Self-fulfilling
prophecy
Look! Up in the sky!! It's a recession. It's a slowdown. It's a blip.
Yes, there has been a
lot of consternation in the last few weeks amongst politicians, retirees,
investors, and business owners over trade wars, tariffs, corporate earnings,
currency devaluations, and interest rates to determine whether or not we are
headed into a dreadful and catastrophic reversal of fortunes. No doubt that trade and macro uncertainty is
causing a “pause" in the market's thinking, making for a more conservative
climate. Are these issues, however,
sufficient to cause a massive bear market and recession going forward?
Ok, let me be the first
(?) one to say it: believing, as I do, that all things in life are parabolic
(quantitative), there is no question in my mind...or my science...that the
global economy and the financial markets are fated to be headed in the opposite
direction at some point in the near future. The issue is whether it takes on a magnitude
of despair or merely pause, and whether it constitutes not only a change of
fundamentals but a reversal of positive psychology. I have written extensively about my views anticipating
a negative turnaround in several "linear" or excessive trends that
have persisted for nearly a decade. I am
not ready, however, to declare that the economic bull is defeated.
That also doesn't mean
that private capital isn't now or will not be in the future essential for
investment in solving immediate and long-term issues such as global water
shortages, hunger, infrastructure decline, territorial security, medical pandemics,
technology, and renewable energy. That
list, right there, is sufficient to dispel any notion that everything is going to hell
in a hand basket, and that we need to abandon all money activities for the
future.
But I realize that each
and every time you, the investor, get your monthly portfolio statement, and it
shows a reversal of your gains (you call it a "loss"), that it is
shocking, disturbing, and terrifying.
So, which comes
first...a decline in the "averages" followed by a recession, or does
the recession creep up on us (as perhaps it already has) causing a decline in
investment valuations, confidence, and activity?
The answer is:
"yes". It's really a little of
both.
Which
came first?
My readers,
specifically, understand that in a world of statistical probabilities, as
things go up, their relative strength potential for increase begins to wane
until such time as the trend expires and reverses direction. Strangely, in the parlance of statistics, the
more something goes "up" the less potential value it retains, while
the opposite is true: as a security loses value it might be of greater upside
potential when the downtrend terminates, as long as the axis of acceleration remains
on a bottom-left to top-right continuum. The timeline might be weeks, months or
years, but all trends traverse this parabolic course....birth, life, death.
Of course, not all
trends or sectors are correlated in such a way that they move contiguously with
one another and in perfect rhythm to everything else around them. Thus, portfolio allocation by sector and
asset class is designed to minimize the effect of following one trend only, and helps to deflect the
magnitude of this chicken-or-egg conundrum that the markets are presently
wrestling with.
Nevertheless, it is
futile to stand in front of an avalanche or to try to roll a boulder up a
hill. For that reason one must have a
sense of timing, patience and realism.
No portfolio will go straight up.
One should do one's methodological best to mitigate the effects of a
trend in (downward) transition.
Absolute skeptics of
the whole process should probably not even be in the investment game. It is, after all your money and if you cannot
tolerate fluctuation then I would proffer that there are less volatile...but
perhaps less rewarding.... alternatives for you. Reversals are a part of the investment
dynamic. Anticipation, methodology, and prudent
man execution are the best antidotes for what happened last week.
No comments:
Post a Comment