Recency Bias...or...Will Central Banks Support Markets Indefinitely? (been reading Chris Cole)

[zghorner]

"BUY THE DIP" / "BTFD" mentality has essentially become gospel...because "stonks only go up" right?

I have been reading through Chris Cole's works on long Vol (thanks to @.sigma for pointing the way), and he is convinced that we are experiencing nothing more than recency bias. Meaning, for the last several decades the market has been incredibly bullish and BTFD has worked out pretty well most of the time.

"Cole notes that fully 91% of all gains over the past century from the 60/40 portfolio have come in just 22 years from 1984-2007. That period which we can call the Boomer Golden Era was the beneficiary of many favorable trends."

I get where he is coming from...when you scale out to a longer time frame, things havnt always been so great. We have experienced some pretty terrible bear markets where BTFD would have put you in line to sell plasma to support your poverty induced addiction to alcohol (late 60's/70's for example).

My question is this: Is it even possible to have a prolonged bear market anymore? Sure, quick, big drops can still happen from time to time but with the Fed's willingness to provide what seems to be unlimited liquidity it really looks like any dip will recover in grand fashion (ATH in months rather than what use to take years). concerning crashes...we even have market volatility regulators (circuit breakers for example) put into place after Black Monday to weaken any crash...Up just seems to be the path of least resistance no matter what.

Cole (who does strike me as a doomsdayer although he denies it), also argues that we are in a passive fund bubble where active managers are being pushed out in favor of passive ETFs. We all know why...the vast majority of actively managed investment funds underperform the market. Cole claims that when the house of cards start to fall there wont be enough market professionals to add stability (via buying undervalued equities on the way down), increasing the chances of a catastrophic crash. Again, not so sure I agree with this either. more money than ever is pouring into the market as people are constantly reinforced by the accuracy of BTFD.

For anyone interested in reading Cole's work HERE is a link to Artemis CM's download page. ITs really interesting stuff especially if you have an interest in long vol as I do.

 

[RedDuke]

It will crush, the only question is when. We could be in nivanna for a long time. Why fight it, enjoy it. Never been this easy. When the music stops it will get ugly in a hurry (margin call movie).

 

[murray t turtle]

"BUY THE DIP" / "BTFD" mentality has essentially become gospel...he is convinced that we are experiencing nothing more than recency bias. My question is this: Is it even possible to have a prolonged bear market anymore? Sure, quick, big drops can still happen from time to time but with the Fed's willingness to provide what seems to be unlimited liquidity .....Cole claims that when the house of cards start to fall there wont be enough market professionals to add stability (via buying undervalued equities on the way down), increasing the chances of a catastrophic crash.

%%
PARTLY true;
bear moves/bear markets have been shorter.
EXCEPT 2000/2001/2002 \LOL so even that pattern /subject to change; + capital markets are not a house of cards @ all.
BUT he seems to be right about some value ETFs now underperforming/LOL.............................................................................................., Summer rally maybe the weakest of them all\we'll see; crashes seldom happen /down moves\corrections are real common.[ Delayed edit, he's more right than i thought\value etf UDOW is an underperformer this week. Always somethin' new\ i saw a polar bear jump in seal hole this week\ i always though they waited/ that polar bear jumped /LOL

 

[iprph90]

The table (right), produced by Delta Investment Management, shows that 84% of the time declines are in the range of 5% to 20% and recover within two months

 

[manic]

A big difference is that interest rates are much lower now. During the 2000 and 2008 crashes, the Fed funds rate was about 5% and didn't start dropping until the crashes were well underway. During the 2018 and 2020 bear markets, bonds were yielding much less, making poor alternatives to stocks. Cash wasn't a good option either, given QE.

Another difference is that more people are aware of the Fed's influence. It's going to be harder for the Fed to blame bubble collapses on extraneous factors when more people know that the Fed is causing the bubbles. The Fed needs to keep the bubbles going. (Covid was well-engineered in this sense, because very few people realize that it was planned.)

What I suspect is that we will see more volatility during corrections, given high leverage and a lack of alternative investments to positive beta securities. The 2020 crash is a good example. I think most of these crashes will be due to "shocks" that appear to be random but which the Fed is orchestrating.

I also suspect that insiders are able to profit more easily from 2020-style crashes, so that's another reason they might continue.

 

[qlai]

For anyone interested in reading Cole's work HERE is a link to Artemis CM's download page. ITs really interesting stuff especially if you have an interest in long vol as I do.

I watched interview with him, very interesting indeed. He said that it used to be that Fed was reactive, but recently became pro-active which prevents declines from even starting (obviously COVID was exception). He said that governments are just kicking the can.

I think what is happening is that the government figured out that they can use stock market to bail out pension funds and all the folks who have their retirement in stocks (since bonds no longer pay enough).

My guess the Fed will continue shamelessly manipulating markets to keep things in check. They will probably start spoofing when they see bubble forming. So I don’t think they will allow something like housing market bubble happen. But still keep the Fed put around 10-15% away.

Free market no more.

 

[Relentless]

I watched interview with him, very interesting indeed. He said that it used to be that Fed was reactive, but recently became pro-active which prevents declines from even starting (obviously COVID was exception). He said that governments are just kicking the can.

I think what is happening is that the government figured out that they can use stock market to bail out pension funds and all the folks who have their retirement in stocks (since bonds no longer pay enough).

My guess the Fed will continue shamelessly manipulating markets to keep things in check. They will probably start spoofing when they see bubble forming. So I don’t think they will allow something like housing market bubble happen. But still keep the Fed put around 10-15% away.

Free market no more.

They'll try anyway.

Eventually it will get away from them. That's when shit will really hit the fan.

 

[qlai]

Eventually it will get away from them. That's when shit will really hit the fan.

But IF it does, why should I care when it’s an apocalypse? Will everything be wiped out? In that case, we’re all doomed and there’s nothing to worry about because you will not be able to protect yourself with any asset in any country.

A more likely scenario is stagnation (Japan lost decade) followed by another run up.

 

[Pricechange]

But IF it does, why should I care when it’s an apocalypse? Will everything be wiped out? In that case, we’re all doomed and there’s nothing to worry about because you will not be able to protect yourself with any asset in any country.

A more likely scenario is stagnation (Japan lost decade) followed by another run up.

Close. Actually, like Japan, the Fed will be forced to buy all of the heavy weighed stocks in the major indexes, of course already owning all of the paper. At that time we will be JUST like Japan. Aging population, fully controlled markets, Nationalistic population and a closed circuit of Printing and spending until the dollar and Yen come to near par. The low Yen is ok since they have strong manufacturing and exports to the USA. But USA has no manufacturing and USA exports are not stimulated by a weak dollar in an inflationary situation. So, a dollar this weak would move us into a South American situation of Argentina (very reliant upon agriculture exports to bring in any real capital along with Record foreign debt interest payments, Biden tax increases avoidance, and capital flight toward property, metals ect.. eventual balance of payments crisis with severe stagflation and including bouts of hyperinflation). The Rich will live wonderfully tho. But the poor, the homeless, the food prices, the home prices...would place most of the population into ultra poverty

 

[tsfx]

"BUY THE DIP" / "BTFD" mentality has essentially become gospel...because "stonks only go up" right?

Why should it be anything different ? It's the only asset class where people actually GO TO WORK for your money. The only reason for any company's existance is to make a profit. You wouldn't do any business if you knew that u'd make a negative margin consistently, would you ? Now, while individual stocks hold much more risk, then stock indexes provide you with much more safety at the expense of not giving you that crypto type returns.

Why are people referring to bear markets in stocks ? like "now, we are in a bear market because we have declined 20% from the top". I can't imagine anything being as retarded as this. You are getting a 5th off of valuation and your thinking is that NOW it's a bear market and you should sell ? wow.

Secondly, when most talk about the craziness of stock markets they usually only refer to SP500. What about europe ? UK ? Australia ? etc. ? Many others aren't even remotely behaving as good as SP500 over the past, say, TRUMP era. Why ? Because it's a technology driven decade. It's a decade of efficiency. Tech proved itself once more and that's where the money wants to go. If tech companies are doing good and provide earnings beats, why wouldn't those stocks go higher ? Blaming the FED while you are mostly referring to FAANG stocks is pretty stupid isn't it ? Like Apple's products are so popular and innovative BECAUSE of the FED ? Sure

I'm not just replying to your post but more so to the going theme on the first page where people refer to the FED as a Bubbley Boy.

Funny thing is, US is actually much healthier, innovative, productive compared to say, Japan or Europe. At the same time, US offers the highest yields compared to the others. And your whole focus is still on the FED...