Sunday, July 23, 2006

Bears Attract (Gorreret) Bears

Some times things turn on a dime. One day it’s good, the next day terrible. Stock markets for example. Throughout the twenties the market boomed. On October 24, 1929, it crashed not to recover for many, many years. The same for the internet boom. JDS Uniphase, the optical telecommunications co., was 130 in Jan 2000, a year later 20, today 2.There were hundreds of stocks with a similar history. When a market has gone up for a long time, and begins to go down precipitously, a speculator has to make a very basic decision. Is this a pullback in basically a bull market, or is it the beginning of a long term secular downtrend? There are many heuristic rules but in the end the trader is in a similar position to what Rabbi Solovetchik described as ‘The Lonely Man of Faith’. The speculator must make an existential decision, a leap of faith if you will.

The world today is faced with a similar problem. From the end of WWII UNTIL 9/11 we were in basically a bull market as a world power. There were problems, but in retrospect they all turned out to be pullbacks, not the beginning of some major downturn. We even held a party for over a decade with those party animals Reagan, Bush1 and Clinton. The opposite was true for Europe between 1914 and 1945. One huge bear market with occasional rallies. All the rallies failed, and the world plunged deeper into chaos and horror. And then one day, it was over. In 1944, the German people were overwhelmingly Nazis or supporters of Nazis. A few years later, Nazism was gone, and anti Semitism had largely disappeared. Poof. What happened? Where did all the hatred go? At first, it was possible to say nothing had changed, the Germans weren’t showing their true colors. Not anymore. Germany has been a decent and peaceful country for 60 years.

My question then is this: Are all the woes that have befallen the US and Israel since 9/11 part of a pullback in a long term uptrend or are they the beginning of a secular bear market? One day we were the only superpower; today we have a host of problems all over the world. President Bush has said we are in a long term war on terror against a determined and devious enemy. The administration’s rhetoric predicts all sorts of problems will soon come our way courtesy of radical Islam. A long term downtrend is not Armageddon. It need not involve an inferno of nuclear war. It could involve no more than a disruption in our comfortable way of life. On the other hand, how is it possible for small groups of terrorists to break this magnificent run we’ve had for 60 years? Maybe it’s only a pullback.

I try not to make once and for all, yes or no choices. I try to adjust my subjective probability assignments as the evidence unfolds. As of today, I would assign a high probability to the idea that America is minimally in a period of long term stagnation. It is more than a localized pullback, a temporary way station to even greater glory. Assuming, hypothetically, I am right, we have another striking example of how a trend can be broken just like this. One day America is master of the universe, the next day we are scrambling trying to contain a 3500 member terrorist group. Incredible.

In the High Holiday liturgy we say again and again Hashem will decide who will flourish and who will perish. Religious Jews know better than most how the world can suddenly take a sharp turn in a different direction. When there are these sorts of tipping points, the religious imagination begins to work overtime. Why did these events happen? What went wrong? What should we have done? Followed in a natural way by “What did we do wrong”, which leads directly to “Where have we sinned?”

Even if we are only in a temporary difficult position, no one knows it is temporary. There may not be a big bear market in America’s future, but there is certainly a bull market in religious fervor and fundamentalism. The two are related. If Americans can’t read its future, imagine yourself an Arab Muslim.

Stock market investors these days are scratching themselves as to what gives with the market. All rallies seem to fail. Friday’s action, after the bullish reading given to Bernanke’s Senate Banking Committee testimony is typical of what has been happening of late. Once again the basic question is pullback or secular bear? Here is a not very helpful idea. Answer my question about the fate of America (and Israel) and you will have the beginnings of an answer about the market. The converse is easier. Check in on the stock and currency markets every now and then, and you will have one good indicator how it is going with America in the world.

2 Comments:

At 12:30 PM, Anonymous MF said...

So, I've had the same thought process many times, coming to the same conclusion as you -- that everything happening is evidence that we're in long-term decline. I attribute the reasons for the decline to very different reasons than you do surely.

However, every time I have the same thought that you do (that we are in a long-term decline), it is always followed by this analysis: I think that every other country in the world, with the exception of Australia and possibly a handful of other countries, are declining at a much greater rate than we are declining at. It's not about the decline; it's about how steep the slope is. One way of framing this is, absolute rates of change are irrelevant as compared to relative rates of change; one good friend (JB) of mine responds to every single political or business point you make with the same sentence, "As compared to WHAT?!?!" and he really does have a point. Applied here--every time I look at the USA and I think, "oh no, my country is going to hell," I then start looking closely at French politics and I think, "wow, they're going to hell so much more quickly than we are," I look at Argentine politics and I think, "wow, they're going to hell so much more quickly than we are," I look at Chinese politics and I think, "wow, they're going to hell so much more quickly than we are" -- and the same for every single other country in the world (with the exception of Australia and maybe a few other small places I don't know about). When you know the details of something, it's easy to think it's going to hell; when you look from far away, everything looks beautiful: details invariably make everything ugly. Monet had it right.

-MF

 
At 11:35 AM, Blogger evanstonjew said...

Currency traders agree with you. It's not enough for a country to be bad, it has to be going down the tubes faster than its counterpart. I am impressed by how quickly these things turn, how a country can go from being on top to being nowhere. I am going to try to develop this idea.

 

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