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We hold these truths to be self-evident.....................
One of my fondest memories as a boy was of my old Latin master and his fresh look at anything. If any of you do not recognise the words above, they are the firt words of the preamble to the American Declaration of Independence. It was described by him as "the most arrogant and intellectually weak statement ever to have disgraced an important document". For that matter he was deeply upset (and you did not want to upset a Master in the days of the cane and the slipper) at the use of the word "surely" to preface a sentence. Both phrases automatically exclude argument or debate by shutting out a priori a contrary case.
This mindset has nevertheless become the bane of civilised society at many levels, not least in the investment community, where the ranters, the spouters and the downright lunatic expound their "self-evident" investment views daily. I do not single out the doom-sayers (although they are the prominent nutters) at the moment. Some of the more consistently bullish commentators do have me wondering quite how much Prozac they are on? My issue is with the danger to the innocent.
Were I to be a small private investor approaching the morass of investment "advice" on offer over the last 2-3 years in particular, I would most likely be trembling in my shelter in the woods, surrounded by my shotgun, bottled water and tinned beans. Despite this, both bond and equity markets have steadily pushed up almost from the moment that the bloated corpse of Lehmans was found floating in the lake.
Why? Well the practical aspects of low interest rates and abundant money thanks to QE are the clear ones - and as Dr.B has given us another $600 Billion to play with yesterday the situation is not likely to alter hugely.
All this is far from new - so why the heading of this blog? If one looks at the shape of the bull market of the last few years one sees it characterised by periods of relative quiet, a few panics (and let us be quite honest here - there are lots of things to worry about) and more than a few "surges".
The detailed mechanisms of markets do allow us to analyse these surges. Figures such as cash ratios, fund holdings, open interest changes and literally dozens of indicators give us an idea of where money is coming from and how much is held in reserves. Hedge Fund and derivative numbers also can indicate the size of short interest - a subject of much discussion. Time after time we find surges (the converse is true - I mention this in the interests of clarity) coincide with maximum pessimism and peaks in short holdings. The psychology here is clear (whoops - is that close to self-evident?) to me. Put simply it is the fear of being left behind combined with the perfectly natural fact that investments are generally entered into rationally after some thought but that the "get me outa here" reaction is more visceral and immediate - leading to sharper moves. For most of my professional life this was a downside phenomenon - with the sell-offs indicating the panics. With the advent of readily accessible shorting, I am now inclined to believe that panic short-covering is the key to many of the recent rallies.
Whither now? (That was an entirely gratuitous use of a word I just like the phonetics of by the way!). In the words of the old joke about asking a village idiot for directions - "If I was going there, I wouldn't be starting from here". My view is that equity markets are fully valued in general and that bond markets, especially government bonds, are dangerously overvalued as they are the refuge haven for scared money. The problem is - where else to go? Dividend yields on Blue-Chips are still in the 3-4% range and even outside the government bond markets, similar or greater yields are available on quality corporate bonds. There is a huge BUT here - which I will not belabour, but merely point to BP as a classic "Black Swan" event - even if the utterly shameful behaviour of the US government has led it close to its losing its only remaining true friend. Risk is now evaluated several sigmas further out than ever it was. (Do look up Mandelbrot on the normal or gaussian distribution - hard maths but great reading and original thinking).
My favourite thought at the moment - and not a "widows and orphans" position- is Bank Debt. Some very juicy yields out there and only three questions to ask -
1. Is it going to be a liquid market for me to get out of or is there a fixed maturity?
2. Is the institution at any risk of going broke? (By which I mean will it be bailed out as well?)
3. Is the interest or coupon guaranteed with no risk of suspension or a "haircut"
However, I do not want to run foul of the regulatory thought police and be too specific. I would refer you to the Banking Section of the Motley Fool discussion site. You will find much of value on Bank Debt there.
http://boards.fool.co.uk/banking-sector-50033.aspx?mid=12082725
To leave you with a thought - The confirmation of the QE2 move in the US last night has led to a surge in both markets and bullish concensus. I suspect (note I do not say it is "self-evident") that the good news is in the market and that we are in for a quiet period at best and possibly a sell-off as markets wake up to the fact that QE2 is a direct response to a difficult and uncertain outlook/
Dum Spiro Spero
The Declaration of Independence is not an invitation to argument or debate; it's a statement of a position reached after argument and debate. If it read "These truths are self-evident" I could agree with your Latin master, but "We hold..." is something else. My only problem is the word "self" - not sure what it means.
ReplyDeleteSorry Tom - but I think your comment lacks in intellectual rigour.
ReplyDeleteWhereas I think Jefferson, Franklin and Hancock were among the finest of that generation and possibly any subsequent generation, the phrase must I think be read not, as you seem to suggest, as the conclusion of their deliberations (with which I heartily concur and which I admire almost without reservation) but rather as an elemental and indisputable fact.
I would agree that the elimination of "self-" would have perhaps been less arrogant and contentious, but as I still aspire to write as well as Franklin in particular, perhaps we should leave the semantics to the authors.