I muse on this term, so fondly taken up on the board, with its comforting connotations of the reasonable, the temporary and the soon overcome.
When the recession or inflation finally comes and the authorities have no resistance available, and the algos. and margin calls and currency traders and momentum-players and Uncle Tom Cobley and all get to work, it is not a correction I am expecting. It is a world-wide collapse.
What is the expression here? Oh yes: ‘Just sayin’!
Strelna
So this means that you are…100% gold and building an underground bunker…contemplating suicide? I am just not sure what the take away is from your post. I am not saying you are wrong. I just don’t pretend to be able to predict the future well.
Whenever pundits are on CNBC or doing You Tube videos, calling for total collapses, worse than the depression, I always wonder why more of them don’t just tell viewers to go to some desert island and live like Tarzan or contemplate suicide. I mean, these things actually sound more appealing than the future they are describing. And yet, they all seem very intent to grow their businesses and accept dollars for payment.
Just saying. What are doing about it?
‘Correction’ is PC speak for all hell breaking lose. Spanish saying: “It’s one thing to look at the bulls from the sidelines and another to be in the ring.”
The problem with ‘corrections’ is the chain-reaction which depends on the criticality of the market. I consider the two main drivers of chain-reactions to be leverage and stop-loss orders neither of which has much to do with valuation per se but with the ‘animal spirits’ of the market.
Consider for a moment a run on a bank. The first people in line get their money but the rest don’t making it imperative to get in line quickly. If the bank can convince the crowd that there is cash for all the queue dissolves because trust is restored. All it took was perception, not the actual valuation of the bank’s ability to pay.
Brian Wesbury is one of my favorite economists. He made the observation that as soon as the ‘mark-to-market’ rule was abolished in early 2009 the market bounced off the bottom. What is the connection? By 2007 the market was highly leveraged in great part by the huge supply of derivatives. When the market started falling in late 2007 the market value of securities started falling. Even if you had no intention of selling a security which you planned to hold for a length of time, say to expiry, had to be priced at the current value. This reduced the value of assets of debtors to the point that some had to sell ‘something’ to meet covenants and margin calls. This selling further dropped the market starting the chain reaction. The price of assets no longer were linked to intrinsic value but solely to market value. By eliminating the ‘mark-to-market’ rule the value of assets became higher overnight. A simple accounting rule change might have been the signal to stop the market rout. In my opinion, these accounting rules are written by academic eggheads who never had a real job and never ran a business. ‘Mark-to market’ was more ideological than practical, it was designed to safeguard clueless, gullible investors. If you search TMF for posts of the time you’ll see I was totally against ‘mark-to-market’ while most Fools thought that ‘mark-to-market’ was just and peachy. You can’t protect everyone from everything, the path to Hell is paved with good intentions.
My point is that at tops and bottoms there is a steep disconnect between market and intrinsic value. If you have the resources, like Buffett has, not only can you ride them out but make a tidy profit from them. But if you are leveraged or otherwise constrained – including emotionally, the current will drag you along. One example: suppose you buy a 5% bond at par and expect to hold it to maturity, say three years, which is how I used to buy bonds. If interest rates rise the market price of the bond drops but yield-to-maturity does not change for you as long as you keep holding it to maturity. But ‘mark-to-market’ forces you to value it lower in your accounts. If you have some covenants based on the bonds you have the risk of being forced to sell ‘something’ potentially starting a chain reaction. Or your ‘fight or flight’ emotional reaction might flip from hold to sell which from my experience happens to me at the very bottom.
I’m not saying what will happen. I’m saying that complacency is a high risk posture. You are not entirely in control sometimes not even of your emotions which were designed for the jungle, not for the stock market.
Denny Schlesinger
No, I am not 100% in gold, nor building a bunker and certainly not contemplating suicide! I am enjoying this astonishing, if wholly artificial market to the utmost degree consistent with rough plans for ‘What would I do if…’ for when the music finally stops. If the market falls 20% the first day it will certainly be annoying; I would prefer more time.
Your extreme assumptions are not the inevitable corollaries of expecting systemic failure from anticipating a vast global hubris to be overtaken by a particularly nasty nemesis! Just show me the fire exits before I come into the club to gamble.
The takeaway is that I do not expect the market to recover in real terms, when this is all over, for years, possibly decades. So this board is a natural. When every possible asset is overvalued, anticipated growth which might even be in excess of current valuation remains the only recourse. I prefer the ones with fundamentals but chacun a son gout as the Francophones say.
There is one asset which is not overvalued: beautiful antique furniture. I have my eye on an absolutely stunning 18th. century burr-walnut table.
Funny - IMO all antiques are overvalued.
“The takeaway is that I do not expect the market to recover in real terms, when this is all over, for years, possibly decades. So this board is a natural. When every possible asset is overvalued, anticipated growth which might even be in excess of current valuation remains the only recourse.”
Then you should be in cash and gold.
It did not take decades to recover from the depression in the 1930s. It took a long time, but not decades. With more and more of the world joining the market economy, it is becoming harder for events in any one place to upset the apple cart.
IMO the valuations today are a direct result of low interest rates and the government printing a ton of money. The only alternative to the stock market is real estate, and I don’t know about where you live, but I live in the Seattle area and RE prices are going through the roof. And now the Chinese are entering the market. The value of my home is up 75% in 5 years.
The only alternative to the stock market is real estate, and I don’t know about where you live, but I live in the Seattle area and RE prices are going through the roof.
Yes.
So I am buying real estate in Mexico in the path of 2nd home development by retiring USAians and rich Mexicans.
But,
you gotta know the Territory!
david fb