Monday, September 10, 2007

What's in the bear's cave? Only what you take with you

For as long as I can remember (and probably longer than that), there has been a sizable bearish contingent in the investment community at large. And I'm not talking about people expecting a run-of-the-mill recession or a normal correction in some over valued asset class. I'm talking about a major recession/massive market repricing to correct a (perceived) deep imbalance.

Anyone who peruses popular blogs, online forums, etc., will find no shortage of ultra-bears. Even here at Accrued Interest, there have been many commenters in this category. Over the years I've read dozens of well-written, well-reasoned arguments for ultra-bearish scenarios. Since starting this blog I've read a few well-reasoned ultra-bearish arguments online or in the comments. Of course, I've seen many more poorly argued cases, but I digress. I'm fascinated by the ultra-bear phenomenon. Particularly since I can't remember the last time I talked to a professionally money manager who was seriously bearish. In other words, you talk to people all the time who are mildly bearish about some asset class or sector, but usually they're talking about anemic earnings growth or spreads reverting to long-run averages. Rarely do you hear a professional money manager make a claim like the S&P 500 will be lower in 5 years, or Treasury rates will rise to 10%, or anything along that line.

This is not to say pros are always right. The tech bust of 2000-2002 is a great example. A lot of money managers were negative on technology, but no body seriously expected the S&P 500 to lose 50% of its value peak to trough. I wasn't surprised when went bankrupt, but I was personally long stocks the whole time.

So anyway, why do ultra-bearish scenarios hold such sway over such a large number of people? Why do financial market disaster stories capture the imagination of so many? And at the same time, why do professional money managers seem to never think things will go badly? Here are my thoughts.

The financial markets always seem like a house of cards. We've seen time and time again stories of companies suddenly falling apart: Penn Central, Barings, Drexel, Enron, Worldcom, the S&L's, etc. Countrywide's flirtation with insolvency recently was a great example as well. In many cases, the company seems to go bankrupt either because of scandal or some complicated
structural issue that can be hard to understand. Again using Countrywide as an example, what percentage of college education people who read about Countrywide's problems in the paper actually understood the issue of securitization? Few. One can't help but feel like something fairly small can bring down the whole system.

And there are a lot problems in our economy that don't seem so small. The budget deficit. Foreign holding of Treasury debt. Terrorism. The negative savings rate. The Republicans. The trade deficit. The housing market. Energy prices. The Democrats. The War. Gold prices. Consumer debt levels. I'm sure I could go on.

Unfortunately, politicians and the media tend to use sound bytes to explain these problems and their potential consequences. And its often the case that the quicker, easier, more seductive conclusion is the bearish one. Take foreign holding of Treasuries. Currently about half of U.S. Treasuries are held by foreigners. A commonly quoted Fed paper claims that long-term Treasury rates would be 150bps higher if not for foreign holdings. The easy conclusion is that interest rates are vulnerable. And if real rates rise by 150bps, we know that a deep recession can't be far behind.

But when you start questioning the underlying assumptions behind a bearish conclusion, you realize this odds of this scenario are remote. Why would China decide to dump Treasuries, when doing so would decimate the value of their reserves? Why would they want to cripple U.S. consumers, which is the lifeblood of their export-driven economy? Besides, as long as the U.S. has a trade deficit, the dollars have to be reinvested in U.S. assets. China (or anyone else) simply can't just pull out of the U.S. market. Its nonsensical. By the way, the fear that foreigners would pull out of U.S. markets has been around for at least 30 years, going back to the petro dollar investors of the 1970's. But to hear the media tell it, the phenomenon is some how new.

I find another problem with the ultra-bearish argument is it tends to ignore economic dynamism. The U.S. economic is incredibly adaptable, and financial markets are even more so. The economy is more able to deal with events, such as 9/11, than ever before. And while obviously such things can cause pain in the financial markets, it doesn't threaten the whole system. Even events which have called into question the viability of certain types of investments, from the collapse of Drexel to the Russian default to the current CDO debacle, the financial markets are able to deal with it. There is still a high yield market, a emerging debt market, and there will still be a CDO market in the future.

It is also a fact that more forces are working to keep the financial system going than working to tear it down. For that matter, there are more forces working to keep a given company alive than drive it under. So that tells you that when you bet on the financial system being driven into chaos, you have to bet that external forces like the Fed or the government will be ineffective. Historically the Fed's reflation efforts have been quite effective at least in terms of limiting the broader economic impact of financial market stress. See 1987, 1991, 1998, and 2001. Have there been recessions? Of course. Will we be telling our grandkids about the horrors of the 1991 recession? Probably not.

I've already hinted at why professional money managers are rarely all that bearish. Anyone who has been managing money for a reasonable amount of time has seen periods of severely overblown fears. In almost all cases, its turned out to be little more than a blip on the long-term radar. In fact, if timed right, every bear market in almost every risky asset has turned out to
be a excellent buying opportunity.

So professionally, controlling your fear and keeping your cash invested has almost always turned out to be a good career move. Whereas sitting on large amounts of cash waiting for financial Armageddon has turned a lot of money managers into insurance salespeople.

I'd say that as an industry, the mistake professional money managers usually make is when we start reaching. Particularly in the bond market, where there can be so many complicated structures. Every honest bond manager will tell you that there was some point in their career where they put some money into something that they didn't fully understand. Maybe they thought they understood it, only realizing too late why the yield looked so good. In fact, if you are ever in the position of hiring a bond manager of any sort, ask about their biggest mistakes in trading. If you don't get a straight answer, don't hire them. Anyway, I'd be willing to bet that most of the worst "reach" trades people have made have happened when spreads were unusually tight. In other words, typically at the end of a bull market in spreads.

My simple advice to those who subscribe to an ultra-bearish forecast: think hard about the consequences of a dynamic economy. Its very possible that we go through the worst housing market since the Depression over the next 5 years, but Countrywide still finds a way to stay in business. Or that AAA-rated subprime pools still make investors whole. Because the market just has a way of working these things out. Betting against the economy recovering isn't my idea of courage. For a pro its more like suicide.


Anonymous said...

This is an exceptionally well-reasoned, calm post. I am an ultra-bear.

I think that the ultra-bears look for things in the economy that are un-precedented and view them as harbingers of the end.

Consumer debt/savings levels are currently unprecedented.

The dollar is unprecedentedly low.

But, if one looks at individual companies, it is hard to imagine them doing really poorly going forward. Some individual companies.

Apple is a great example. Great foreign exposure, surely the best operating system out there, no viruses, really cool toys, etc.

What would it take for Apple to really suffer?

Anonymous said...

You should not be dogmatically a bear or a bull. But history is littered with many bulls at the precisely wrong time.

Countrywide may stay in business and the economy/world may muddle along but anyone who bought Countrywide in the last 12 months is in a bit of trouble.

Accrued Interest said...

Anon #1: This post was less about arguing for or against a position. Its funny that I'm painted as a bull when in fact I've been bearish on corporates/high yield for a while and am now bearish on interest rates. I think its fair to say that the money management business is not set up to deal with any ultra-bearish scenarios should they come to pass. The 2000-2002 bear market is a good example.

Anon #2: I agree about being dogmatic. I'd say my industry is less dogmatically bullish and more focused on adding value vs. a benchmark. In the long run, we've seen that fear leads to suffering, in terms of relative performance.

Anonymous said...


Ultra-bears (like myself) tend to see things as being connected, the pro's as isolated. We ask, "what are the odds that a correction is self feeding?" They ask, "what are the odds that one event can cause a recession?" They view the world through a Gaussian lens, we look for evidence of power laws.

It sounds like I'm creating a "bull" straw man, but not really. I can't count the number of times bulls said, "subprime is only 15% so it doesn't matter," or, "housing is only a small part of GDP," or "SIV's losses are only 10bp of a bank's capital." Each successive event in the chain is explained away as isolated or immaterial.

Accrued Interest said...

David: I hear you... I think in many cases PM's are reflexively bullish and so they look for reasons why the current problems won't turn out so bad. Again, I think that's because history is on the side of the bulls. I think we're all suseptible to forming a opinion based on instinct and then building facts to support our case. Early in the history of this blog, when I had about 10 readers, I complained about this kind of analysis here.

I try to see the whole picture. I know its next to impossible to REALLY see the whole picture, but I try. I'm still coming down on the side of mild recession at worst.

Anonymous said...


BTW, I'm a former pro and now just use good blogs, like yours, and raw data for research. I have to say its an improvement as the noise/signal ratio is much better than with Street research.

Also as an aside, the Chinese may revalue to fight food inflation. Not because they want to, but because they have to. Bears have said this for awhile, only now, given the cpi numbers, its more likely than before.

Anonymous said...

Jeremy Grantham is a pro that I would call an Ultra Bear. He's got a fairly impressive track record.

Anonymous said...

After doing this for a while, I've come to the conclusion that revolving one's investment strategy around bull or bear market predictions is a mug's game. At least for me it is.

I actually think the bearish commentary I read -- Faber, Fleckenstein, Grantham, etc. -- tends to be more erudite than the bullish -- e.g., CNBC guests -- but allowing oneself to be overly influenced by them is toxic to one's portfolio.

At least with equities, I think the best approach is to look at individual names and calculate upside vs. downside. The best way to protect oneslef against a bear market is to buy stuff that is cheap (and it doesn't hurt if it's beaten down either, I'm guessing). Then give the actionable ideas time to work. It's good to revisit the ideas frequently to make sure that the original thesis' validity hasn't deteriorated, but watching the daily ticks is counterproductive, IMHO.


Accrued Interest said...

I knew I'd get a ton of comments from the bears. Anyway, I didn't meant to imply that there are no investment pros who are bearish, even severely so. I've heard that Grantham's returns are very hot and cold. I know he was bearish on equities back in 2005, and I'm assuming he's been getting killed on that bet. Even YTD 2007, we're still positive. Being short stocks over the long-term had really only worked in a few isolated cases.

Another problem with the perma bears is that the risks they see never actually go away. Like if you believe that consumers have too much debt, then you've held that opinion for probably 10 years.

BTW, I'm not a believer in the dollar causing things. I believe the dollar's value is a result of something (interest rate differentials/inflation). Now I know 1987 is widely blamed on the dollar, so I know I'm not always right. But I think most people misread the dollar most of the time.

Anonymous said...

Grantham -- Grantham distinguishes between "market risk" and "career risk." Although he's been bearish on most equities in theory, he still remains invested because, as a mutual fund portfolio manager, he believes the risks to his career are too high not to be. He has made suggestions for individual PAs that have not panned out.

His analytical approach is to pick sectors and/or asset classes that have the least "mean reversion" downside or the most mean reversion upside (using simple metrics like p/b and price performance). I haven't read his recent letter, but I think he can't find a sector that has mean reversion upside.

Back in '98 Grantham argued that tech, media, telecom ("TMT") had severe mean reversion downside, and the portfolios he managed steered clear. He was wrong for two years and his funds suffered redemption en masse -- like 50%, I believe.

Then in 2000 he stated that there were many sectors outside of TMT that had significant mean reversion upside (e.g., REITs). And he was right about that.

I think one take away from this is that a mean reversion approach (and even a pure Graham & Dodd approach) might trail badly in a raging bull market; however, it is likely to outperform in a bear market by enough of a margin to give such an approach an appreciable margin of outperformance over the long run.

By the way, when it comes to value investing, I'm not talking about some Russell or S&P value index vs. growth index; I'm talking about a stock-by-stock upside vs. downside approach (though I think Grantham employs a sector-by-sector/asset class-by-asset class approach).

The problem is that it is extraordinary difficult for the vast majority of investors to tolerate underperforming the indices for multi-year time periods, even if they'll probably come out on top in the end.

Anonymous said...

I think the issue revolves in large part around expected value. I don't consider myself an ultra-bear, but I do currently lean bearish.

Professionally, it does make sense to be bullish, because you're effectively selling lottery tickets. Most likely outcome is that I make money. If things don't work out every 6-10 years, I still got a lot of bonuses banked. I can sell a negative expected value trade and still book a gain almost every year. Until things melt down.

I absolutely agree that the economny is dynamic and that we won't be living in caves anytime soon. Still, if there's only a 1% chance that a lottery ticket pays me $1mm, I'd pay 2k for it. That's a similar argument to being bearish in this context. Probably we don't melt down and start grinding tighter--but we won't get back to previous tights. Meanwhile, if some major bank/fund goes under, we gap wider and I lift the short profitably. the grind tight is more likely, but the gap wide pays a lot more.

Accrued Interest said...

I think there is a big difference between saying that a certain sector or asset class is overvalued and being an ultra-bear. To me, being ultra-bearish is to claim something like the S&P 500 will lose value over 5-10 years. Or that interest rates will rise to 9-10%.

Like I was bearish on high-yield earlier this year. I would have put a target of +400 to +500 on junk spreads. That's where we are now. So now I'm neutral on HY, and looking to add. I think that's in the realm of normal PM bearishness.

What you rarely see if a large cap PM who tells his clients he's keeping 25% in cash believing the market is about to plummet. Applesaucer mentions career risk. That's certainly part of it. But I think its more than that. I think the reinforcement the market gives you is to remain cautiously bullish most of the time. I think PM's are like dogs who have come to learn that a ringing bell means chow time. A falling stock market or widening spreads means its buy time. I really think its as simple as that.

Anonymous said...

TDDG, how can being off 6% from the all-time highs possibly be considered a bear market? What's different about this one is that we're in a credit bust, not an economic bust (yet). So we go through the 5 stages of grief with our investments:

Denial, Anger, Bargaining, Depression, Acceptance

Right now I'd say we're still in denial. So why in the world would professional money managers begin buying securities that face headwinds now? I'm not saying they have to exactly time the market bottom ("markets bottom in silence"), but the downside seems greater than the upside in the near term. And the long term is made up of many near terms. The time value of money ensures that avoiding losses early is better than getting late gains on a lower capital base.

Anonymous said...

Fascinating discussion ... especially valuable and unusual (given the topic) as all voices are rational.
2 questions:
1) For what reasons are interest rates >10% unimaginable? (NB: they're easily imaginable to me, having come of age in the late 70's-early 80's);
2) What effect do you think there might be on the incidence of ultra-bears if PM's were transparent (i.e. promptly and rigorously disclosing to clients where their OWN money is invested)?

Anonymous said...

Isnt it true that to a large extent PMs have a very short-term time horizon? Do consultants/investors allow a PM to be "early" and underperform for an extended period of time? Sounds like Grantham was "right" but way too early and as a result lost a huge amt of assets. Doesnt sound like a great way to run a business

Accrued Interest said...

Did I imply that today was a bear market in stocks? I didn't mean to. I'd say it feels like a bear market in credits. But I wouldn't call it a real bear market unless it persists a while longer. If for some reason credits in general bouce back quickly (which I doubt very seriously) then I wouldn't call it a bear market.

Accrued Interest said...

Long time readers of this space know how militant I am about rational commenters. If anyone is thinking about posting some obscure quote from Oscar Wilde and try to pass it off as analysis, don't bother.

On 10% rates, I guess I wouldn't say its unimaginable. I'd say its sufficiently unlikely to make betting on it pointless. I used 10% rates and negative 5-year returns on stocks as examples of things that have happened but that I view as incredibly unlikely.

Accrued Interest said...

And on revealing what we own personally, I think you'd be surprised. The mutual fund managers I know well are all invested in their own fund. And not just a little bit, but a very large percentage of their wealth. And at my firm, all of our partners have essentially all of their money managed here.

Accrued Interest said...

On PM's time horizon.... there are two elements to this. First, most get paid a bonus based in part on annual performance vs. a benchmark. So I'd call a 1-year horizon pretty short. Now those that are signifincant owners in their firm are going to have a bit longer horizon, because consultants are usually looking at 3-5 year numbers.

I f*ing hate consultants, by the way. You want to make the principal/agent problem worse? Just add more agents!

The tech bubble was very drawn out. In fact, you might say that it started out as a legitimate rise in price for an emerging sector and only in the later stages became a bubble. Sometimes its possible to be so early that even when you are eventually right, your clients were no better off. That's especially true in the bond market where bearish sentiment almost always costs you in terms of yield.

Anonymous said...

What is your definition for a bear market in credit? Aren't spreads dramatically wider YTD?

Anonymous said...

anon said.."Consumer debt/savings levels are currently unprecedented."". Would that be on a absolute or a relative basis? This is an old bogeyman used once again to scare PM's and investor's out of their holdings. The facts that are hidden when you hear someone say that is that the "savings rate" does not include capital gains of any sort. It is no coincidence that the "savings rate" started a long decline in the early 80's at the start of the great bull market in stocks. So, when people start to wise up, maybe we can concentrate on more relevant statistics such as the "Real Net Worth per Capita". Which is at all time highs.

Anonymous said...


I enjoy your blog, but this latest article leaves me wondering whether you analysis of the bull/bear debate is sound. Perhaps it is a bad thing to be in cash at the present time. No one has a crystal ball. I would cite your statement that:"The tech bust of 2000-2002 is a great example....But I was personally long stocks the whole time." If you have been long the stock market since 2000, I don't think you've made much headway unless your a terrific stock picker. I believe TBills have outperformed the S&P for about 8 years running now.

In any event, great blog and keep up the great work.


Accrued Interest said...

I'd say that when high-yield moves 100+bps wider and stays there for several quarters, that's a bear market. Because that's like a 5% price loss, and I think that about fits.

Dave M.: My point exactly. A lot of the bear stories are a little like urban legends. They are constantly updated, but not actually changed.

Jim: I'm not sure I follow your point. Yes, I got killed personally owning stocks at the time. Yes, I'm probably up like 2% annualized from 2000-now. Yes, I'd probably have been better off in T-Bills. But that's part of my point, that we investment pros tend to just stay invested at all times. Because history says that's the right play almost all the time. We aren't always right, but we usually are.

Anonymous said...

tddg said..."Because history says that's the right play almost all the time. We aren't always right, but we usually are.""

Amen. Since my friends know I trade stocks for a living, they usually ask me about my take on the market. I always tell them that the stock market is a bet on technological advancement and American ingenuity. From the invention of the radio, car, TV, microwave oven, VCR, cell phone,etc., there will always be companies cashing in on these inventions. And the stock pickers at most mutual funds are quite good, so just keep putting money in your favorite funds or an index fund, month-in and month-out. Stock market getting killed? When that happens I tell them to think..."Oh goody, this month I get to buy them on sale!""

Anonymous said...

"Again, I think that's because history is on the side of the bulls"

tddg, I know that you try to see the big picture and I applaud you for that. Could it be that your time horizon just isn't long enough? May I suggest a very serious look at the K-Wave?

It's common for people to view the recent past and project that onto the immediate future. In fact, I would argue that this is the very reason the K-Wave exists at all. Most people will experience each season of the K-Wave once in their lifetimes if they live a full life. Unfortunately, time has now run out for the bulls and K-Winter cometh, and this experience will be a real eye-opener for many.

Anonymous said...

you sound like myope greenspan when he said we were in the new economy of assets( thats to say bubbles everywhere). The macro really looks gloomy, usa will be entering into a secular recession for many years. Parties has to be paid sooner or later. Reinflationing now will go to goods prices nor to financial assets triggering a scalating inflation.

Anonymous said...

I am willing to wager ANY amount of money that our host was not of age in 1987. He is under the age of 45, has never experienced real financial turmoil. He is smart, well educated and clueless all at the same time, and is about to be a roadkill poster child for what is to come.

Everything he says is consistent with the post 1987 bubble world he grew up investing in; and he is woefully ignorant of other 'modes' of financial reality. I'm sure his optimism has served him well (except for his unfortunate experience with dot com equities), but he ultimately posits a kind of blind partisanship that is devoid of objective analysis.

Having said that, there's an innocence to our host as well--HE DOESN'T KNOW BETTER, HE'S NEVER KNOWN ANOTHER WORLD...

In the next four quarters some major banks will fail. The SIVs, the Conduits, the mark to market fantasies have triggered a massive wave of borrowing Peter to pay Paul, from off to on balance sheet entities. This is not going to self correct.

Just a quick review of ironclad factoids:

Dollar testing all time lows.

Oil all time high.

Gold within striking distance of all time high.

The largest MORTGAGE ISSUER in the United States on the verge of bankruptcy.

UST yield largest one day spike IN HISTORY within the last month.

ABCP, CDO, MBS markets frozen--no pricing confidence. What unfreezes? A bottom in housing.

All signs point to a DEEPENING of housing crisis, not bottoming. Short term paper must be rolled....

LA County home sales largest volume drop largest on record in August--50%.

First national median home price drop since great depression.

All MBS ratings done with Monte Carlo simulations that did not take into account a national home price drop--as IT HAD NEVER HAPPENED UNTIL NOW.

All MBS securities, and ALL the derivatives on top of those securities, will have higher default rates than the models predicted.

Special exemptions given to 3 or 4 mega banks by the Fed on reserve requirements as it pertains to their brokerage arms....

I won't quote Oscar Wilde, or Galbraith or any of our esteemed forebears whose hardwon wisdom might shed some light on the current situation. I don't want to disturb our host's concentration on his 'analysis'...

Anonymous said...

I don't think it matters when our host was born. I think your comment perfectly illustrates the point of the "ultra-bear" platform.

Accrued Interest said...

Well I was too young to be trading in 1987, but wouldn't we agree that 2000-2002 was a worse period for the stock market than 1987?

This is another problem I have with the ultra-bearish crowd. There is a tendency to find parallels between today and ultra-bearish events in history. But I'd be willing to bet I can find parallels between today and bullish periods in history also. Off the top of my head, the fall of 1998 comes to mind.

Anyway, when I say the people who stay invested win most of the time, I have way way way way more evidence on my side that just the 1990's. Not only does the stock market usually rise, but the record of market timers is terrible.

Now, if someone tells me that they are bearish for now, but would be a buyer if the market corrected some reasonable amount, like 5-10%, then that's an argument I can get behind. But the true ultra-bear is looking for something much more severe. And I just don't buy it.

Anonymous said...

This says the 3-month Libor rate for pounds was 6.9%.

But this says current 3-month Libor rate is 5.70%. Maybe thats for $, not GBp. That would explain this 5.703% rate, I think.

Any clarification from you would help.

Accrued Interest said...

Psycho: You've got it figured out. US LIBOR is 5.70313 today.

Anonymous said...

The doom and gloom ultra-bears waiting for the black swan event have a problem. They have to time the market because they have to get back in at some point. However, as financial pundit James Altucher points out...

" And let’s not forget, of the last 11 recessions, six produced rising stock markets from the beginning of the recession to the end of the recession."

Even if you are in a field blanketed with winter snow, it's still not easy to shoot the black swan! I've heard those suckers are quite evasive! lol. Good luck ultra-bears!

Anonymous said...

Altucher also mentioned...

"The only way you are not OK is if you didn’t diversify in the bust. But even if you bought a portfolio diversified over value and growth, across sectors, across market caps, at the absolute peak of the markets, you’d be in great shape now. And that holds for every other crash, or recession.""

And the facts show there has never been ANY 20 year period where the stock market (with dividends included) has shown a loss. None. Zip,Zero,Nada.

Being an ultra-bear is a loser's game. They are quite analagous to a stopped clock being right only twice a day.

Anonymous said...

Show me some analysis that a single MBS/CDO was not rated by Monte Carlo simulations, all with a starting assumption that home prices never go down.


Now 'analyze' what happens when their true worth comes to light.

Now consider the amount of derivatives that came from those original MBS securities. This is not a subprime event. This is an Adjustable Rate Event.

Forget prime, alt a, subprime. Is it adjustable? If so, it will default at 5 and 6 sigma--statistically 'impossible' levels.

I'm not an ultra-bear. I made money on the dot com bubble. I didn't get the top, but I got close.

But what has happened in finance since is unprecendented leverage (errr 'derivatives'...errr 'financial innovation'....). We've all seen the charts about notional value of derivatives, its parabolic, etc.

It matters. Those charts spell out quite clearly what is in the process of happening now. The black swan is nesting in front of your eyes, you just refuse to see it.

Anonymous said...

or this

This time it's different!

Anonymous said...

interesting discussion all. as one with a bearish tint to every outlook, i've come to think the tint is almost certainly behavioral, be it learned or (more likely) genetic, and not at all rational. but then i think that's true of every investor. it really only a matter of establishing what your tint is and trying to apply rational and probabilistic counterweight.

being short at all times has certainly been a very difficult business to make money on. but i think one cannot ignore the development of things -- financial markets today are not the same as they always were. financial engineering and leverage are a MUCH bigger part of western finance than they were 20 years ago. speed and complexity have multiplied, while information has become a doule-edged sword -- being swamped with data is not the same as being more knowledgable or wise. i tend to agree with richard bookstaber in this regard, and would contend that similar periods of financial engineering in history have tended to end very badly.

and it has to be said that even the stopped clock will be right in time. if your intention is to survive that awful event, one can't simply hold long with the knowledge that you should be right 9 times in 10. if permabears suffer the slow notorious deaths under steady redemptions in rising markets, permabulls suffer quicker and more easily forgotten deaths in deleveragings and capital destruction.

in any case, the mode of capitalizing on a 'k-wave' outlook does not necessitate losing money -- one can play both sides, turning the financial engineering boom to one's advantage. sacrificing bips to otm put strategies is difficult for most people to subject themsleves to -- as it implies the failure of what are today compelling ideas -- but provide a window of opportunity onto disaster. just a thought.

Bernardo A said...

Hi all,

please feel free to vote on my "What will the FED do on Sep 18th" poll on (no ads):


Anonymous said...

"And the facts show there has never been ANY 20 year period where the stock market (with dividends included) has shown a loss. None. Zip,Zero,Nada."

This is kind of a silly statement. The stock market is supposed to be a reflection of the underlying economy, and as such one would expect the stock market to expand most of the time as the economy expands. This is sort of a truism and being an ultra-bear doesn't mean that one can't see this dynamic.

Having said that, There have been plenty of 15-25+ year periods where the returns have been sub-par. For example, if you were to buy right at the top in 1929, you wouldn't be back to even until 1955. For many, that would be the entirety of their investing lives. Dividends during the period wouldn't make up for the capital depreciation. This underscores the importance of NOT BUYING during late K-Autumn.

1965-1982 (K-Summer) was another period of flat performance, and this during a time of high inflation. RE or gold would have been a much better choice during this period.

If 2007 turns out to be the start of K-Winter which appears likely, we're looking at a good 25 years until the DOW reaches 14,000 again. How does that sound?

Anonymous said...

darth toll said..""For example, if you were to buy right at the top in 1929, you wouldn't be back to even until 1955. For many, that would be the entirety of their investing lives. Dividends during the period wouldn't make up for the capital depreciation.""

Flat out wrong. Check your facts before posting. With dividends reinvested, you broke even in January 1945, according to Ibbotson research. Additionally, from USAtoday..

"What's important to note, however, is how much more protected you were from downturns in the balanced portfolio. The Wellington fund started just before the Great Crash of 1929 and the epic bear market of 1929-1932. Wellington investors broke even three years after the bear market ended.""

Anonymous said...

So if you were in the right stocks and you re-invested your dividends just right, you'd be back to even is just 16 years!! yay!

Thanks but no thanks. Late K-Autumn is a terrible time to jump in with both feet. Good luck if buy and hold is your strategy - I hope you are well hedged. I'll probably dive into equities in 2012 or thereabouts and my return will be much, much better.

Anonymous said...

darth toll said..."I'll probably dive into equities in 2012 or thereabouts and my return will be much, much better.".

Good luck with that! From Ibbotson..

""The average 5 year return (1926 to 2003) from large-cap stocks ranges from +29% to –12% over five-year period."

I like that risk-reward, don't you? You really should get educated on risk & reward of the various investment classes. Here, I'll help you get started...

Anonymous said...

I don't really have any rational commentary to make (nor Oscar Wilde quotes). Future historians, with benefit of hindsight, will do that for me. I don't have the heart to waste time arguing with anyone. Just sit back and watch it happen. God willing, we're wrong and you're right.

Accrued Interest said...

OK I can't respond to everything but here are a few thoughts.

1) I don't think Monte Carlo simulation was the problem per se. Honestly I don't know how else you'd propose structured deals get rated. I think the problem was the inputs. See this post on the ratings agencies and comment if you disagree.

Dr. Keynes: I'm honored that you'd come back from the dead to read my blog. Please say hi to Adam Smith. Anyway, while its amusing to see how many people incorrectly predicted events during the Great Depression, that's not really relevant evidence today. I could just as easily find quotes predicting we'd never get out of the deflation trap in 2003. Or that after the 1987 crash the economy would spiral into recession. Or that the S&L crisis would cause a depression. Or that stocks would never recover after the late 1970's.

Anonymous said...

great site !!!

Also , it's very nice to see a calm dialogue , as opposed to the verbal insanity and nasty name-calling and ad hominem attacks on The Big Picture .... besides which , I'm a bit tired of the Tin-Foil Hat crowd of conspiracy theorists there

Anonymous said...

"This time it's different" is a notorious mistake when applied to bubbles. It never is.

But for downturns, on the other hand, once in a while "this time" really is different, as Japan found out some time ago. The Nikkei today is at the same level as twenty years ago.

So citing 1987, 1991, 1998, and 2001 ("See? Those weren't so bad") only gets you so far. Some of us fear that this time will indeed be different.

Accrued Interest said...

Anon 1: Reasoned debate and less tin foil is exactly what I'm aiming for. I honestly think running a blog where the writer keeps things measured and reasonable will result in commeters who are measured and reasonable. The extremists on both sides probably find AI pretty boring.

Anon 2: "This time is different" has become painfully cliche. The truth is its always different. Things are never the same. The only thing we can say is that in the long run, securities prices are set by fundamentals. Bubbles often form because people think the fundamentals have changed in a way that they actually haven't.

You can't just throw "this time is different" in someone's face and call it an argument. If someone claims that the fundamentals have changed, maybe they have, maybe they haven't. But to argue against such a position, you have to show how fundamentals have not changed.