A Different Analytical Approach

A Different Analytical Approach

I have read with great interest the arguments put forward here by Anatole that equities are in a “structural” bull market. Having listened closely to his presentation at Gavekal’s London seminar, I now understand where our main point of difference lies. Anatole argues that we are in a bull market that began in 2013 when US stocks broke above their long-established trading range and which continues to this day.  In a nutshell, he looks at the red line in the chart below and concludes that the consolidation which started in 2000 ended in 2013. Ever since, the market has been in a structural bull trend similar to those it saw between 1900 and 1929, and from the mid-1940's to 2000. This approach allowed Anatole to make a great call in 2013-14.

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The 1929 Parallel - John Kenneth Galbraith (Atlantic Magazine, January 1987)

The 1929 Parallel - John Kenneth Galbraith (Atlantic Magazine, January 1987)

In March of 1929 Paul M. Warburg, a founding parent of the Federal Reserve System and an immensely prestigious banker in his time, called attention to the current orgy, as he said, of "unrestrained speculation" in the stock market and added that were it not brought to an end, there would be a disastrous collapse. His warning was badly received. It was made clear that he did not appreciate the new era in economic well-being that the market was so admirably reflecting; he was said by one exceptionally articulate critic to be "sandbagging American prosperity." Less eloquent commentators voiced the thought that he was probably short in the market.

There was a decidedly more sympathetic response somewhat later that year to the still remembered observation of Professor Irving Fisher, of Yale, one of the most diversely innovative scholars of his time. Fisher said, "Stock prices have reached what looks like a permanently high plateau." Fisher was, in fact, long in the market and by some estimates lost between eight and ten million dollars in the almost immediately ensuing crash.

There is here a lesson about the larger constant as regards financial aberration and its consequences. There is a compelling vested interest in euphoria, even, or perhaps especially, when it verges, as in 1929, on insanity. Anyone who speaks or writes on current tendencies in financial markets should feel duly warned. There are, however, some controlling rules in these matters, which are ignored at no slight cost. Among those suffering most will be those who regard all current warnings with the greatest contempt.

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Lessons from the Mississippi Bubble - Edward Chancellor

Lessons from the Mississippi Bubble - Edward Chancellor

This year marks the 300th anniversary of the start of an economic project in France which posterity knows as the Mississippi Bubble. The brainchild of an expatriate Scot, John Law, this scheme has been hailed as the most ambitious economic experiment prior to the establishment of the Soviet Union in 1917. Like Lenin’s creation, the short-lived Mississippi Bubble burst in spectacular fashion. Central bankers around the world are currently embarked on a mission not altogether different from Law’s, making lessons revealed by his failure particularly relevant today.

Law was born in 1671, the son of an Edinburgh goldsmith. In adulthood, he became by turns a dandy, gambler, murderer, entrepreneur (“projector” in the parlance of his day), economist, central banker and finance minister. At the height of what he called his “System,” Law was the richest and most powerful man in Europe. His Mississippi Company incorporated all of France’s overseas trading companies – one of which claimed title to half the landmass of what is now the United States, along with monopolies for tax collection, tobacco, and coinage.

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A Trading Veteran's Market Perspective

A Trading Veteran's Market Perspective

We finally got the "required" breaks in Amazon (AMZN) and Netflix (NFLX), not to mention the Tesla (TSLA) fantasy. Also of note are Disney (DIS) and General Electric (GE) - key members of the equity cult. The big buy back announcement from GE, that got the idiots all fired up, fizzled (back below the pre-announcement level) and the straight up, mindless pursuit of "momentum" in DIS, got the "attention" of the robots when it broke - not a healthy sign when one of the key components of "The Dow" gets slapped hard (this gets the attention of all the soccer moms and bartenders who recently "discovered" the stock market.)

The hype surrounding the 200-day moving average (MA) is another ominous signal. The 200-day MA is a time tested support when in a bull market. There will be anywhere from two to as many as four or five VERY QUICK tests of that support. However, what all these "newbies" don't understand, is the fact that each "test" drains more and more firepower behind the bull move. 

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The Federal Reserve Asset Bubble Machine

The Federal Reserve Asset Bubble Machine

Janet Yellen's comment last week at the International Monetary Fund headquarters in Washington, D.C., that stock prices are “quite high” hardly captures the frothiness in U.S. financial markets. The Federal Reserve chair’s admission also stopped short of acknowledging the role of free money in inflating the price of stocks—as well as the price of bonds, houses and every other financial asset.

At Morgan Stanley Investment Management, we have analyzed data going back two centuries and found that until the past decade no major central bank had ever before set short-term interest rates at zero, even in periods of deflation.

To critics who warn that pumping trillions of dollars into the economy in a short period is bound to drive up inflation, today’s central bankers point to stagnant consumer prices and say, “Look, Ma, no inflation.” But this ignores the fact that when money is nominally free, strange things happen, and today record-low rates are fueling an unprecedented bout of inflation across asset prices.

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Stanley Druckenmiller at The Lost Tree Club

Stanley Druckenmiller at The Lost Tree Club

I thought I would start by spending a moment just reflecting on why I believe my track record was what it was, and maybe you can draw something from that. But the first thing I'd say very clearly, I'm no genius. I was not in the top 10% of my high school class. My SAT's were so mediocre I went to Bowdoin because it was the only good school that didn't require SAT's, and it turned out to be a very fortunate event for me.

But I'd list a number of reasons why I think I had the record I did because maybe you can draw on it in some of your own investing or also maybe in picking a money manager. Number one, I had an incredible passion, and still do, for the business. The thought that every event in the world affects some security price somewhere I just found incredibly intellectually challenging to find out what the next puzzle was and what was going to move what. And the fact that I could bet on that interaction, those who know me, I do like to bet. One of the great things of this business, I get to gamble for a living and channel it through the markets instead of illegal activity. That was just short of nirvana for me that I could constantly be making these bets, watch the market moving, and get my grades in the newspaper every day.

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