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starbucks4ever (94.36)

This market will disappoint bulls and bears alike, but not in the way they expect

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October 13, 2009 – Comments (5)

It looks like everybody here is preparing for the last war. We're going back to the doom and gloom of March! No, we're having another dot-com bubble, onward to Dow 36000! No, we're going back to the hyperinflation of 1970s! Who tells you that the market can't surprise you in a new and unexpected way?

Imagine a knight preparing for a battle with a dragon. Still scarred by the dragon's talons after the previous fight, he now orders the strongest shield and the heaviest armor that money can buy. So he sets out his new battle plan, thinking he now has all the bases covered. On his way to the battlefield he gets attacked by poisonous mosquitos.  

Of course you don't have to be a Lancelot to have a similar experience. Just a 6 years ago a certain president decided to invade Irak. When he did his homework, he was most afraid of stronger-than-expected enemy resistance, so he assembled an invincible armada and finally started the campaign, only to see the enemy's army collapse without a fight and to end up with a completely useless Phyrric victory that he in retrospect would be more than happy to trade for a few barrels of Texan oil.

The law of unexpected dangers is as true in economics as it is in the military art. In 1950s everybody was afraid of Great Depression 2.0 which never came. The real danger then was being underinvested, but it only became apparent in hindsight. In 1960s people finally realized it and corrected their mistake, only to be hit by a secular bear. In the 1970s they came to appreciate the power of the bear market, withdrew into "safe" treasuries, and got slaughtered by inflation. In the 1980s they licked their wounds, made their portfolios inflation-proof, and missed the great secular bull market in T-bonds. When they understood why treasuries should be a part of their portfolio, it  was again too late. This time the danger was being underweight speculative dot-coms, and then housing. Just when people got ready to enjoy the bubble economy of the 2000s, GS decided to take the market down from 1500 to 666, and now you were a fool for not owning bear market ETFs. Finally, the bulls got converted to the new religion, bought TZA for $150 a share and got their a..s handed over to them.

Today a) missing the coming inflationary rally and b) missing the coming deflationary collapse are the two new dangers de jour. And of course what's actually going to happen will again be different. The market will again respond with a new trend that will leave both camps thoroughly disappointed. What is the main new factor that is going to dominate the market's behavior over the next 10 years? The solution is obvious...

5 Comments – Post Your Own

#1) On October 13, 2009 at 7:38 PM, chk999 (99.97) wrote:

Our new alien overlords will raise us for the table?

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#2) On October 13, 2009 at 8:32 PM, motleyanimal (58.16) wrote:

Even sitting on the fence can put slivers in your butt.

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#3) On October 13, 2009 at 8:45 PM, ozzfan1317 (80.58) wrote:

So the apocalypse isn't coming and America isn't going to collapse? But I keep hearing so much about it and our new socialist government I was so sure they must be right.....

;) 

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#4) On October 13, 2009 at 11:08 PM, streetflame (30.12) wrote:

"What is the main new factor that is going to dominate the market's behavior over the next 10 years? The solution is obvious..."

The obvious answer is the growth of middle-class China/India/South America. But hmm, is it TOO obvious? (And of course, it is not new.)

Swine Flu/Global Warming/Alien Attack?  Not obvious enough...

Extreme leverage, complex financial derivatives and unpredictable government intervention? They have certainly dominated the market's behavior over the last 2 years.  God help us if they keep dominating the market over the next 10 years (as seems likely).

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#5) On October 14, 2009 at 1:40 PM, Rehydrogenated (32.16) wrote:

Maybe the world will esplode and all the rich will go to hell and the poor to heaven so everyone who lost their shirt over all these years will have the last laugh.

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