to HomeThe Investment Philosophy of Tacitus
COMMENTS of Wednesday night, October 20, 2010
by Chris Temple
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"He that fights and runs
away, may turn and fight another day; but he that is in battle slain, will never
rise to fight again."
Tacitus - Roman
senator and historian
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Confusing. Maddening. Contradictory. Dangerous.
Any number of adjectives could be used besides these to describe the crazy, frenetic and unreal nature of the financial markets these days!
Take the last two trading days, for instance. Yesterday -- Tuesday, October 19 -- traders here in North America were greeted with the news that China had raised certain key, official interest rates for the first time since 2007. Given that much of the world's hopes for any kind of growth at all rest on the success of this growing power keeping its brisk pace of growth in tact, it caused traders in commodities particularly to get the willies.
At the same time, some felt it was time to take a little more seriously the BIGGEST economic and financial story of the last several months: the new dangers to the housing market. As you've certainly heard by now, a wide range of challenges is being made to what's left of the mortgage origination industry in particular; in a worst case scenario, the credit crunch that already exists could turn into a virtual freeze.
In addition to this manner in which consumers and the real estate industry itself may be undergoing more misery, Wall Street is also feeling queasy. Already, investors in some mortgage-backed securities are demanding their money back from the slicers and dicers at investment banks and elsewhere. The whole crazy food chain that led to the outrageous real estate bubble -- just as I described it in "Understanding the Game" (still archived on the front page of this site) -- is reversing now; and ever more violently!
It's no wonder that yesterday's trading saw a sharp rebound in the dollar, and plunging prices for stocks and commodities.
Which brought us to today -- Wednesday, October 20.
No, markets in today's sessions didn't quite recover all the ground lost yesterday; but they got back most of it. What changed, you asked? Nothing but the mood of the fickle traders -- those high-frequency traders and other gunslingers you've heard so much about -- some of whom today merely decided to run things in the opposite direction to scalp a few more bucks from their casino!
Chiefly, traders today recaptured their presently unshakable belief that Fed Chairman Ben Bernanke will make all their various bets good in the end by his promise to print as much money is needed. The dollar today obediently gave back all it had regained yesterday of its recent plunge. This caused oil and stocks in particular to stage rallies.
Now, as I've pointed out recently, it's a dangerous thing to become too smug over the idea that Bernanke can solve all our problems with his printing press and fleet of helicopters. If you don't believe me, ask the Japanese. For some twenty years now, they have been printing copious amounts of new yen -- and adding to their own mounting public debts -- in a thus far FAILED effort to boost both their economy and their stock market. But for now, all kinds of hope, abetted by a cheaper dollar, are making many traders feel positively bulletproof; this, even as most of us on Main Street just watch with both awe and incredulity, wondering when the music will once again stop.
This is one of the most challenging, and dangerous, times I have witnessed in three decades in and around the financial services industry. Many risks that the economy still faces could, without warning, cause a more violent reversal of things than the one-day blip we saw yesterday. Yet until that happens, this game of musical chairs continues; and those making big bets that the dollar will keep going down...that the coming "QE-II" campaign of the Fed will be massive, and will WORK...that the modern day currency war already being waged won't tip the world economy into a protectionist-fueled new depression...are singing "Happy Days Are Here Again."
At times like this when there is an overwhelmingly bearish fundamental picture for the economy and markets yet a bullish one owing to the massive monetary juice being injected into the markets by the Fed, what do you do?
What you don't want to do is make too heavy a bet in one direction or the other; and that's particularly true now, after the big (if improbable) rallies in all manner of risk assets since the beginning of September, on the "bullish" side. In the blink of an eye, a heavily invested portfolio of stocks, commodities and emerging market paper -- the biggest winners of late in a falling dollar environment -- could lose 20, 30 or 40%. It's happened before, and it will happen again. You play this game of musical chairs at your own risk.
Yet it's hard to be 100% bearish right now either. Some well-known personalities are positioned that way right now, punctuating their quite correct sour assessments for the economy with calls that the Dow will plunge from its current 11,000-or-so all the way to 1,000 before the devastation is over. I doubt that, if for no other reason than that SO many dollars are being created that, in nominal terms, it would be extremely difficult for the Dow to move that low. (What we're most likely to see over the next 10-20 years is a market that, net, moves neither up nor down, but swings in a wide range as it has for the last decade. That won't do anyone a whole lot of good, though -- especially buy-and-hold investors -- since the Dow at 11,000 in 10 years will buy a whole lot less than it will today!)
WHAT WOULD TACITUS THINK?
The first half of the famous saying of the Roman statesman Publius Cornelius Tacitus is well known. But the second half is less so; and it contains an important lesson and message for you as an investor today!
The most important thing you can do as an investor is avoid major portfolio losses. 2008 was a humbling lesson for those who were "all in" where risk assets were concerned; the financial crisis turned their modest profits from the first half of the year into HUGE losses. The typical investor's portfolio was down by 20-40%. Mutual funds and hedge funds were decimated. (For 2008, The National Investor's portfolios' return was essentially even: down a mere 0.1%, versus a whopping 37.2% loss for the Dow Jones/Wilshire 5000. This is a key reason why our long-term record is generally among the top of those services covered by the Hulbert Financial Digest!)
Those investors who decided to "fight," to have their portfolio heavily on the bullish side, got creamed. And here's my key point: to recoup all that was lost by that average 37.2% loss, one would have had to experience a GAIN OF 60% just to get back to even!
It's indeed maddening right now to be in a position (at least, as far as Yours Truly is concerned) where we CAN'T be completely bullish, or completely bearish. As I put it in a recent issue of The National Investor, I am presently a chicken amid the bulls and the bears. I strongly advise you to be one, too. You can do this as we presently are: balancing long positions (most heavily in gold-related equities and ETF's of late) with exposure to "inverse" funds that rise when the market falls. The two positions together will keep you meandering around the break-even line right now for your portfolio.
Or, you can say the heck with it -- as so many Americans have -- and just stay away, perhaps until after the next crisis or trading snafu chops 20 or 30% off present prices, and provides a safer entry point.
Most of all, as Tacitus might also advise, it's sometimes best not to "fight"; or in our context, to stake out a position too far in either the bullish or bearish camp. Don't be like those who got caught in 2008, many of whom have still "not risen to fight again", having yet to recover their losses.
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