Extrapolating Growth

  • July 25, 2018
Market returns and economic growth have underlying drivers. At their core, extended periods of extraordinary growth and disappointing collapse reflect large moves in those drivers from one extreme to another. Extrapolation becomes a very bad idea once those extremes are reached.
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Mind the Trap Door

  • June 27, 2018
Even when extreme “overvalued, overbought, overbullish” warning signs are present, we now require explicit deterioration in market internals before adopting a negative market outlook. That, however, is far different than saying that extreme conditions can be ignored altogether. With market internals negative here, underlying market risks may be expressed abruptly, and with unexpected severity.
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Hallmark of an Economic Ponzi Scheme

  • June 3, 2018
The hallmark of an economic Ponzi scheme is that the operation of the economy relies on the constant creation of low-grade debt in order to finance consumption and income shortfalls among some members of the economy, using the massive surpluses earned by other members of the economy. The factors most responsible for today’s lopsided prosperity are exactly the seeds from which the next crisis will spring.
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Comfort is Not Your Friend

  • May 8, 2018
Strong investment opportunities are almost always born out of discomfort. Likewise, market collapses are almost always born out of confidence and euphoria. Markets peak when investors feel confidence about the economy, are impressed by recent market gains, and are comforted by the perception of safety and resilience that follows an extended market advance.
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Risk-Aversion Meets a Hypervalued Market

  • April 6, 2018
Investment is about valuation. Speculation is about psychology. Both factors are unfavorable here. We’re observing the very early effects of risk-aversion in a hypervalued market. Based on the deterioration we’ve observed in our most reliable measures of market internals, investor preferences have subtly shifted toward risk-aversion, which opens up something of a trap-door.
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The Arithmetic of Risk

  • March 2, 2018
In my view, the idea that higher risk means higher expected return is one of the most dangerous and misunderstood propositions in the financial markets. The reason it’s dangerous is that it ignores the central condition: “provided that one is choosing between portfolios that all maximize expected return per unit of risk.” Presently, the S&P 500 is both a high risk and a low expected return asset.
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Measuring the Bubble

  • January 28, 2018
I expect the S&P 500 to lose approximately two-thirds of its value over the completion of this cycle. My impression is that future generations will look back on this moment and say "... and this is where they completely lost their minds." As I’ve regularly noted in recent months, our immediate outlook is essentially flat neutral for practical purposes, though we’re partial to a layer of tail-risk hedges.
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When Speculation Has No Limits

  • January 15, 2018
Here we are, nearly three times the level at which I expect the S&P 500 to complete this cycle. Yet our immediate outlook remains neutral (though tail-risk hedges remain appropriate). It’s essential to distinguish between valuations, which have long-term implications, and market internals, which have implications for shorter segments of the market cycle.
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Survival Tactics for a Hypervalued Market

  • December 31, 2017
The essential survival tactic for a hypervalued market, and its resolution ahead, is to recognize that market valuations can experience breathtaking departures from historical norms for extended segments of the market cycle, so long as shorter-term conditions contribute to speculative psychology rather than risk-averse psychology. Yet those departures matter enormously for long-term returns.
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