The Future is More Variable than the Present

Photo Credit: Michael Dales || Futuristic, and with a twist

Well, I am back. This post will test whether images will post or not. My guess right now is not, so maybe I have more work to do.

Once I know that images will post, I will repost the deleted articles. On to tonight’s piece:

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There are many who get annoyed at the concept that the market is rallying while unemployment is soaring.  Though this is not true now, others get annoyed at the market falling when the economy is humming along quite nicely.

My friend Howard Simons said something like, “Stocks aren’t GDP futures.”  There are several reasons for this:

  • When corporate bond yields fall, stock valuations tend to rise. When corporate bond yields rise, stock valuations tend to fall. Corporate bond yields fall when there is economic weakness, and rise when there is economic strength.
  • Stocks react to changes in estimates of future profits (or free cash flow). That doesn’t have much to do with present economic distress or success.
  • When there is a disaster, not all stocks share in the trouble equally. Companies with strong business models. low operating leverage and strong balance sheets get hurt less. The other companies fall into distress. The financial stress on those companies can lead to sales of assets, letting go of employees, and perhaps default. Those getting unemployed often work for a different group of companies than the ones where their stock prices are rising. (Creative destruction benefits society in aggregate, but not everyone benefits. Those who benefit do not all benefit equally.)

The main thing is there is only one present, and there are many possible futures. Shifts in government policy, particularly during times of stress, can rapidly shift estimates of what the future may hold, which makes the market move.

As such, I encourage caution when markets are moving rapidly. We know the future poorly, but in general optimism triumphs so long as there is overall stability. As I said 13+ years ago:

“Moderate bullishness should be the posture of most investors because absent famine, plague, war on your home soil, and aggressive socialism, markets tend to appreciate over the intermediate term.”

Closing Comments for 3-1-07

Now all that said, don’t assume that recent bullishness is fully correct. Valuations are high. Part of that is that corporate bond yields are low. But if anything happens that shifts expectations of profit margins down for a long time, there is room for the market to fall. Treasury yields might fall in a scenario like that, but corporate yield spreads would rise more.

It’s a good time to pick through your portfolio and find what might not survive so well if the economy does not pull together as quickly as we might like. Avoid marginal names that could be subject to distress. For non-financials and non-utilities, one test is to look at the ratio of debt to market capitalization, and consider scaling back positions where the the ratio is over one.

Remember, you are your own best defender. Moderate risk taking generally wins, so trim back the aspects of your investing that don’t fit that.

PS — If you want a “blast from the past” you can read the piece When the Sirens Sing, How to Avoid Giving in… I quote some of my old lost columnist conversation posts from 2006, including one entitled “More Things Can Go Wrong Than Will Go Wrong.” Maybe that could have been today’s title.

One thought on “The Future is More Variable than the Present

  1. The Observational and Empirical Case for Observational Quantitative Asset Debt Growth and Decay Saturation Fractal Macroeconomics as a Science akin to physics, chemistry, and biology…

    The data that follows offsets the immediately assumed possibility of quackery.

    From the December 2018 Composite Equity nadir valuation low: x/2-2.5x/2-2.5x/1.5y :: 11/26/26/15 of 16 weeks : on a daily basis nonlinearity can be observed between the 22nd and 23rd week of the second 26 week fractal. (see main page regarding second fractal nonlinearity)
    This correlates to a 3/7/7/4 of 5 month fractal series of similar x/2-2.5x/2-2.5x/1.5-1.6y proprotionality. On a daily basis for the CRB, the fractal progression is 5/11/10/4 of 7 days. A 1987 like collapse is expected over the next three trading days.
    This web site makes the observation that the asset debt economic system is mechanistic and quantitative in its nature of its hourly, daily, weekly, monthly, and yearly composite asset class valuations following simple growth and decay fractal valuation patterns so precise that ‘the mathematical laws’ and ‘self assembly’ of asset valuation growth and decay are similar to physics and chemistry and biology.
    Asset Debt Saturation Macroeconomics likewise has the quality and property of a science.
    The simple ever recurring and easily observed quantitative fractal ‘mathematical laws’ determined by the nadir asset valuation are:(y connotes final valuation low for the individual fractal series pattern)
    x/2-2.5x/2-2.5y
    x/2-2.5x/2-2.5x/1.4-1.6y
    and x/2-2.5x/1.5 to 2.5y
    (the second fractal length of 2-2.5x determines the ideal base first fractal length; the third fractal is a 1.5 multiple of this ideal base.)
    Qualitatively, the facilitated creation of excessive debt leads to overvaluation, overproduction, and over-ownership of assets. The system is self correcting with liquidation of bad debt and a lower re-equilibrium of asset valuations with a lower total denominator of composite system wealth near the nadir of bad debt liquidation and lower asset composite valuation.
    At any given time period, all individual asset valuations are denominated in first time derivative of the composite total worth of all other asset valuations.
    The fractal mathematical laws of the composite asset valuations of the asset debt system are elegantly simple.
    While global central banks’ interventions can cause observational rises of subfractal components, the fractal grouping patterns are still easily observable.
    In fact these observational patterns show the direct effect of central bank intervention.
    The US Hegemonic Asset Debt Macroeconomic grand Fractal series had an initiating fractal base of about 18 years near the initiation of its constitution in 1790.
    The First Fractal started in 1807-8 and ended after the panic of 1837 in 1842-43 for a base fractal of 36 years. Its 90 year Second Fractal ended with nadir composite equity valuations in 1932. The US 89 year Third Fractal composed of two subfractal series of 51 years and 39 years and is expected to end very shortly (three trading days) in 2020. A fourth fractal is expected to end in 2074. (1.5y) The US 54 year fourth fractal will be supported with necessary debt creation.

    A Look at the 1982 second subfractal series: 9/20/12 year :: x/2-2.5x/1.5y concluding US 1932 third fractal series:
    The monthly fractal progression of US composite Equities from the low in 2003 was made of two fractal series: 6/13/15/10 months :: x/2-2.5x/2.5x/1.6y and a decay fractal of x/2-2.5x/1.5y : 9/20/12 months: The ideal base of a second 20 month fractal is 8 months with 1.5 times 8 months yielding a 12 month third fractal.
    What was the composite equity and CRB valuation fractal effect of the global Central Bank intervention on the 2008-2009 collapse? The 2/5/5/3 month fractal series composing the 12 month third decay fractal begins a valuation climb in March 2009 at the beginning of its third 5 month fractal.
    Note the x/2-2.5x/1.5y fractal similarity of the 1982 9/20/12 year fractal series (completing the 89 year US Third Fractal) to the 9/20/12 month fractal series completing the second 20 year subfractal series which started in 1990.
    Sans global central Bank coordinated intervention, the expected unassisted starting point for the observed March 2009 composite nadir was at the end of the 2/5/5/3 month natural self assembly fractal series or September 2009
    From the expected September 2009 low (unassisted by Central Bank assumption of toxic debt and collaborative interCentral bank money printing and interbank borrowing), the two monthly subfractal series – 2/5/4/3 and 3/7/8 months :: x/2.5x/2x/1.5y and x/2-2.5x/2-2.5y, respectively – make up a 26 month base first fractal sequence of the final 12 year third subfractal.
    The final 12 year third fractal sequence of the 1982 9/20/12 year :: x/2-2.5x/1.5y decay fractal series (this second fractal subseries follow a 1932 10-11/21/21-22 51 year first fractal subseries ) is composed of 26/53/52 of 53 months. (x/2-2.5x/2-2.5y)
    The second 53 month subfractal of the 26/53/52 of 53 series is composed of two fractal subseries 3/7/6 months and 8/17/17 months (x/2-2.5x/2-2.5y – both subseries)
    The third 52 of 53 month series is composed of 10/26/18 of 19 months. The integrative final series is 10/25/20 months)
    The first 10 month fractal is composed of a 2/4/4/3 month series; the second 26 month fractal is composed of a 5/11/11 month series, and the third 19 month series a 3/7/7/4 of 5 months series.
    The patterned asset composite valuation activity of the Asset Debt macroeconomic system is directly observational and is indisputable. What causes the ideal self assembly of mathematically precise fractal asset valuation growth and decay patterns?
    What causes the mathematical laws and derived numerical constants of physics and the naturally occurring self assembly of subatomic particles, atomic particles, molecules, plant and animal embryological development, stars, solar systems, galaxies and the universe?
    The observational self assembly highly patterned fractals defining the counterbalancing growth and decay of valuations of composite assets composing the asset debt macroeconomic system confers upon that macroeconomic system the properties of a science.

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