At a time when the financial
services industry is reeling from uncertainty following valuation collapses
unseen in recent history, we should be aware that peaks and valleys, twists and
turns, are part of the investment process.
For those who might have been lured into believing that home values,
portfolio values, and altruism provided external support for their needs,
welcome to the reality of risk management.
Does is really make sense believing that “nothing goes
down?”
Indeed, the disruption caused during the last two years
has changed the landscape and mindset of investing for decades to come.
Reality.
What becomes fascinating about
the current chain of events is the global synchronicity with which all measures
fell. Typically there are leaders and
laggards in the market. But when the
credit crisis hit in late 2008 it seemed as if the floor fell out on all
measurable statistics. Now, we are left
to make sense of the carnage and to figure out a “new” way to reevaluate
financial data transparently and accurately.
For some, the burden of
solving economic stagnation lies with government. For others, that burden falls upon the
private sector. For both, issues like
taxation, stimulation, regulation, and moral authority are paramount.
The risk, however, is believing that exogenous
“stronger hands” play a greater role in narrating the result than does the
inevitable push/pull of time in a
parabolic, cyclical world. Sometimes it
just takes time for cycles to evolve and for problems to go away.
Execution.
Am I advocating a hands-off
approach to market strategy? Absolutely
not. As a quantitative scientist it is
my duty only to measure the events before me, not to ameliorate them. However, as a social scientist I can look
back over statistics and glean that this is not the first market collapse, nor
is it inherently different from those which preceded it.
The timing and magnitude and
congruence of this decline do look a little suspicious, though. I suspect that this recent bear market is much
more a function of us putting all our eggs in one basket without adhering to
commonly-held tenets about diversification.
It’s more a generational thing, a belief that “it can’t happen to me in this internet, always-plugged-in world.” Perhaps the “new paradigm” our dot.com
forebears envisioned was really a pre-pubescent narcissism about infallibility
and invulnerability. Buy a house? It’s always a “win.” Stocks?
Never go down. Merrill Lynch,
Prudential, Goldman? Steady as rocks.
Where were the adults while
all this was going on?
Today, the market looks to be
rallying from recent lows. Some might
think the danger has passed. I see these mini-rallies, however, as
reflex adjustments from within a continuing bear trend.
Our financial issues are complex
with no single answer. Not one political
party, not one financial institution, not one piece of data, alone, can resolve
a cyclic, systemic progression from occurring.
The next wave, and the ones
after that, will slowly reveal the timeline.
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