It is time again to take a long hard look at our view on the markets, to look at critical pricing levels of the major asset classes and to try and interpret what the market is telling us. We try to keep things very simple, so our underlying philosophy goes something like this;
- The future cannot be predicted. If it could, then actions taken now would change its course. Humans just cannot cope with the unknown, it could be said that superstition is man's way of dealing with the unknown.
- Markets are driven by broad based themes, or some sort of "force." These broad-based themes last for considerable lengths of time - months, even years.
- The market will do all it can to keep the average investor from making money. That is, it will do whatever it can to keep weak hands out of the market. Peter Lynch highlighted this fact when he said that the majority of investors in the Magellan Fund lost money while he ran it, even though for some extraordinary length of time it was one of the best performing mutual funds in the US.
- People need drama in their daily diet... and that is what the media feeds us.
The media and popular market commentators would have us believe that the "austerity" measures taken by European nations are going to affect the global economy/economic recovery and the price of fish in New Zealand. They would also have us believe that there is a reasonable probability that the EU is going to be disbanded and that it is all over for the euro. We have no idea of what is going to happen to the euro, but we will say that this sort of commentary is a text book example of what happens either at or very near a cyclical market bottom. Let us not forget all the commentary that predicted the end of the world back in October 2008 and the six months that followed! We find it rather amusing that most of the doomsayers who were predicting the end game in late 2008/early 2009 are the very commentators who are predicting the end of Europe and the euro right now!
In the eight charts below, representing all the major asset classes from a global perspective, note the degree to which they have all advanced (fallen for US treasuries) since the depths of 2008. Markets do not move in straight lines, they weave their way in a general direction. Every time a linear trend becomes apparent it indicates that too many weak hands have entered the market and accordingly it goes through a cleansing action. We think that this is what is happening right now across the different asset classes.
Yes, you may well argue that "this time it is different"... it is all about the the PIIGS. Well, if it wasn't PIIGS it may well be GOATS or SHEEP or some other bizarre reason.
The good news is that weak hands have been taken out of most markets. If the carry/yield/risk/inflation/growth trade was popular a few weeks ago it certainly isn't so popular now. Yet what has changed? Certainly from a fundamental perspective little appears to have changed. In fact, economic and earnings releases appear to have improved. From a behavioral perspective we see absolutely no evidence that any key pricing levels of the major asset classes has been breached.
Of course, in the charts above you will notice that in a number of instances the market is treading alarmingly close to the "edge." Will it topple over? A bull market is a bull market until proven otherwise. Perhaps it is too simple for most to accept!
Disclosure: Long VTI EFA EEM FXA GLD JNK DBC TBT DBV