This Week’s Message: This Time Is Different

“This time is different” — market sages like to say that, when it comes to investing, those are THE four most dangerous words in the English language.

The notion, essentially, is that while times, conditions, technology, and so on are ever-changing, certain fundamental characteristics of market cycles — and human nature — are not. And that thinking otherwise often leads to the most unfortunate investment decisions.

Calls to mind the boom/bust cycle I’ve featured a number of times herein these past few months:

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. Like the 2011, the 2015/2016 and the 2018 corrections…

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. 

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.

Yep, my experience over 35+ years of market/economic observation says that booms and busts follow that sequence to a virtual T.

But pandemic!, you say, surely that’s something altogether different than anything modern American history has served up! Well, I absolutely agree, how could I not?

Ironically, however, it just so happened that COVID-19 hit the seen when we were already pointing herein to economic and market fragilities that had us shifting to a more late-stage-of-the-bull-market posture — not knowing of course when the end would come, just recognizing that the risk/reward setup had changed markedly, months before the virus ever showed up, first in China. 

So how then should we think about the COVID-19 impact? Well, aside from providing 100% assurance that we’re about to experience the next recession, the sheer, and certain, magnitude of the economic hit to come has the powers-that-be implementing (central banks), and proposing (governments), stimulus measures in record proportion.

On top of the massive liquidity provisions already brought to bear by the Fed, and other central banks — reflecting serious stress in global funding markets — the Trump Administration today outlined a $1+ trillion stimulus package that inspired an impressive (save for the market internals) rally that clawed back a bit of yesterday’s record selloff.

To get your head around the whys of the record stimulus to come, think about, for example, the extent to which businesses are, and will be, needing to tap existing reserves and credit lines while — due to their customers hunkering down — their cash flows dry up. Now think about what that does to liquidity in the banking system, and how critical liquidity in the banking system is to the proper functioning of financial markets, and so on. 

Not to mention how the same sort of pressure on the banking system cash-strapped individuals will be applying as well. 

Now you begin to get a feel for why (the prospects for cash flows/earnings drying up, pressure on the banking system, job losses, etc.) markets have been selling off in epoch fashion. And for why that’s likely to continue to be the case, on balance, for the foreseeable future. And, therefore, for why I continue to push back against the notion that now is an ideal time to go pouring new money into the stock market, rallies like today (there’ll be many more before this is through) notwithstanding.

My point: While of course anything’s possible when we’re talking the stock market — i.e., it may very well turn out to be a great time to buy — real world circumstances argue firmly against it.

Lastly, I can recall a few occasions over the course of what was the longest bull market ever when I was taken to task on my then bullish point of view. One gentleman in particular had been reviewing commentaries on how government debt and deficits, flattening yield curves, societal issues (growing populism, I recall), etc., had us on the cusp of the next great recession. He had me reading articles and watching Youtube videos that presented chapter and verse on how the world was going to hell in a handbasket and on how gold was the only true store of value we could count on.

After acknowledging that he and the pundits he followed expressed legitimate concerns, which I addressed individually, I went on to explain, and illustrate, why I felt that general conditions at the time did not allow for those concerns to come to fruition in the then foreseeable future. I recall telling him that I recognized that I sounded like just another run-of-the-mill permabull, but that it was an inevitability that I would indeed one-day turn bearish, at which time I’d be expressing my views without apology, as I was my bullish views back then.

Well, folks, if any of you are new to the blog and think me the permabear, I can assure you that this too shall pass, and that there will indeed come a day when I’ll be painting quite the rosy macro picture herein. 

That, however, and alas, is definitely not today…

Thanks for reading, 


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