Commentary

Fundamentally Unsound

Saying that extreme stock market valuations are “justified” by low interest rates is like saying that poking yourself in the eye is “justified” by smashing your thumb with a hammer.

Commentary

Incubation Phase: Gradually and then Suddenly

Severe economic recessions often feature what might be called an “incubation phase,” where an exuberant rebound from initial stock market losses becomes detached from the quiet underlying deterioration of economic fundamentals and corporate balance sheets.

Commentary

Amygdalotomy: Surviving the Intentional Demolition of Warning Signs

A compassionate society has both economic reason and ethical responsibility to provide a social safety net to its most vulnerable members. It is an act of both economic insanity and ethical corruption to provide a financial safety net to its most reckless speculators.

Commentary

Containing the Crisis

Amid the current crisis, a forceful economic policy response is essential. The central principle here is that the closer we can get economic support to the point where current spending enters the “circular flow” – basic incomes, net rent and lease obligations, utilities, contractual payments, even net interest payments, the better we can support the entire economy.

Commentary

Navigating Turbulence

I expect that the most valuable aspect of our investment discipline over the completion of this cycle will be our ability and willingness to flexibly respond to changes in observable market conditions as they emerge.

Commentary

Clearing Rallies and Crashes (Buckle Up)

From a full-cycle perspective, the decline in the U.S. stock market from its recent high remains something of a non-event, compared with the probable market loss over the completion of this cycle.

Commentary

Make Good Choices!

There are two key drivers of investment returns. One is valuations, which provide a great deal of information about long-term investment prospects, and about the income component of total returns. The other is the uniformity or divergence of prices across thousands of individual securities, which helps to distinguish whether shorter-term investor psychology is inclined toward speculation or risk-aversion.

Commentary

Whatever They’re Doing, It’s Not “Investment”

Understand this. The more glorious this bubble becomes in hindsight, the more dismal future investment returns become in foresight. The higher the price investors pay for a set of future cash flows, the lower the return they will enjoy over time. Whatever they’re doing, it’s not “investment.”

Commentary

One Tier and Rubble Down Below

One of the striking things about bull markets is that they often end in confident exuberance, while simultaneously deteriorating from the inside. We’ve certainly observed this sort of selectivity during the past year. The market advance in 2019 fully recovered the market losses of late-2018, fueled by a wholesale reversal of Fed policy, hopes for a “phase one” trade deal, and as noted below, a bit of confusion about what actually constitutes “quantitative easing.”

Commentary

The Meaning of Valuation

The recent half-cycle has been admittedly difficult. My bearish response to historically-reliable “overvalued, overbought, overbullish” syndromes proved detrimental in the face of zero-interest rate policies that amplified speculation, and we’ve adapted our discipline to give priority to our measures of market internals – which we use to gauge that speculation.

Commentary

Marks of a Phase Transition

By the time a bull market reaches its peak, investors have experienced numerous instances where the market has declined by several percent, followed by an advance to fresh highs.

Commentary

A Striking Collection of Duck-Like Features

One of the pitfalls of identifying market conditions using labels like “bull market” and “bear market” is that the accuracy of those labels can only be verified in hindsight.

Commentary

Propositions for a Recessionary Bear Market

As the financial markets enter what I expect to be a rather disruptive completion to the recent speculative half-cycle, it will be helpful for investors to consider certain propositions that are readily available from history, rather than insisting on re-learning them the hard way.

Commentary

Going Nowhere in an Interesting Way

Not surprisingly, the higher the valuation at the bull market peak, the longer the subsequent period of disappointing returns, in several instances extending more than a decade, though not without intermittent failure-prone bull market rallies to add excitement. This is what I often call ‘going nowhere in an interesting way.’

Commentary

How to Needlessly Produce Inflation

What distinguishes an overvalued market that continues to advance from an overvalued market that often drops like a rock? In my view, it’s the psychological disposition of investors toward speculation or risk-aversion.