Old Always

We humans are optimistic by nature and self-interested by necessity.

So when the markets and the economy stay relatively uncooperative for more than a dozen years, no matter how foreseeable in terms of the “long cycle,” people scrambling about to claim that this time is different is entirely to be expected, especially when it’s in their interest to do so.  Russ Koesterich, the iShares Global Chief Investment Strategist, is the latest to jump on the “new normal” bandwagon.

[I]t is very hard to envision the world going back to the way it was anytime soon. For investors this means that investment process and philosophy need to be geared to the current environment, rather than the way the world was.  In my next post on this topic, I’ll outline 3 strategies for doing just that. 

How much do you want to bet that these three strategies require the use of iShares?

I’m with James Montier and the Reinhart/Rogoff team.  The “new normal” is effective marketing, but reality is the old always.  Since March of 2000 we have been suffering through a secular bear market.  These periods, which average about 17 years in length, are characterized by sharp volatility in both directions (cyclical bull and bear markets within the secular bear) but little overall progress.

Source: Crestmont Research 

The current situation is especially precarious because of the way that the Fed has propped up both equity and fixed income markets, making it achingly difficult to ascertain value.  During these secular bear market periods, one’s first priority should be — must be — to preserve capital.  Thus hedges matter. Risk matters.

The markets have performed exceptionally well this year, at least to this point.  I don’t pretend to know how long that may continue. The Keynes adage about the market being able to remain irrational longer than you can remain solvent is always apt.  For those who have been prudent and taken some care to be cautious, this year has been very challenging.  Cyclical bull markets within secular bears are both tempting and frustrating.  It is extremely hard to withstand the psychological pressure to make a dramatic move during such periods.  But withstand it you should.

My position here isn’t new and it isn’t unique.  But it’s worth reiterating with some regularity.  It’s hard to be patient when the markets are difficult and the “natives are restless” (both professional and client “natives”).  The urge to take action — perhaps dramatic action — can be overwhelming.

Resist the temptation.  Stay the course (once you have gotten on the right course).  Play the course that you’re on — not the course you wish you were on.

O-L-D   A-L-W-A-Y-S.


Update (10.17.12):  I just received a question via email that I think deserves comment here. 

I have a question regarding the historic measuring of bear and bull markets. My question is how does one determine the end of the current secular bear?

Unfortunately, one can only determine the end of secular bulls and bears with any degree of certainty in retrospect.  The key measurables relate to valuation, but we can never be sure how high or how low valuations will (can) get.  I keep reminding myself of what Keynes said – the markets can stay irrational longer than you can remain solvent.  I looked at the valuation data most recently here.