Juggling Dynamite

Over the latest upcycle starting in 2009, we have noted that participants were increasingly value-indiscriminate, trend-chasers, buying–not based on security analysis or investment prospects–but because prices were going up.

Indeed, recent data confirm that some 85% of trading volume in the past few years has come from computer-driven models, high-frequency traders, so-called ‘market makers’, passive funds and indices.  This mindless game of follow-the-leader has grown bigger and more leveraged this cycle than ever before in history.  To many, it looked brilliant as prices rose far above rational metrics, but few are prepared for the other side of the bargain: indiscriminate selling where prices fall far below rational metrics, and often labor there for years to come.  See Behind the Market Swoon:  The Herd-Like Behavior of Computerized Trading.

Tragically, in the midst of today’s capital roulette games are mom and pop participants –with real life, time-sensitive needs like housing, education and retirement funds–who are counselled and enticed to ‘buy and hold’ at every price on the way up, and ‘stay the course’ as prices plunge and the herd tramples over them.  This is a highly inefficient, devastating strategy for individuals with finite time-horizons.  It is also entirely unnecessary.

We do not need to speculate with our life savings–blindly follow the masses– to reach our financial goals. Indeed, the odds of achieving and maintaining strength and stability while doing so, are nearly nil.  The biggest part of financial strength comes from careful income and expense management, regular savings plans and debt avoidance.  Investing well is part of prudent financial management, but it requires personal discipline and careful rules about when and how much of our principle is allocated where, and for how long.

Today is an excellent time to break away from the madness of crowds and mindfully define a more secure path to your goals.  If you would like some help to get started or a review of where you are at, send me an email outlining your circumstances, and I will offer my thoughts and suggestions — happy New Year.

Excellent article from Economist Stephen Roach on 30 years of destructive monetary policy and the short-term asset pain that is necessary in order to restore longer-term strength and stability.  See: In defense of the Fed. Here! Here!

Predictably, the current equity market rout has left many aghast that the Fed would dare continue its current normalization campaign. That criticism is ill-founded. It’s not that the Fed is simply replenishing its arsenal for the next downturn. The subtext of normalization is that economic fundamentals, not market-friendly monetary policy, will finally determine asset values.

The Fed, it is to be hoped, is finally coming clean on the perils of asset-dependent growth and the long string of financial bubbles that has done great damage to the US economy over the past 20 years. Just as Paul Volcker had the courage to tackle the Great Inflation, Jerome Powell may well be remembered for taking an equally courageous stand against the insidious perils of the Asset Economy. It is great to be a fan of the Fed again.

For some much-needed perspective on the S&P 500’s 20% decline since October, that evidently prompted Secretary Mnuchin to call major bank heads on ‘liquidity’ concerns, here is the chart (yellow box on far right below, compared with the past two bear markets on left).  We would be wise to remember, that smooth sailing does not build the best sailors.  And years of ‘easy money’ have aggrandized fools and enabled widespread idiocy.

Speaking of productive ways to use our time…my favorite place to read is on the elliptical, especially during periods of holiday cheer!

If you are looking for an excellent big picture view on what is hindering productivity and economic progress today, The Myth of Capitalism is very well researched and full of illuminating trends and numbers.

As I previously mentioned, author Jonathan Tepper discussed his new book in November here.