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.

Echos and Rhymes

While it's true that a bell doesn't ring at market tops (or bottoms) it is also true that valuation and psychology matter when determining prospective returns and risks in markets.  Complacency implies more (not less) uncertainty about future outcomes as some probabilities are excluded a priori. Stretched valuations in asset markets imply lower (not higher) expected returns in the medium term.  At high levels of valuations and high levels of complacency I have low conviction that the near term returns will be sustainable; the current speculative returns on capital will risk becoming negative returns of capital in the median term.

China is unraveling, one tenuous, credit woven thread at a time. Seemingly insignificant corporate / trust defaults, a weakening currency (piloted or not) and the devaluation of debt collateral (see copper and iron ore futures).  Problems aggravated by rampant rehypothecation.

The Shiller CAPE is at 25, a level associated with mediocre (0% to 2%) stock market returns in the subsequent 5 to 7 years. Margin debt is unsustainably high as is bullish sentiment (85% bulls).

Credit markets are very active. Corporate IG grade issuance to finance stock buy backs is exploding at spreads that leave little room for protection when the credit cycle turns. New High Yield bond issues have increasingly fewer protective covenants, at low absolute yields and insufficient spreads.

Risky assets in general are not inexpensive, risk is the crowded trade. We're closer to the end than the beginning of a large cyclical bull move in stocks (S&P 500 666 in 2009).  I'm not calling a top, I simply believe that the easy money has been made and at these valuation levels there are insufficient prospective returns for the risks assumed.  Markets may continue to levitate but the speculative returns in this phase will probably prove temporary and I think it's better to have less capital at risk until valuations and psychology become more favorable to investing.