Like an Eagle

January 24, 2023

Look at that handsome devil. Look at the hair! Well, there’s a dark, horrible secret, there.

One day, after I stepped out of the shower, my wife commented on my hair. Specifically towards the top of the head. After a heated debate, we’re OK now.

Yes, early male pattern baldness has struck. My forehead is more like a fivehead, as my hair apparently is migrating off my head and onto my back. Great. I also have to start thinking about wearing a hat if I’m going to be out in the sun for long periods. Oh well.

How does this relate to anything at all? Well, my (nonexistent) editor says people like these sorts of personal stories to build engagement. I don’t want to be losing my hair but denying it doesn’t change reality. Similarly, plenty of investors would rather easy times last forever, rather than recognize times change.

In 1999, how many investors decided that investing in tech was the only thing you needed to do? How’d that work out? In the Sixties and Seventies, all you had to do was buy the Nifty Fifty stocks and just watch the dough roll in. How’d that work out? Remember 2008? We may not like it, but downturns are a regular feature of markets. If anything, considering the leverage now involved, we should probably expect hard downturns to be an even more regular feature than they used to be.

Now, we have what some call the everything bubble. That’s OK. Just stay aggressively invested and eventually the Fed will swing by to bail you out. Want to place any bets on how that will turn out?

None of these downturns went down in a straight line. Why? Because a downturn always provides reasons to buy. Early on, it’s just the pause that refreshes. Later on, everything is priced in. Then we bounce 5%, 10%, 20%, or more, and the bottom is in. People rush in to buy, then the rug is pulled.

Right now, the story is that China is reopening, which will somehow save us all, and I guess also not cause inflation to reinvigorate while doing so. As I’ve said before, I view that attitude as magical, but that’s what makes markets. It seems to me like many people who subscribe to that idea admit this is only a temporary bounce in an environment of longer-term problems, so buyer beware, I guess.

Like I said last week, there are lots of different ways to manage, and if you have a system that involves something like day trading or swing trading, have at it. For me, we don’t chase these sorts of moves. How do I know the bottom isn’t already behind us? I don’t, really. Even with a fairly systematic approach, we can be surprised. In this case, we would have to see the first time where the market bottoms before we even see hard evidence of a recession. It can happen, I suppose, but I’m willing to bet against that.

Investors who embrace reality seem likely to be better situated than those who don’t, because then you can do something about it to address the problem. Maybe that involves chasing the China reopening story and hopefully getting out in time. For our part, the market was telling us that any upside from that story has been quickly priced in, based on volatility and relative performance. The complacency is astounding really, considering that the Fed is still tightening into a slowdown.

Perhaps the Fed-induced party from 2009 to 2021 went on too long, and investors no longer recognize just how problematic these conditions are. To me, the market is balding, so to speak, and pretending that’s not the case just isn’t healthy or helpful.

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