What’s certain? what went up too far will come down

It is a good juncture to leaf through some market classics like Charles Kindleberger’s Manias, Panics, and Crashes for a refresher on how bear markets move. A few timeless points to keep in mind:

  1. Most financial ‘advisers’ and firms are long-always, or in the business of selling long -always financial products to others, so don’t expect them to say a downturn is in motion, or that anyone should wait to buy, or sell, in order to avoid losses. The majority will only utter such suggestions near the bottom of a bear market after capital has been pulverized and they are demoralized and inundated with client complaints and lawsuits.  At that point, that is likely to be the wrong advice.
  2. There is no such thing as certainty. All those (including El-Elrian in the clip below) who talk about the Fed or companies or the market waiting for ‘certainty’ are talking nonsense. The only participants who see certainty, are those who are deluding themselves.
  3. All we ever have are probabilities to assess.  When prices have gone far past historic averages in duration and magnitude in either direction, the probabilities of mean reversion are high.  Perfect timing is not the goal.  Minimizing losses and buying undervalued assets are the goals.
  4. Only those who limit their exposure to losses in the bear market and preserve cash will have the wherewithal to take advantage of sale prices and buy when everyone else is liquidating in panic.
  5. Bear markets during secular bears that begin from extreme valuations and financial leverage like today, tend to run for 18 to 24 months and take valuations down by 50% and more.  They also include regular counter-trend rallies along the way, when those who are losing, will repeatedly call bottoms throughout.  Trying to catch falling knives by stepping in early or buying interim dips, tends to be financially painful.
  6. Bear markets that hit when policy makers are out of bullets (like today) tend not to rebound to previous highs quickly, but rather labor in a trading range for years, as valuations grind well below fair value and average dividend yields well above 5%.  By then the masses who are holding today, will have left, revolted by their losses.
  7. A bear market is overdue this cycle.  It may now be underway, or hold off a while longer, but one thing that’s certain:  asset markets that have gone up too far the past few years, are highly likely to come back down.  And it is wise to be prepared.

Mohamed El-Erian, Allianz Chief Economic Adviser, shares his outlook on global markets and why it is causing “heightened risk aversion.” You’re going to see lots of opportunities as dislocations spread.”Here is a direct video link.

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