
The current elevation in asset prices is clearly beginning to reach levels of exuberance particularly in high yield "junk" bonds. This time, like every other time before, will eventually end the same. However, while this time "is not different" in terms of outcome, the fundamental level from which the eventual "reversion to the mean" occurs will likely surprise most of the mainstream "bullish" clergy.
There one overriding advantage of the “always bullish” financial media is that they created "protective bubble” of never being wrong. When asset prices are rising they continue the “sirens song” of the bullish mantras of long term investing, buy and hold, and beating some random benchmark index. However, when it inevitably goes horribly wrong and costs individuals a major chunk of their life savings, the excuse is simply “well, no one could have seen that coming.”
In the end, we are just human. Despite the best of our intentions, it is nearly impossible for an individual to be devoid of the emotional biases that inevitably lead to poor investment decision making over time. This is why all great investors have strict investment disciplines that they follow to reduce the impact of human emotions. While fundamentals, valuations, and economics will have a significant impact on long-term returns, they are all extremely lousy tools for managing portfolio risk in the short term.
Take a step back from the media, and Wall Street commentary, for a moment and make an honest assessment of the financial markets today. If our job is to "bet" when the "odds" of winning are in our favor, then exactly how "strong" is the fundamental hand you are currently betting on?
This time could indeed be different, but are you willing to bet your retirement on it?
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No shit?
Fri, 09/03/2010 - 11:41 | hedgeless_horseman
Fundamental analysis? Earnings? Technical analysis? Charts? We don't
have a prayer when Ben has his finger on the button under the table.
You can take the ghosts of Graham, Dodd, Edwards, and McGee, as well as every CFA on the planet to manage a portfolio. I'll take one insider at 33 Liberty and my performance will wipe the men's room floor with your's.
http://www.zerohedge.com/article/ecri-declines-again-pass-below-double-dip-10-threshold-again#comment-562073
gh0atrider almost wants to go out and buy an index just because he know's that will finally bring this mf'er down.
Last year, I publicly dared the market to go down. I even used reverse-sarcasm and said it never would again.
It didn't work.
Dump all you want....the Fed will buy....look at today....it was close. Easily could have flushed except for you know who buying
I agree, historical analysis and charts are worthless, with central banks buying, what happens next is anyone's guess. For all readers, my question is how long can they keep it up, with every bank doing the same thing, how long can this continue.? I'm asking, because i dont know anymore.
CNBC Just had headline: " Banking earnings shine"
What?
Marketwatch: Yahoo misses target, but shares are up.
Junior miners have been routed.
In a rational world, sell side & buyside would be asking if Marissa is worth her 300 million in options/compensation given YAHOO ex-Alibaba is actually grown -20% in 2 years, while she has consistently came in at the top of all compensation metrics, while pushing out good workers for ego projects.
Come to think about it, half the tech world should be off massive given the slowing growth in cloud & mobile micro-transactions. who are still mostly negative gross margins ex-stock options & accounting gimmicks.
It's not enough to argue emotions when "the only emotion being argued is euphoria" (and it's malcontents.)
I agree...euphoria is always followed by depression...but one cannot argue that euphoria therefore does not exist.
The "safety play" is everywhere and always with the data. An investing thesis to be true must be backed by the actual "something" that is argued "has happened in the past and thus will happen going forward." (Bakken shale et al.)
Fuel cells had an epic rally today. On no news? Obviously not. (Fuel cells have been around since the 1890's.) it's the sheer size and scale of the production of natural gas production from whence hydrogen can be derived thus providing the "fuel" for the fuel cell.
Unlike lithium ion batteries (which are reaching maturity in truly spectacular fashion here) fuel cells have been a mature technology for well over a decade now.
This is highly disruptive to the internal combustion world...a world that has been with us...been us actually...since the 1890's.
Fuel cells are going no where fast, and I don't mean that just literally.
If you want the tech for the future it's EV's and Hybrids.
Yeah, until you realize hybrids have twice the problems of a single drivetrain and half the full life-cycle of a conventional oil/electric platform.
Fuel cells have been the new thing for as long as solar. Unlike solar, nothing has changed with their tech, which still suffers from temperature / collision explosions + horrible replacement costs for bad packs. If you want to aruge this, go buy some Ballard Power at 50 bux.
How do headlines like this make it through editing? Bloomturd and Reuters have zero credibility... I saved the 1st 4 comments in the screenshot.
http://i.imgur.com/xERsJL0.png
because, Obama.
"while "this time is not different" it is also "not the same.""
This distinction without a difference passes as analysis?
I don't care how many times an imaginary fairy farts when riding a unicorn, nor whether the author imagines their aroma is of fairy-dust or rainbow grass.
The only SIGNIFICANT DIFFERENCE betwee this round of money-printing insanity and all the rest is the volume of bills produced and the politician pictured on them.
zirp 4evah means that this isn't a problem and never will be
It's almost as if these people never heard of the fed and zirp
Algos don't care! Tuesday finished up!
risk in capital structure should vary inversely with business risk and volatility
paging Michael Milken
I didn't know the S&P was around in 1871...
Stocks need fresh money to move. The perception of an end to QE is all it takes to execute this market with extreme prejudice. It did its little last pump, as I have seen so often, in the face of the most horrid trend killing news. That is "arranged", using some other people's money, to get the connected people out. Then the pump and dump ends with a crash. This is just like when Steve Jobs died and AAPL started losing market share. AAPL soared for a little while. Then they kicked the crap out of it. That counter intuitive pop is not some market mechanic of buy the bad news. It is arranged. Just like the last few months on inducies have been "arranged". No free money and this thing has no hope. When central banks and soverign funds announce they are in for 29 trillion, and you should come in because the water is fine, that is bait you don't want to take.
This "emotional blood letting" of the next market plunge, are you saying it doesn't need a reason to start? Just the indication of a reason, the sneeze of a reason? And then the contagion it caught and the exit illness invades us all?
But the trigger must be something no? Yellen and her big mouth maybe? Yeltsin selling massive numbers of bonds? South Asia Sea conflict? ISIS crippling Iraq's oil production? Something has to trigger the panic.
Like the reasons given each day for stocks going ever higher the reason can be anything we make it. My favorite example, people still debate whether it was the policies of FDR or WWII that brought us out of the great depression.
A 20-year data set is indeed to short. I contend this cycle started in the early 1970s and saw a major reset when interest rates went through the roof in 1980 to halt inflation. Over the last few years economic policy has become far less stable and unsustanable.
We may soon be forced to face our economic Armageddon. The forces that have driven stock markets ever-higher and upward may be beginning to wane. Many markets became distorted years ago when QE and super low interest rates hit the economy in an effort to lessen many of the missteps of recent years.
This has been more helpful in holding up the underlying value of assets and derivatives than helping to repair a wounded economy. QE has up to now stopped an implosion of derivatives including the resulting contagion and shock that would have spread throughout the financial system. Unfortunately the economy has not fared as well as these asset prices and in many ways these policies have harmed Main Street. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/05/facing-our-economic-armageddon.ht...
Society has been pouring such a large percentage of wealth into intangible products or goods such as stocks. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.
The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas.
It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years. More in the article below.
http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....