I'm Not a Market Timer or a Forecaster

I observe.  What I've observed in the past can be seen in my posts which date back to July 2013. Two years later, it's been interesting and informative watching how things have progressed and unfolded.

The causes of the declines in almost all asset classes have ALL been forecasted perfectly in hindsight: the narratives constructed are both tight and logical, very appealing to our need for pattern recognition and desire for plot.

Without predicting causes or direction, but by simply observing initial conditions and comparing them to history could have provided a reliable sextant or compass to navigate the unpredictable and uncertain seascape or landscape.

Have a time horizon, know your tolerance for loss and recognize that capital, like it's counterpart debt, is not an infinite quantity.  Debt (carry trades) is particularly insidious.  Closing a carry trade takes borrowed money out of assets (selling the asset) BUT does not create "money on the sidelines" that can be redeployed... it reduces debt but it is not free capital.

Risk is about paying irrational prices for assets, and future returns are dependent on the price you pay and the sustainability and quality of the future cash flows of the underlying asset. You can't always sell your asset to the greater fool, but you can abstain from being the fool who is driven by emotion and the need to be part of the herd.

The dynamics and the behavior that drive markets apply to markets that rise and markets that fall.  Mental flexibility and mental agility will be important to be able to continue to recognize were we are and how we got here; the famous initial conditions that determine (not predict, the outcomes are multiple) the "behavior" of  non linear, complex systems.

No Predictions, Just Observations

• Lots of debt, public and private, has been created and "must be" repaid or refinanced (or not).
• When you "invest" in bonds you're lending money.
• Leveraged share repurchases have substituted productive investment (capex).
• Risk premiums (term, credit, inflation, liquidity) are thin or non existent: we're not being compensated adequately for the risks we're assuming, there's no real margin of safety.
• Today's US equity valuations are extreme and unsustainable unless one believes that the conditions "created" in the last 5 years will be continued indefinitely.
• Today's valuations ALWAYS have an impact on tomorrow's returns.
• There IS a difference between value and price.
• Momentum can be negative too...things that can't continue indefinitely eventually end.
• Complacency and overconfidence are the fruits of incomplete analysis and lack of critical thinking.
• Greece has been a problem for 4 or 5 years.
• Initial conditions matter more than predicting the future.
• Herding behavior exists...crowded trades sew the seeds of there own destruction.
• Liquidity and volume are not the same.
• Liquidability matters.
• There may be a buyer for every seller but perhaps not at every price point or risk level.
• Cash seems like a bargain with respect to the value (and opportunity cost) of other risk free and risky assets.
• Things, as always, are unpredictable and complicated.