Do Not Mix

A couple market lessons from history perhaps worth considering for both bulls and bears.

I’m an analytical soul. Data and facts matter to me. But clearly they don’t blend well in our current age which is filled with noise and data that is subject to distortion and misrepresentation. Dare I say outright propaganda?

Much of this is coming from the political world. I’m not a political person, but I see tons of people on twitter who are very much engaged on the political side and I think it’s fair to say emotions are running very high. My message: Whatever your political views and passions, don’t let political views influence your assessment of where markets will go or should go. Trading and politics do not mix.

Markets will do their thing independent of anyone’s political views or perceptions. But note our fragmented world does exactly that, project market direction based on political affiliation:

If people were to view market direction independent of politics one would assume they would reach the same market conclusion. But clearly they are not and it’s influencing investment behavior.

I’m raising this point as I generally, and I’m sure you do as well, see a massive degradation and fragmentation in social discourse, especially on the political front. It’s global, but of course is front and center in the US.

The upcoming 2020 US election will be ugly beyond belief and we’re already seeing it shaping to be just that. That said one cannot let an assessment of political climates or views influence one’s trade strategy. Markets are amoral, they place no judgement on whether something is heading for gloom and doom or not. In fact markets are notoriously bad at forecasting bad news to come.

Think of the 1920s which ultimately ended with the 1929 crash and depression, but saw wild speculations and exuberance before it.

And of course the 1920s led to massive political discontent and brought about reactionary political forces into power which led to even worse outcomes. Take a very extreme, but real example. Hitler was the worst person ever to get elected, he ended up ruining Germany yet people cheered him on. Did the stock market care? Nope, in fact it celebrated right up until the very end:

Why? Because the economy grew:

I’m highlighting this extreme case to raise awareness of a well known reality: Markets can stay irrational for an extended period and can and will ignore outcomes already visible well ahead of what is to come.

On that note let me add another point away from the political: There are many examples of persistent gains in markets that ultimately meant nothing that have nothing to do with such extreme political backdrops, take 1987:

Massive move from January into March, a correction into April/May and then another massive non stop ramp in June/July into early August. And guess what? That was the top and then the crash into October. Many people think that markets crashed from the top in October in 1987. Not true. Markets topped in the summer, in August as matter of fact. The crash came later after a lower high.

Funny enough what we’re seeing so far in 2019 is very similar. Massive ramp in January – April, correction in May and now a relentless ramp in June/July. A similar fate to come? Oh please, don’t use another 1987 analog. Don’t worry I’m not, just highlighting the action and current similarities.

The lesson though: In 1987 all of the year’s gains were taken away with the crash. Be clear I’m not calling for a crash, but I am however pointing out that market gains this year, which I view as primarily Fed driven and aided by buybacks, could just as easily disappear as they have arrived, or even disappear quicker than they have appeared. And there are plenty of example of gains disappearing quickly. We don’t even have to go so far back.

Have we forgotten 2018 already?

No, markets are very good at ignoring bad news when it suits.

And so here we are, markets ignoring the very real risk of recession:

The decline in profits:

The expansion in deficits:

All that matters is a dovish Fed ready to cut rates and buybacks:

The result they’re chasing stocks to the max:

The main lessons here: 1. Just because markets keep going up and make new highs doesn’t necessarily mean good things are to come either. 2. Don’t mix political views with trade strategy. You may think certain policies, or political turmoil should spill into markets, history shows us they may not for years. It’s not a tradable edge.

Perhaps the most important lesson: Stay analytically sharp and don’t presume anything, but stick to an analytical framework of risk/reward. Neither projecting political beliefs nor being infected by market euphoria are a long term winning strategy.

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Categories: Opinion

15 replies »

  1. Sven, did you notice that the 10Y and the 13wk Treasury are right about at the same yield at the moment? I suspect the 10Y, having inverted, and then de-inverted, is now re-testing that level, and yields are about to blow out.

    Stagflation is ominous for the long-end, mortgages back at 8% sooner that you think, H-Y to the woodshed, and corporate debt that can no longer be rolled.

    We could even break the historic bond channel since Volcker. Imagine that.

  2. I am certain 100% this central bank stupidity will end in total fiasco. But I have been expecting this for a while….I fully thought the high in October 2018 was it. I was massively short….and lost all my gains and much more since then. I have given up trading this market as a consequence.


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