Reducing risk before an “official” recession call is key

The usual suspects are populating the airwaves this week with a slew of nonsense and harmful advice. Most frequently you will hear long- always managers and commentators without any meaningful investment discipline, recommending stocks every day of the week. None of them believe recessions are a normal part of the cycle (and especially during de-leveraging, secular bear periods). They think of recessions as a policy mistake or random catastrophe rather than the natural breaking system of capitalism to control human excess. Hence almost none see incoming recessions. Even if they did, most still insist people sit tight with their portfolios as prices crash down. In short they are hopelessly ineffective at helping real life people manage capital risk. This clip of ECRI Lakshman Achuthan talking to Tom Keene last week is very good in explaining the importance of seeing incoming recessions to inform one’s allocation decisions in business and investing, and how and why the mainstream misses them. Here is a direct link.

This week’s market letter from John Hussman is also illuminating on this same topic. See: Dancing at the Edge of a Cliff.

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8 Responses to Reducing risk before an “official” recession call is key

  1. aliencaffeine says:

    You can add Ken Goldstein of The CONference Board and Jack Ablin of BMOHarris both of whom were interviewed on todays WBBM News Hour radio show as firmly in the ‘what, me worry camp’. Goldsteins comments were especially galling and so bad and obvious the liar that the hosts yanked him off prematurely because the lies/spin was so blatantly obvious they had to. The usually smart Ablin was also out white-washing too. Its so sad they seem to be in collusion in trying to keep the little guy (sheeple) calm so their buddies can unload the hundreds of thousand of shares of stock they have accumulated before the mine caves in. Danielle is right. CESSPOOL.

  2. The long-only, buy-and-hold, rebalance, 60/40 crowd have to pretend that recessions are aberrations rather than necessary occurrences that cleanse excesses and allow for another cyclical upturn. A typical salesperson will never tell you it’s a bad time to buy his product.

    Unfortunately, they hurt themselves in the long run by losing credibility. On the other hand, most investors today want quick returns with no risk. Their expectations are out of alignment with reality.

    So money managers working within the long-only model have to fudge and assuage for fear of losing clients––and their jobs. And the fact that we’ve had over a decade of “nothing” in the markets, coupled with repressive rates that hurt yields, only makes it worse.

    Investors have lost all confidence in markets and in the people who sell them. It’s the result of a bad model combined with unrealistic expectations all pressed up against a big bad bear.

  3. So basically you are left with timing the market. Good luck to everyone on that.

  4. aliencaffeine says:

    The market can be timed believe it or not. You just need to learn how to do it. William J. Oneil is very, very good at it since he studied Jesse Livermore and Gerald Loeb tactics.

    Wait in cash for a Follow-thru Day which shows that institutional money (hedge funds, mutual funds) are entering the markets, usually being able to be identified by big volume on an advance sometime 4-7 days after the first big up day.

    I have followed this ‘rule’ and it has done me well. However, you need to think/act for yourself. The last ‘FTD’ was a bad call, since it was totally predicated on AAPL’s earnings which I suspected as a bad call. And it was.

    Does anyone know what a ‘rolling stall’ is? I get the feeling we are in one at the current time.

    And don’t forget the worst is yet to come. If the market goes down, and deteriorates into a Bear…how are these pension funds from all the states, municipalities etc going to deliver the checks to all promised?

    Thats right. They can’t deliver and won’t deliver. Then the Promises will begin to be broken. Problem-reaction-solution.

    I surely hope Bernanke is going to be busy this weekend.

  5. I have studied a veritable plethora of market timers (for my own trading and also as an academic exercise). Usually, their work is based on some school of technical analysis, such as Elliott Waves, Dow Theory, Cycles, or just plain pattern recognition, volume, stochastics, momentum, etc. No one I have studied can time the market consistently, or even most of the time. Of course when they do get it right they say, “I told you so”, as if all of their previous bad guesses never happened. Make no mistake: timing markets is nothing more than a guess.

    Jesse Livermore, one of the early greats, had stunning success in the ‘20’s. But he also lost it all (more than once, I think). This is not a knock against him. I point it out to demonstrate that even a great trader like Livermore can make some very bad calls that turned millions into bankruptcy and an eventual suicide.

    More recently, Bob Prechter has been calling repeatedly for the next big wave down (read crash) in stocks since the summer of ’09. He told his subscribers to short the S&P no less than seven times over the past three years and he’s been wrong every time. Now, with the markets in a downtrend, the folks at Elliott Wave International are already saying, “We told you so.”

    As for the bad calls, there is always some rationalization as to why it wasn’t they (the prognosticator de jour) who were wrong; it was because somehow the markets did not cooperate and do what they were “supposed” to do. If one keeps claiming the markets will crash, eventually they will be correct. But what happens until then? Sometimes, a timer will make a call that seems remarkable. But, in my opinion, the only truly remarkable thing about technical analysis and market timing is that people still believe they work as market timing tools.

    Now, that’s not to say that technical analysis is useless. Technical analysis can, when done well, give you a good read on market sentiment and momentum. The problem is that markets, by definition, do not do what you think they are going to do. When it comes to market timing, the past is a terrible predictor of the future. One very insightful observer whose book on investing I read put it this way: “Markets can and usually do turn on a dime.”

    And inherent in technical analysis is personal bias because it always requires the technician’s interpretation of the data. Not even Elliott Wave technicians agree most of the time, and they are supposed to follow very strict rules regarding wave counts and patterns.

    In the end, the best timing tool an investor can have is good luck. If you started investing in the early ‘80s and retired in 2000, you had it made. If you started investing in around 2000, you’ve been had. And most of it was due to nothing more than when you were born.

    IMO, investors should rely less on market timing technics, and more on risk management. Get in when risks are low and get out when risks are high. This approach takes patience, keen historical knowledge of markets and investing, fortitude and the power of your own convictions (it’s not easy to sit on the sidelines and watch the markets keep going up). You will not catch tops and bottoms, but you will reduce your chances of loss and increase your chances of long-term success.

  6. JW says:

    “IMO, investors should rely less on market timing technics, and more on risk management.” An excellent point, totally agree. (risk management as in Ms Park’s style instead of JP Morgan’s) JW, Langley BC

  7. doug robertson says:

    And don’t forget in all this hoopla over market timing this, and market timing that is that you have to factor in the global aging baby boomer waves, and there are a lot of them needing funds for retirement. These waves may be the most important factors out there for market timers to consider.

    I for one, don’t ‘have the time to make it all back’ in case of a market meltdown/crash whatever. It’s exactly like those T-shirts state with the old man with a cane rapping on some kiddo’s head saying “I’ve got mine, now you get yours but not from me”.

    Sometimes you just need to push yourself away from the table and take your chips with you and let the rest of the players figure it out, assuming they don’t get up and leave also.

  8. Demographics are certainly important, but they alone should not guide one’s investment decisions. Harry Dent relies heavily on demographics. He’s been all but completely discredited as a market forecaster, as far as I can tell.

    There can always be countervailing forces to any trend. Long ago I supposed that Western governments would try to counter the aging trend with young immigrants from places like Asia and the Middle East. I’m not saying the immigration wave into Canada of the last decade was a policy response to the aging problem, but it make sense to me. By God, something has to be done to ablate the tsunami of boomer retirees heading our way.

    It helps to understand why money flows into certain assets (e.g. demographics, business cycle, laws, policies, inflation, politics, geo-politics, innovation, etc., etc.) at different times. Generally, you don’t want to buy the assets that everyone else has, but rather the ones that everyone else will want in the near future.

    But that’s certainly easier said than done. Does the lack of volume in stocks presage a big market drop? Or can Hal 9000 carry stocks all on his own until volume returns? I thought we would have a big drop in Canadian real estate in 2008. But the feds reflated the system like a cheap balloon and turned a boom into a mania.

    Eric Janszen did a great deal of research about a decade ago before going heavily into gold, silver, and Treasuries. FYI: he got out of silver right at the recent peak, but remains in gold. James Dines identified the rare earth elements boom long before anyone in the MSM even knew what rare earths were. Both have been richly rewarded (also because they sell investment newsletters, perhaps the greatest source of their wealth. But you can’t deny the fact that they made good calls).

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