Apr

4

 Europe and emerging markets are the favorite topic of all in the coming months. Osmotic pressure?

Ralph Vince writes: 

But Stef, why screw around with those markets when the US is in a monster bull market — bigger than anything seen in over 50 years, or maybe in modern times? The US and the earth may have de-linked, and the US is, at least, a sure thing. We are in SUCH a raging bull market it's silly. This may be MORE than 1982, and the reason I am certain of it is because EVERYONE is SO RISK AVERSE. A planet of absolute weenies now.

I had some stooge tell me the other night, as I went to our myself a glass of tap water from the faucet of a friends condo here, "I only drink distilled water." Are you f***ing kidding me?

A bike helmet society. Since 9/11 and the crash, everyone is insanely risk averse. "The Presidents first priority is to keep Americans safe!" has been a common theme. That appears NOWHERE in the US Constitution btw, and I'm certain its framers - who were individually certified badasses, would laugh at such a statement. If you step outside of the day, if you transcend the era we are in and look at the bigger picture, it;s clear that never have so many people, been so motivated by fear in my lifetime. Maybe in 1938/9 people in Europe were, maybe in the Spring of 387 they were, Do you think this is not manifesting in the markets? Does anyone think that fear has dispersed yet?

Youth is steeped in it, and now, must be conditioned, only trough painful, firsthand experience to NOT be so risk-averse. The markets have never accommodated everyone, why would it be different this time around? Yes, there will be fits and starts and sputters, but the next 20 years are up and up and up and it doesn't matter what happens politically–this is bigger than politics, but is the market's reaction to one-sided human emotion.

J.T Holley writes: 

I completely agree with you Ralph. Having been a Father of three, Athletic Coach, and Boy Scout Leader I can tell you that there are two generations of folks that would rather be risk averse and maintain a lower standard deviation with their lives than take even the surest of bet!

The only other generation that might have had more fear would be that of the 1950's after WWII. That generation or slice of generation were the ones who did bombshelter drills, got under desks at school, and were spoon fed propaganda. They feared total nuclear annihilation. That eventually faded.

Ralph Vince writes: 

We're finally seeing what we "feared" for a long time, that all this inflating would result in a giant asset-bubble. This is now manifesting, but nowhere near to the degree it would to be commensurate with the size of the inflating that occurred.

If people are risk averse, the late-boomers, people my age, mid 50s to early 60s. simply want to be able to hobble into "retirement." They are not taking any risks. The younger set has been programmed NOT to seek risks. People of wealth are and have been hunkered down for a long time. Bank prop desks are dissolved…so very few are taking serious risks in the equity of assets–an endeavor the vast majority of people think is about finished for a variety of weak, small minded reasons.

Kim Zussman writes: 

Ralph I admire your optimistic enthusiasm. So much, in fact, I would like to adopt you as my brother (along with a select group of spec listers)!

I somewhat get the point about pervasive fear. But as a devil's advocate (and I'm not particularly bearish):

1. There could be even more fear, including the acute variety, just thinking about risks involving N Korea, Iran, Russia, ad nauseum
2. Dems will do everything they can to stop the president from executing his pro-growth agenda, though he has and will continue to get some of it via executive order
3. Related to #2 (and to some extent with the same motives), the Fed is in tightening mode
4. Protectionism and withdrawal from international trade might not be good for many company's earnings
5. To the extent one cares about valuation, stocks aren't particularly cheap here
6. VIX has been quite low and spikes are smashed apace. Long time since 10-20% "correction"
7. Boomers are retiring and they can't eat their stocks. Many might be inclined to lock in asset values, but who will buy them?

You may point out these and other fears are bullish, and I agree. But we don't have anything like the fear of 08-09 that resulted in over a 3X - 9 year gain (and probably won't again in my lifetime).

Would you suggest all-in, or scale-in on dips?

Ralph Vince responds: 

Kim, my response to your points is below: 

1. There could be even more fear, including the acute variety, just thinking about risks involving N Korea, Iran, Russia, ad nauseum

This is already baked into the market.

2. Dems will do everything they can to stop the president from executing his pro-growth agenda, though he has and will continue to get some of it via executive order

Very likely they will do all they can to obturate things. But as I said, this saturnine, fearful sentiment is what drives markets, and it;s the same mechanism we saw, for the same reasons as in 09. Except the fear - at a deep and cultural level, has remained as an ocean of cash has been pumped into the system — still out there. The ascent of Trump merely gasoline on this deep, prolonged, over-arching cultural shpilkes.

3. Related to #2 (and to some extent with the same motives), the Fed is in tightening mode

At the short end. Mr market is telling us a differetn story at hte long end, where the free market for credit occurs. I'm looking for a 1 big handle on the thirty within a year.

4. Protectionism and withdrawal from international trade might not be good for many company's earnings

You're talking a zero sum game by definition. It may not be good for some, but people will still buy light bulbs.

5. To the extent one cares about valuation, stocks aren't particularly cheap here.

They aren't expensive either, the relationship being (earnings ^2 ) / ln(long rates). By this (linear) measure they ARE quite failry priced indeed, and at the 1 big handle on the denominator, well….

6. VIX has been quite low and spikes are smashed apace. Long time since 10-20% "correction"

And where SHOULD Vix be? Is the pre-November historical level……..is that same level where it should be? Everyone for months has been looking for Vix to spike. It will, of course, at SOME point,as stocks too will correct beyond a few percentage points, at SOME point.

As an aside — perhaps looking at outright vix levels is deceiving us, just as looking at absolute interest rate levels deceives us. Perhaps vix, like interest rates, should be looked at for the character of its term structure, rather than absolute levels? (and further, vix exhibits the character, ie.e the manner in which it moves, which is very similar to monthly unemployment — not that they move together, they do not, but they move with similar personality)

7. Boomers are retiring and they can't eat their stocks. Many might be inclined to lock in asset values, but who will buy them? We haven't seen Dr. Greed enter the picture yet. How many guys do you know well past retirement who love to take a spec on things? Boomers aren't going to leave this game en masse — where will they get a return?


You may point out these and other fears are bullish, and I agree. But we don't have anything like the fear of 08-09 that resulted in over a 3X - 9 year gain (and probably won't again in my lifetime).

We have similar fear today, and, just like 08-9, it is deep and culturally ingrained, far beyond the mere fear of capital market corrections. The difference is we've been further steeped in it, and the markets have continued higher, stoking hte fear further. By every metric, gun sales, political banter (on all sides, favoring "safety!") etc., we are a culture in a sort of tenebrous, deep fear, which has persisted well beyond a decade and a half now — I contend it is so deep and so ingrained that we aren;t even aware of it.

Would you suggest all-in, or scale-in on dips?

Timing dips is for dips who think they can. Why piddle when things are just going to keep making new all-time highs? Just buy and buy and keep buying. Come up with more money and buy some more. Add and add and ultimately cause yourself to have a bigger stake in it which has naturally averaged in. If you want you can protect it very cheaply for about 1-2% /year.


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