Why Bear Markets Are Inevitable

Investment Analysis Clubs Saul’s Investing Discussions
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This is a piece on WSJ by TMF analyst Morgan Housel.

In the 1970s, most theories held that modern economies were fundamentally stable. Deep recessions and financial crises were anomalies, caused by outside “shocks” such as bad policy, war or a spike in oil prices.

Mr. Minsky, an economist at Washington University in St. Louis who died in 1996, didn’t buy this.

…

In short, Mr. Minsky believed that a stable economy leads to optimism, optimism leads to excessive risk-taking, and excessive risk-taking leads to instability.

“Success breeds a disregard for the possibility of failure,” he wrote. Booming business and “the absence of serious financial difficulties over a substantial period” leads to a “euphoric economy” where consumers and businesses grow increasingly comfortable taking on debt in pursuit of profit.

http://www.wsj.com/articles/why-bear-markets-are-inevitable-…

Anirban

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This version is just as accurate:

Why Bull Markets Are Inevitable
Here’s How to Get Ready for the Next Bubble, Whenever It Occurs

By DENNY SCHLESINGER
Updated Feb. 16, 2015 9:20 A.m. ET
0 COMMENTS
It has been more than seven years since the last bubble popped.

When will the next bubble come? I don’t know. I don’t think anyone does. But make no mistake: A new bull market—that is, a 20% or greater market appreciation—will occur.

Stock markets always will—indeed, must—bubble from time to time. To see why, consider the work of the late economist Hyman Minsky.

If markets are unstable they don’t just crash, they also bubble, for the very same type of reasons. Instead of fear, greed, over optimism take over. Just this weekend I got an email suggesting AIG warrants in place of my AIG stock:

If you wanted to lever up a bit (or keep your exposure with
less capital), AIG Warrants expire Jan 2021, trade at $23.50,
and covert [sic] at $45.

to which I replied:

I’m aware of the warrants but I’m avoiding leverage in the name of safety.

Now, think about this: AIG is busy buying back shares at around $50, shares which they happily will sell to us for $45. WHY ON EARTH does AIG want give money away? They don’t. But back a few years ago the warrants seemed like a good gimmick. Current and future shareholders will pay for it. I don’t expect to be holding AIG by 2021, I’m looking for an exit point already.

Why do we get so many scare articles by financial advisers? I have a rather nasty answer to this question. What’s yours?

Denny Schlesinger

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Why do we get so many scare articles by financial advisers? I have a rather nasty answer to this question. What’s yours?

I don’t know, the big shots make a lot of fast, easy money swing trading off $2-5 dollar pullbacks generated by fear and uncertainity? Hedgefunds are shorting a bunch of stocks and benefit from doubt?

You’re smarter than I am and have almost half a century more experience trading and investing than I do, why do you think?

Sweetadeline

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“Success breeds a disregard for the possibility of failure,” he wrote. Booming business and “the absence of serious financial difficulties over a substantial period” leads to a “euphoric economy” where consumers and businesses grow increasingly comfortable taking on debt in pursuit of profit.

That’s a relief, Anirban. Glad to hear that there is NO bear market in outr immediate future!!! It’s hard to remember a time when there was so little euphoria, so little overconfidence, and so much cash on the books instead of debt.

Saul

For FAQ’s and Knowledgebase
please go to Post #5584

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Why do we get so many scare articles by financial advisers? I have a rather nasty answer to this question. What’s yours?

Negative headlines generate more clicks and page views than positive headlines.

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Here’s my take on bubble/bust cycles.

Bubbles like the mortgage debt crises are not only inevitable, but considered desirable by the uber-rich, so they will actively foster the conditions that create the bubbles and the subsequent bust.

Why you may ask? Don’t the bubbles damage their net worth, so why on earth would the desire the economic carnage?

The answer is simple. Of course their net worth is damaged, in fact they may lose millions of dollars, but don’t mistake this with impairment of lifestyle. Fact is they don’t even notice it. But here’s what they relish, the medicine . . .

The standard medicine (since FDR) has been austerity rather than stimulus. Even though austerity as a remedy is based on since discredited academic study, and even though there are precious few (if any) real world examples of austerity actually providing widespread economic benefits, the one thing it reliably produces is fire sale prices of physical assets. Debt burdened real estate, plant, machinery, equipment, etc is virtually given away. And who do we inevitably find in line picking up these assets for next to nothing - you guessed right if you guessed the uber-rich. They’re the only ones around with the wherewithal to gather them up.

When the economy recovers - as it inevitably does, most of these assets regain value providing handsome profits to those who already were in possession of the most wealth to begin with.

You may think this is just cynical, but take a look at the pace of wealth inequality since the 2008 economic crises here, in Europe and even in China and Africa (lest you weren’t aware, the distribution of wealth in the US and Uganda are roughly the same).

One of the few places where we don’t see the same result is Iceland. The government there responded to the economic crises by jailing the bankers who were largely responsible for the melt-down and providing debt relief for the average citizen as well as stimulus for general economy.

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