Thinking back on that conversation, and those themes, I find myself pondering the notion that if indeed the lack participation theory holds true, then, by definition, a measurable amount of the latest buyers — having missed the sweet spots of the longest bull market ever — virtually have to be profoundly inexperienced, untutored and emotionally-driven. Or perhaps forgetful, finally lulled back to sleep by witnessing this longest-ever bull market, if they actually experienced one or both of the past two bubble bursts.

Question therefore being, how will inexperienced, emotionally-driven (forgetful?) late-comers react when the market begins to succumb to its own weight against weakening fundamentals? 


So far even the slightest dip has seen yet more rush in and, therefore, I suspect in the process emboldening the earlier arrivals to hold steady, if not add more themselves on the next dip. All the while their impulses are no doubt validated by the more sophisticated professional trader who has to deliver (or lose his/her job) and who has identified this phenomenon I just outlined; thus leading the unsuspecting to slaughter while expecting to exit just as the bloodbath begins. 


That “smart money” exit — in that it would be sizable — will likely be the reflexive action that catalyzes the panic rush toward the exit.


Of course the latest action (a strong stimulus-driven rally amid weakening macro trends), whether embodying the sequence/relationship between the actors I just described or not — while it can go on for a very long time — explains how bull markets typically end. That said — although certainly amid a different sequence/relationship among the actors — one could argue that the latest action also explains how bull markets typically begin (strong, sustained move off of a big capitulation selloff [like the Q4 2018 correction]). 


Thing is, bull markets virtually never begin from record valuations, amid heavily debt-laden corporate balance sheets and macro data that appears to be topping after a prolonged (longest ever in this case) expansion; they tend to begin under virtually the opposite scenario.


Clearly, the folks (not the seasoned professionals) piling in belong to the looks-like-a-new-bull-market camp. 


I suspect that they’re wrong, and that we’ll ultimately (could still be awhile) look back and recognize what turned out to be your classic boom/bust cycle:

1. In the initial phase the trend is not yet recognized.
2. A period of acceleration, when the trend is recognized and reinforced by the prevailing bias; that is when the process approaches far from equilibrium territory.
3. A period of testing when prices suffer a setback. Latest occurrence being the 19% correction in Q4 2018.
4. If the bias and trend survive the testing both emerge stronger than ever and far from equilibrium conditions in which the normal rules no longer apply become firmly established. If the bias and trend fail to survive the testing no bubble ensues. Bias and trend survived the test.
5. The moment of truth when reality can no longer sustain the exaggerated expectations.
6. A twilight period when people continue to play the game, although they no longer believe in it.
7. A crossover or tipping point when the trend turns down and the bias is reversed.
8. A catastrophic downward acceleration; commonly known as the crash.

Yesterday’s Wall Street Journal published a deep dive into the global implications of the coronavirus, and while I’ve been reluctant to join the chorus of doomsayers, I have acknowledged that relative to when SARS hit, the Chinese economy is exponentially larger today with far more global impact. WSJ’s exposé vividly illustrates that, while also pointing out that the present situation has been far more paralyzing in terms of internal Chinese production, on top of a long list of rapidly deteriorating global factors as well.

Here’s a snippet:

“When SARS hit, China’s economy was on an upswing, with swelling numbers of outbound travelers and fast-growing trade, but it was only the sixth biggest economy, whereas today it is No. 2 in GDP and No. 1 in world trade. Only about 7 million ventured beyond Hong Kong in 2002, according to Goldman Sachs figures; the government now counts around 150 million international trips annually. Seven of the busiest 10 container ports are in China today, according to United Nations figures.

During SARS, most Chinese factories and schools remained open, and the nation’s contribution to global GDP was under half its value today…”

Of course this is so much more than an economic crisis, in Hubei especially, it’s a human crisis. The story depicted in this morning’s Bloomberg article China Sacrifices a Province to Save the World from Coronavirus is heartbreaking. 

Thanks for reading!
Marty