Hussman of Hussman Funds on the anatomy of the Bear….
In the first week of March, the U.S. stock market established a set of conditions placing it among the most negative 2.5% of historical observations (see Warning: A New Who’s Who of Awful Times to Invest) – a short list that includes the major peaks of 1972-73, 1987, 2000, and 2007. Since then, we’ve seen an increasing set of indicator syndromes that are associated with historically hostile market outcomes, maintaining us in a hard-defensive stance that is as rare as it is imperative. Last week, the market reconfirmed the “exhaustion syndrome” that I discussed several months ago (see Goat Rodeo). Prior to 2012, there were 112 weeks in post-war U.S. data where our investment strategy would have encouraged a similarly defensive position with that syndrome in place. Following those instances, the S&P 500 plunged at an average annual rate of -47.5%.
The trend-following components of our market action measures remain negative here, but it is important to note that those components are moderately – probably a small number of positive weeks – away from an improvement that could shift us from such a tightly defensive stance. While our outlook would not become bullish by any means, this shift would rein in the “staggered strike” put option hedges we presently hold in Strategic Growth. These positions (which raise the strike prices on the long-put portion of our hedges) substantially improve performance during market plunges, but make us vulnerable to the loss of put option premium during “risk on” advances such as we saw last week. That is uncomfortable even if the puts only represent a very small percentage of assets (as they do here).
Merkel managed squeezing the shorts late last week (and fixing the half year p/l for many). Austerity and bank bail outs will apparently save the “problematic” Eurozone countries. We have argued over the past weeks that the first “good” signs in Europe are seen, as the “elite” is at least acknowledging the problems. Our long Med countries vs short DAX recommendation a few weeks ago has performed well, but the EU phoria won’t last forever, and we expect the futures to start hitting some resistance levels shortly. 1400 is a big level in the SPX. Market reactions and the fundamental shape of the economy are two different things. Below are some lessons from the Latvian situation, by Sommers and Hudson.
Austerity’s advocates are declaring victory with Latvia’s battle against the European economic crisis and advocating it as the model for Greece & Spain to emulate. Curiously, Latvians have been declaring this “win” by exiting their country.
The “austerians” are celebrating Latvia as the plucky country that through hard work and discipline showed the way out of the financial crisis plaguing so many countries. For austerians, Latvia represents a veritable Protestant morality play demonstrating that austerity works. Indeed, they hope the Latvian example will retread Margaret Thatcher’s “there is no alternative” tire for a European-wide scale austerity tour. Few writing on the subject unfortunately have the time on the ground to evaluate the economic and social costs of the Latvian model. While the Latvian government chose austerity, most of its people have not. Feeling there is no acceptable political alternative available, many elect to emigrate.
Bloomberg Businessweek on Paulson’s great subprime year, which has been followed by rough years.
One institutional investor, whose firm withdrew its money from Paulson’s funds in 2011, says that most hedge funds follow a familiar developmental pattern. During the first stage, funds often improve quickly, but they’re also small and therefore difficult for large institutions to invest in. The second stage is when the fund’s managers are working hard and have shown some success; that’s when the upward curve is steepest, and the most astute investors get in.
Guest post by Doug Short.
Was the March 2009 low the end of a secular bear market and the beginning of a secular bull? Without crystal ball, we simply don’t know.
One thing we can do is examine the past to broaden our understanding of the range of possibilities. An obvious feature of this inflation-adjusted is the pattern of long-term alternations between up-and down-trends. Market historians call these “secular” bull and bear markets from the Latin word saeculum“long period of time” (in contrast to aeternus“eternal” — the type of bull market we fantasize about).
Guest post by Azizonomics.
Markets are true democracies. The allocation of resources, capital and labour is achieved through the mechanism of spending, and so based on spending preferences. As money flows through the economy the popular grows and the unpopular shrinks. Producers receive a signal to produce more or less based on spending preferences. Markets distribute power according to demand and productivity; the more you earn, the more power you accumulate to allocate resources, capital and labour. As the power to allocate resources (i.e. money) is widely desired, markets encourage the development of skills, talents and ideas.
Planned economies have a track record of failure, in my view because they do not have this democratic dimension. The state may claim to be “scientific”, but as Hayek conclusively illustrated, the lack of any real feedback mechanism has always led planned economies into hideous misallocations of resources, the most egregious example being the collectivisation of agriculture in both Maoist China and Soviet Russia that led to mass starvation and millions of deaths. The market’s resource allocation system is a complex, multi-dimensional process that blends together the skills, knowledge, and ideas of society, and for which there is no substitute. Socialism might claim to represent the wider interests of society, but in adopting a system based on economic planning, the wider interests and desires of society and the democratic market process are ignored.