On Optimism

“Thinkin’ about not reading you anymore,” he says, “too damn pessimistic.”

“What do you want to read?”

“Good news, of course! Not your frickin’ end of history crap!”

OK, here:

We are constructive on the markets, advising a well diversified portfolio of high quality stocks. Also Treasury and municipal bonds

–Merrill Lynch-Bank of America, 2 July 2015

Our Vanguard Capital Markets Model (VCMM) simulations indicate that balanced portfolio returns over the next decade are likely to be below long-run historical averages, with those for a 60%/40% stock/bond portfolio tending to center in the 3%–5% range, adjusted for inflation. Even so, Vanguard still firmly believes that the principles of portfolio construction remain unchanged, given the expected risk-return trade-off between stocks and bonds.

–Vanguard, 12 July 2015

Bankers and brokers will give you all the good news you want, and they’ll never tell you to sell. Have at it.

I do optimism this way:

Confront the brutal facts of your current reality, yet never doubt that you will prevail.

–The Stockdale Paradox

As U.S. Navy pilot, Capt. Jim Stockdale was floating down in his parachute after being shot down in North Vietnam in 1968 he said to himself, “Five years, it will be Epictetus’ world.”

Even before he hit the ground and furious villagers were beating the shit out of him, he confronted his reality: he would now be in the hands of the enemy for an indeterminable time with no guarantee when he would get back to America.

In an instant, he assessed his situation, accepted it,  and moved on, determined to survive no matter what. Eight years later, he came home.

Years after returning to normal life, Author Jim Collins asked him who among the other prisoners did not survive.

“Oh, that’s easy,” he said. “The optimists.”

“The optimists? I don’t understand,” replied Collins.

“The optimists. They were the ones that said, “We’re going to be out by Christmas.” And Christmas would come and Christmas would go. Then they’d say, “We’re going to be out by Easter.” And Easter would come and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.”

I’ve been asked, more times than I can count, “What makes you think what you write is going to happen?” I don’t have a short answer to the question.

My evolving views on the markets are informed by nearly fifty years of daily involvement with the financial markets as a stockbroker and a trader. For the first ten years, I accepted the recommendations of my firm’s research department and found them to be useless. This led me to independent research and a workable, probabilistic theory of markets. I’ve written 458 essays since 2001, mostly reflections on the application of the theory and my daily observations. My answer lies in those essays, which are posted on this blog.

This is my current assessment: It is now a one hundred percent certainty that a global deflationary depression is underway. The effect of this phenomenon will be an almost complete repudiation of most of the debt extant in the world, severe losses in all asset classes, and economic stress that has no modern equivalent.

There will be high unemployment and significant losses in income sources such as pension funds. There will be massive bankruptcies, the collapse of commodity prices and enormous shrinkage in all forms of business.

The only uncertainty in this expectation is the time lapse from start to the bottom, and the form of the markets’ declines. My best guess on this is that, starting now (China, Greece and Puerto Rico have now been recognized as insolvent entities), all markets should join in a sharp decline into the summer of 2016, when some important behavior cycles are expected to bottom, followed by a year or two of bounce before a longer and more destructive phase takes the globe into a low within a decade or so.

While I cannot personally anticipate how this all will affect me and my family, I think it is very probable that, like retirees in Greece today, there may be a time when my pension and my social security income will be reduced. Such an eventuality will be very difficult for me, but I am profoundly optimistic.

My optimism does not lie in the wishful thought that all will be well. It lies in the resilience that is available to anyone who accepts the current state of the world for what it is, and never doubts that he/she will prevail.

Cheers,

Rod

 

 

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