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My Sunday Business Washington Post column is out. I sometimes forget they are a mainstream paper, not a business publication, and they let me get away with things the Economist or Barron’s never would. Like the headline in the print edition is a perfect example: “The trend is your friend until that nasty bend at the end.” The online version is the more traditionally headlined: Smacked by big market swings, investors should alter their outlook.

Its one of my first attempts at explaining secular market cycles to a non-investing professional audience.

Excerpt:

A few weeks back, we discussed the reasons traders were rethinking risk. A combination of the slowing economy, a potentially weakening profit picture and European bank problems had finally convinced them that stock prices were too high.

But what investors really need to understand comes down to one word: Trend.

Markets tend to move in long-term cycles. The overall economy oscillates through periods of greater and weaker growth. These are driven by big macro factors that last not for quarters or even years, but decades. These changes lead to significant economic changes and are often the impetus of major expansions. Then, after a decade or two, they fade and are replaced by periods of softer growth, or worse.

Over the past century, numerous “secular” long-term trends have played out. The results have been surprisingly predictable.

The long economic trend after World War II was very supportive of markets. Millions of servicemen returned home, married, had kids, created the baby boom. We created suburbia, built out the interstate highway system. And after years of footing the wartime effort, the private sector could once again refocus on peacetime production of goods and services. All of this begat a huge expansion, and from 1946-66 we had a 20-year secular run in stock markets with 500 percent in gains.

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Click for PDF of dead tree version

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Source:
Smacked by big market swings, investors should alter their outlook
Barry Ritholtz
Washington Post, August 21 2011
http://www.washingtonpost.com/smacked-by-big-market-swings-investors-should-alter-their-outlook/2011/08/18/gIQAriG8RJ_story.html

Washington Post Sunday, August 21 page G6 (PDF)

Category: Apprenticed Investor, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

26 Responses to “The trend is your friend — until that nasty bend at the end”

  1. ga082003 says:

    events for the week. EU area to be dominated by economic releases while US to wait for FED speech. Wonder why all these speeches on a frida?

    http://capital3x.com/?p=109

  2. BusSchDean says:

    Good article. The post-WWII trend would not have been nearly as healthy without the GI Bill. The gov’t did not know such a program would work and it was hotly contested in Congress. However the serious post-Civil War and WWI recessions — with problems extending to the Great Depression (i.e., the Bonus Army fiasco) — caused Congress to act. Interestingly, the unemployment part of the GI Bill was the least used benefit while education and training and the home loan guaranty were the most used. Funny what can happen when millions of households have money to spend.

  3. Chief Tomahawk says:

    So the online editor is more sensitive with the headings?!? Doesn’t that person know they have to compete with all of the cat videos posted to the internet???

  4. dead hobo says:

    BR observed in full article:

    Markets tend to move in long-term cycles. The overall economy oscillates through periods of greater and weaker growth. These are driven by big macro factors that last not for quarters or even years, but decades. These changes lead to significant economic changes and are often the impetus of major expansions. Then, after a decade or two, they fade and are replaced by periods of softer growth, or worse.

    reply:
    ———–
    Absolutely. That being said, I have been wondering of late about the trend beginning around 1995 when Greenspan and his Fed starting being accommodative with monetary policy with respect to equities. The bust of late in the equities markets coincides with the right shoulder of a 15+ year head and shoulders trend. This trend correlates tightly with loose money worldwide. Money pumps, today, are far less effective than about 15 years ago. The next one will take unimaginable amounts of cash which will only move the markets a dozen or two percent. I have little doubt that the markets will fall to the neckline soon enough. What comes next is subject to debate.

  5. blackjaquekerouac says:

    that of course was the goal after ww2 given our experiences during the great depression. not this time. this time its “looks like its your dpression not mine hardy har har.” of course that’s the good news.

  6. call me ahab says:

    “We don’t know what is going to happen in the future— certainly not with any degree of confidence.”

    if someone could know what the future holds, they would be 100% confident, but reality is, we can only make educated guesses

    ~~~

    BR: Well, we do have a high degree of confidence that the sun will dawn tomorrow, that we will be hungry, that people will make bad decisions.

    I was referencing a different form of forecasting, specifically, about the markets. Read: Apprenticed Investor: The Folly of Forecasting

  7. macrotrader603 says:

    BR…Ed Seykota is proud of you today!

  8. techy says:

    Off Topic:

    My beleif is that the reason for the rally from 2009 march, is due to socialization of losses of all banks and other entitities. Hence I started looking for the FED balance sheet.

    These two seems to imply that the FED balance sheet is around $16 Trillion
    http://www.digitaljournal.com/article/309485
    http://www.countercurrents.org/bailout1.jpg

    But over there at the FED: http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
    seems to be telling that it is less than $3 trillion.

    What gives?

  9. macrotrader603 says:

    It doesn’t matter why markets rise or fall

    The only thing that matters is being on the right side.

    Everything else is noise. Traders need to spend less time worrying about “why” and more time on “what” is actually happening now.

  10. dead hobo says:

    RE my observations on a 15+ H&S trend:

    On the way to big neckline, it looks like there might be a jump up at around S&P1050. This coincides with a minor H&S that started with the inauguration of QE2. It might go to about S&P1200, more or less. The H&S pattern appears highly common in the S&P for several years now, both in major and minor configurations. If the minor one flowers out into a full right shoulder, then both the minor one since QE2 started and the major one since Greenspan discovered easy money will end at the same time. Speaking of H&S trends, all major bumps from QE were enhanced by coinciding with the right shoulder of reverse H&S trends. If you’re looking for a tell, this would be a good one.

  11. dead hobo says:

    Also, if the H&S pattern set holds on the S&P, it would almost demand another run up, from maybe S&P900 to S&P 1050, to coincide with a right shoulder of the H&S pattern starting from QE1. This means a triple wammy would end after this run up, if such a run up occurs.

  12. Nuggz says:

    These shenanigans going on over the last few weeks are nothing more than what the real estate/construction industry did during the last decade.

    The financial industry has been placed into too big of a box and is in the process of hurting itself. But that’s not going to last.

    Now you have clowns like Roubini going around talking about revolution…he must have a new book to sell.

    People are such chumps.

  13. MayorQuimby says:

    Our current system is broken and unfixable. A new monetary system (or systems) is inevitable. No one should be heavily weighted in risk unless they can afford to be (ie your house is paid off and you have enough for retirement). The problem with Americans is everyone wants to be rich tomorrow. The other problem is that everyone thinks they CAN be rich tomorrow.

    The entire edifice of cheap worthless credit, corrupt gvmt, a docile, easily manipulated docile and obedient sheeple, consumerism and a cake-and-eat-it-too philosophy is destroying itself. What % of Americans are on anti-depressants? How much volatility have we had to endure for almost TWENTY FUCKING YEARS NOW?!

    Enough. Blow it all the hell up and rebuild. We need to grow the hell up already. We need to have sound fiat money. We need BALANCE and STABILITY, not bubbles and crashes.

    Revolution? Oh it’s a possibility alright. I’d rather we don’t go there. A good leader can get people to meet in the middle. Instead we have shitty worthless rich dudes trying to keep the terminally ill patient on his or her feet with monstrous doses of drugs. It won’t work because we are on an unsustainable trajectory.

  14. call me ahab says:

    you’re still wrong BR,

    the sun coming up tomorrow presumes one is not hit by a truck, falls down a flight of stairs or overindulges in prescribed medication, to the detriment of their very existence,

    so for that person, their is no sunrise . . .one can never know when their time is up

    ~~~

    BR: Whether Ahab is hit by a truck or falls down a flight of stairs, the dawn still breaks tomorrow.

    On a related note, I now understand your trading failures — you are myopic and overly self involved ( a common problem amongst you HU-mans).

    My advice — likely to go unheeded by Ahab, but perhaps picked up by other souls — is to go study the great philosophers, including a healthy dose of existentialism and some Zen Buddhism. Its good for trading as well as your soul.

  15. Greg0658 says:

    simply .. a main street economy blinded by credit and now buried in debt

    > MEW and building buildings kept us alive last decade .. and what seemingly carried the wars thru
    > its repossession time …. (or policy time) .. and why all branches of government need to fire in unison for Capital or for Labor
    > deflation of mass Labor with Capital attempting to remain afloat via inflation of everything they can stick an iv into

    CSpan this morning was asking what the caller would do 1st if they were the new POTUS in 2012 .. I think the biggest fastest method to rebalance the world is dissolve the ability of corporations to sell stocks & bonds .. GASP .. make business play on a level board with other corporations and with labor and with currencies of the world
    > start flying flags of people nations instead of corporations
    > power shifts to stable borrowing and TBTF is self checked
    > the market will self regulate with way less corporate law and court action

  16. macrotrader603 says:

    I’ll give you guys a hand, like I have before.

    As long as stocks trade under the 200 day moving average be in cash or short.
    When they get above the 200 day you can load up.

    It isn’t that complicated.

  17. brianinla says:

    Hey macrotrader you also said this:

    macrotrader603 Says:
    August 19th, 2011 at 12:31 am
    Anyone who listens to anyone else to trade is a fool.

  18. rktbrkr says:

    As baby boomers enter retirement they will be liquidating assets – stocks, second and first homes probably faster than expected with zero interest rates and frozen/declining socsec and medicare. Long term downward pressure on asset values.

  19. macrotrader603 says:

    @brianinla, you raise a good point.

    You can always continue with throwing darts, flipping a coin, watching cnbc and hoping you get it right…

    Cheerio!

  20. call me ahab says:

    “a common problem amongst you HU-mans”
    it appears you do not include yourself in this category . . .or else it would say “we” humans,

    in any event, I counter that for something to exist it needs to be perceived . . .
    if the universe was lifeless, does it even exist?
    ~~~

    BR: Too obscure a reference? (Guess you are not a Star Trek Next Gen fan)

    To answer your query, the universe existed before life did, therefore with nothing to perceive it, your argument is it did not exist. As I advised previously, learn a little philosophy

  21. farfetched says:

    Ah Yes, the sound of one Ahab complaining… if we don’t read it does it still make that annoying whining sound?

    If a tree falls….?
    The sound of one hand clapping?
    The roar of a million butterfly wings?
    If a man does something and his wife isn’t there to see it, is he still wrong?

    All the mysteries of life.

  22. carleric says:

    The 400/500 point swings are probably, at least partially, explained by the advent of HFT and quant based computer program trading. Computers apply techincal set ups with about the same intelligence as would be (retail) technical analysts. BR is right, within violent movements the trend remains intact and folks the trend is down. Stan Weinstein said it best years ago. “Don’t fight the tape”. Of course he also urged folks not to fight the Fed and in the short turn, given Bennie’s penchant for sticking to his half-baked ideas, there is also the possibility of a short term rally. But know this; Bennie doesn’t really have a clue. He still thinks the answer is in his favorite books.

  23. layyah0905 says:

    @macrotrader603-Besides the money management aspect,over 90% of fund performance was related to what class of asset they were investing in rather than stock picking-however to do that one has to be in flow of what the relevant markets are telling you and most people do not have the right tools to do so.

  24. Through the Looking Glass says:

    Look at the S&P 50 year chart
    http://eparity.files.wordpress.com/2008/01/sp-500-50-year-monthly-chart.png

    and look around you at the wars the Wall St. rip offs, the criminally corrupt that prevails in the ruling class and most of all on that chart look where computers took over and tell me the past can be used to predict the future. Are you freaking NUTS? No one predicted THIS future and it has nothing to do with the industrial revolution . It has to do with greed .
    Money creating money out of thin air.
    But the masses are tired and ready to fight if the oligarchs dont listen , What else can they do Vote?
    They own the vote and politicians their pawns.

  25. macrotrader603 says:

    @layyah0905…all one needs is an online trading account and access to the charts for any market they are interested in…

    one does not need to be an expert in each market to properly trade stocks, stock indices, rates, energies, metals, ag, fx, etc…. price is price and can be traded off of