Having addressed and adapted to the challenges we’ve faced in the half-cycle since 2009, I am more confident in our full-cycle discipline than at any point in nearly three decades of investment work, but overvalued bull market peaks may still be drawn-out and frustrating. They can seem endless (see The Journeys of Sisyphus) and then suddenly unravel far more rapidly than it seems they should (see Chumps, Champs, and Bamboo) at which point the “lagging” features of a defensive stance are often reversed with striking speed. As the late MIT economist Rudiger Dornbusch once observed, “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.” Recall that the 2000-2002 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996. The 2007-2009 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to June 1995.
As I’ve noted before, the problem with what we call the Exit Rule for Bubbles – “you only get out if you panic before everyone else does” – is that you also have to decide whether to look like an idiot before the crash or an idiot after it. I have no particular desire to convince anyone that our view is the right one. Go your own way. Those who value historically-informed analysis, value-conscious investment, relentless discipline, and open communication know where to find us. With the recent overvalued, overbought, overbullish extreme now followed by a deterioration in market internals (that as yet has not been reversed), history informs us to be very cautious here. That evidence will change, and our outlook will change as the evidence does. As for the near-term, I’ll reiterate again that we have no pointed views, but as in 2000 and 2007, we believe history clearly informs us about how this cycle is likely to end, and that we should not be surprised to see years of market gains wiped out during that completion.
In the meantime, we’re mindful that the financial markets move not based on what is true, but by what is perceived. On that point we remain attuned to the quality and uniformity of market action across a wide range of market internals. Our view remains that this is a recklessly speculative market, but we also recognize the potential to fight somewhat less strongly against that speculation if internal deterioration becomes less evident. Aside from the expectation of broad volatility and abrupt reversals, I have no views about short-term market direction here. We’ll take our evidence as it arrives.
