Sublime Paradox

“…What is involuntary human nature.”
This “involuntary” is very true, very beautiful,
very well observed, and this observation is new.

—Joubert, 1818

Today is Saturday, and a gorgeous day. After the gloom and rain and cold last week, the thing to do was to wheel his Harley out of the garage and head for the Interstate to blow the carbon out of the carburetors and the cobwebs out of his head. “Most motorcycle fatalities happen when the rider is not wearing a helmet.” he said. “I’m going to start wearing one, but not today.”

Why not today? would the risk be any less today than next Thursday? Leave aside it’s the consequences, not the probabilities of a careful biker crashing that matter. Once would be enough.

Ah, but it hasn’t happened yet. Context takes precedence over logic when making decisions in matters of uncertainty. Until he has that first crash, he cannot imagine it actually happening to him.

The same is true with investors. I discussed the market condition with a fellow this week. We both read a piece about the characteristics of market tops. High levels of low quality debt, for one. For the third time since 2000, Liars Loans, loans that are made by lenders to borrowers for whom the credit application is fudged if not outright falsified are back with a vengeance in record amounts throughout the financial system. And there’s more, but I’ve run the numbers ad nauseum in earlier essays. “It’s very scary,” he tells me. Not scary enough, apparently. He remains fully invested.

We humans are equipped with terrific instincts for getting the hell out of the way when a lion comes out of the woods to eat us. For avoiding the destructive effects of a bear market on stock and bond portfolios, not so much. If the main thing for an investor is to avoid being a sucker in uncertainty, it should not take much research for anyone to discover that, by every historical metric, the stock and bond markets are more risky now than ever in history. The paradox, due to our peculiar response to the moment, is that until we start taking serious gas in our 401k, we are more dominated by the unreasonable fear that if we get out now the market will go straight up, making rich people out of everyone else but us. It will take some pain to make investors start treating a bear market the way they do a man-eating lion.

Actually, it may be starting to happen. At a meeting this morning, a woman told me she lost money in the market last year. Right, Treasury Bills outperformed both stocks and bonds in 2018. Made her mad. She told the guy that advises employees in her company to get her out of things with market risk. She’s an early adopter. No surprise to me, I’ve always given women the edge on decision making. Men have to be beaten up before they pay attention.

I hold the view that a Grand Supercycle Bear Market began in the US market on October 4, 2018. It began with the same profile as the Supercycle Bear market of 1929. The model aborted at the lows on Christmas Eve, and has been in a countertrend rally since then. In the February issue of Elliott Wave Financial Forecast out yesterday, the analysts confirmed that the bear market is very much in force and that when this countertrend move ends, the primary downtrend will resume.



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