Its Friday (and a hot summer Friday at that), and as such, I like to wax philosophical about what I see around me as some of the broader issues today.

Cullen Roche of Pragmatic Capital sets the scene for us:

“The economy continues to do okay, the stock market is hitting all-time highs every day, real estate is back on the up and up, interest rates remain very low by historical terms, the net worth of Americans is back at all-time highs, we’ve just dragged ourselves out of the worst recession in 80 years, but people are still upset about a lot of things . . . I have a feeling that there’s more to this general unhappiness than meets the eye. And I think a lot of people are mad because the fear case has totally lost out at this point.”

He is precisely correct: A large source of angst is from those who missed the 146% rally to all time highs. Sell offs can be painful, but the mathematics of mean reversion are inescapable. Asset classes eventually recover, but if you fail to participate in a generational rally, it will haunt your compounded returns forever. Cullen implies that (beyond high unemployment) this might be the source of this angst.

But there is a deeper, more fundamental reason for the unfocused rage and misdirected anger: The failure of the narratives that have been driving much of economics, investing and politics. As John Kenneth Galbraith famously said, “Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.” Rather than accepting certain unpleasant realities, many participants have contorted themselves into a painful waiting game. They are “busy on the proof.”

The Galbraith quote reflects a favorite topic of ours – Cognitive Dissonance — and we have spilled more than a few pixels in these pages on the subject. As many of the narratives have failed, rather than admit the error and face the music, the rationales have morphed into a waiting game. Dow 5000 will happen eventually, Collapse of the Dollar — and all fiat currencies — is coming; Hyper-inflation (any day now), Gold will hit $10,000 (sold to you), Great Recession 2, Oil $200, etc.  The reference is not to any one of these errors specifically, but rather, tot he entire narrative driven belief systems in general. They are by design money losing stories, either torturing the data or ignoring it entirely.

Cullen gets more specific than I do in The Narrative Failing — he calls it The Fear Trade Has Been Demolished:

“If you’ve been paying attention over the last few years, you probably remember how many people predicted hyperinflation, surging bond yields, soaring gold prices, a cratering US Dollar and a collapsing stock market. This was the fear trade. You overweight gold, short US government bonds, short the USD, short equities and laugh all the way to the bank. Parts of that trade have worked out OKAY (like the gold portion over the years), but on the whole that trade has been a big disaster. In other words, fear lost out – again.”

Here is where the rubber meets the road — the specific cognitive reaction to the narrative failure:

“A lot of people who bought into the fearmongering nonsense are angry. They’re angry because they backed their political beliefs with their wallet. They’re angry because they listened to so-called “experts” peddling their political beliefs as an understanding of the monetary system. They’re angry because they read scary websites that claim to have predicted the crisis, but have gotten almost everything wrong since 2008. They’re angry because they let their emotions get in the way of sound analysis.”

And that is what cognitive dissonance is all about. Its coming up short in your forecasts, and making all the usual excuses. Its rationalizing why you are right and the markets are all wrong. Its doubling down on the bad trades, despite the obviously failure of the original thesis. Its sticking to your story no matter what the facts are. “Who you gonna believe, me or your lyin’ eyes?

It is the triumph of narrative over planning, ideology over facts, politics over data, emotion over intelligence.

I see this everyday in the office. We speak with potential asset management clients who have this false understanding of the world, and we have to deprogram them from their diet of fear-mongered narrative driven insanity. I’ve looked at $100 million+ foundation money sitting in 50% TIPs, 50% Cash (nothing else). We keep seeing  portfolios that are mostly junior gold miners and currency bets.

How is this for an astonishing but by no means surprising data point: In self-directed 401(k) plans, “The biggest single equity holding was Apple (AAPL) . . . followed by the SPDR Gold Trust (GLD), an exchange-traded fund.” (US News, 2012)

All of these trades represent the same cognitive foible: Investing by a well told if erroneous and unsupported story. And now, that Narrative has failed. The more adaptable, enlightened investors are learning the errors of their ways.

What narrative are you following?



UPDATE: Josh sends me the link to Greg Harmon’s similar take here: You Have Been Calling for A Crash for 6 Months and Been Wrong, Now What?


The Cognitive Dissidents (November 14th, 2011)

The Dangers of Non-Modeled Narrative Story Tellers (December 3rd, 2012)

Why don’t bad ideas ever die? (December 16 2012)

Rise of the Empiricists (January 29th, 2013)



Category: Cognitive Foibles, Investing, Philosophy, Psychology

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.

126 Responses to “The Narrative Fails”

  1. freethinker52 says:

    its fox news that is poisoning the minds of masses. where I live everywhere you go that has tvs on have it tuned to fox news. sports bars, waiting rooms, mom and pop restaurants.
    the people are fed a 24hour diet of misinformation from the right wing perspective.

    • Widgetmaker says:

      Best one I’ve heard: “Fox – the equivalent of getting your news from the town drunk.”

    • Stuart Levine says:

      Fox News is bad? Try watching the early morning “Squawk Box” show on CNBC. The parade of misinformation lead by Joe Kernan and Rick Santelli is simply breathtaking. (See Paul Krugman’s recent post “Fish in a Barrel, Rick Santelli Edition.”

      • My AM TV habits in 3 parts:

        When getting dressed in the morning, I used to start at CNBC, switch over to Bloomberg whenever Kernan said something idiotic, switching back and forth.

        1) Start at CNBC wait for idiocy –> Bloomberg wait til Commercial –> CNBC idiocy –> Bloomberg

        Then I found my self switching and not coming back

        2) Start at CNBC wait for idiocy –> Bloomberg END

        And now:

        3) Bloomberg

        It was an evolution, but Tom Keene has made it easy for me.

      • Stuart Levine says:

        I tend to still watch CNBC in the AM for a very simple reason–at the age of 62, I want to check to see whether I’m developing dementia. As long as I can see through the nonsense of Kernan, Santelli, and most of the guest hosts, I feel assured that I’m reasonably healthy. I can then go to work in a somewhat angry (at the nonsense) but also comfortable (because I am assured that I still have most of my cognitive abilities in tact) mood.

  2. PeterR says:

    The angst stems from the hijacking of The Human Dream by the hubristic empire building of various cartels over the centuries. Pick your term:

    – Roman Empire
    – British Empire colonialism
    – Robber Baron industrialists of the 1800′s
    – Ike’s Military Industrial Complex
    – Cheney/Bush [sic] Cartel
    – Too Big to Fail Bankaholism
    – HAL – 2013, A Space Odyssey

    Class warfare at its finest! Now global in scale with the escalation of imbalances being the norm.

    Sooner or later, though, matters will find a balance.

    The resolution may be unsettling in my opinion.

    • You seem to be replacing the failed narratives with a different narrative!

      I am hoping to go Post-Narrative

      • PeterR says:

        Narro, ergo sum?

        “hoping to go Post-Narrative” ?

        Be careful what you wish for, or you may surely get it! The only Post-Narrative state I can think of involves leaving one’s body, either temporarily or permanently.

        Have a good weekend, and please come back on Monday.

        Hot out here!

      • rallip3 says:

        The problem with ‘post-narrative’ can be probalistic meaninglessness:
        If A says “There is a 25% probability of the S&P falling below 1000 in the next 7 years and B says “There is a 75% probability of the S&P falling below 1000 in the same period”, there is no way of ever deciding who was right, however the future unfolds.

        Only there may be an arbitrage opportunity, buying a put from A and selling it to B; one man’s narrative is another man’s arbitrage?

      • What I mean by Post-Narrtive is using the other part of your brain — the non narrative, logic & data portion.

        Skip the story telling, stay with empirical-evidence driven approach.

  3. morning_star says:

    I know you have little regard for Zerohedge, and you have been right about the market advance while they have been wrong. Yet they had a post yesterday noting the stock market reaching new highs on the day Detroit declared bankruptcy. It seems to highlight the difference between Main Street and Wall Street. On CBS News this morning, it was stated that the declaration of bankruptcy will likely allow Detroit to avoid its obligation for as many as 20,000 employees (many union members) with regards to retirement and health benefits.

    Meanwhile, I read your posts about the Lambourghini you are interested in.

    Yes, that’s capitalism at its most basic level. Still, I believe that is what accounts for the angst that people feel. One of our greatest cities has just declared bankruptcy, and tens of thousands will be hurt by this. Combine that with a decade of irrational wars, a country spying on its own citizens, and a government that seems unable to accomplish anything (when it isn’t lying to its citizens), and yes, even those who profited greatly during the last few years should be feeling at least a bit uneasy.

    • What I really like about Zero Hedge are the insightful explanatories about complex issues — they do Derivatives, Goldman Sachs issues, and HFT very well.

      Where they go off the rails is the relentless end of world, fear-mongering, rooting for doom, recession porn. Its not only been wrong, its become utterly tiresome and boring.

      They took what was an insightful blog, tried to turn it into a publishing business, and went full on sensationalism. They also lost the poor fools who followed them a huge slug of investable dollars for the worst of reasons. Most rational people would find that unforgiveable (I don’t know why you are okay with THAT but mortified by Detroit).

      And I while I have a broad interest in classic cars, I have no special interest in Lamborghinis. But just for you, I’ll see if I can dig up a good Ferrari video for Saturday morning.

  4. [...] Barry: the landscape is littered with failed political and economic narratives and this is why so much angst still exists.  (TBP) [...]

  5. Petey Wheatstraw says:

    My narrative is my own, and it is based on the observation that economic homeopathy is worse than doing nothing.

    We suffered a crash due to fairly obvious criminality and cronyism, yet we did nothing to set the issues that led us to that point straight. Instead, we huffed, and we puffed, and we built a straw house to replace our stick house. In fact, we built directly on the rubble of the old house.

    My doom and gloom comes from the fact that the real dangers still exist, and that we are ramping up the danger of a recurrence by ignoring them, and worse, making them even more potentially powerful — the next “correction” will dwarf the previous.

    As always, the question is when that next event will happen. Could be tomorrow, could be ten years out. The longer it takes, the worse it will be.

    None of this — from QE to derivatives cascading failure throughout the system, to the shadow housing inventory (undeniably marked to fantasy) — has been remedied. It has simply been swept under the bulging rug.

    As I have noted in the past, and continue to believe, the real damage will manifest itself as a social upheaval that will make economic upheaval look like a loose hinge screw — as opposed to a completely shattered door and frame.

    There is no fix that does not involve investigations, trials, convictions, reparations, and strict legislation/regulation to prevent recurrence. Nothing else will remedy the situation.

  6. Icouldabenacontendah says:

    You nailed it, Barry. While I was never into the world doom, head for the hills scenario, I was caught up in the “market will soon plunge” narrative, and it was a kind of two-edged sword. It was something to fear and yet simultaneously something to hope for, both from the standpoint of shorting and of getting back in at the bottom to recover from my costly failure in 2009 to recognize the recovery for what it was. It wasn’t until mid-2011 that I changed course, and things have moved up solidly from there. There are losses that I will not make up. I am starting from a lower base, but I realize that I have learned much that I would never have learned if I had kept with the fear narrative or retained my mindset from the pre-2008 days. Learning from painful mistakes makes an imprint like nothing else, and following The Big Picture has been a major influence in changing my thinking.

  7. jnkowens says:

    CAPE of 24 is not a narrative. Corporate profitability at 11% of GDP is not a narrative. Nothing about those numbers is reassuring, so where is a little guy supposed to put his life’s savings? I can’t afford to have my nest egg cut in half, especially since I am now in the drawdown phase of my life. And I’m better off than a lot of retirees because I have access to a stable value fund paying 2.5%.

    I’m sure you hear this exact same thing from prospective clients all the time.

    • CAPE is but one measure of value. I have yet to see any investment approach that successfully relies on one measure and ignores broader context and history.

      As to Corporate profits, they are high because borrowing costs, taxes, and labor costs are very low.

      But the narrative you are following is a variant of the narrative I discuss above — you cherry pick the valuation measure that shows stocks are expensive (CAPE kept you out of stocks for most of the past 5 years). I am not saying stocks are cheap — but I question how long you have been using CAPE and what you thought of it previously.

      Part II: As to you just having your nest egg cut in half: Yes, its painful to have your portfolio cut in half. You can do that two ways: Buy at the top before a 50% crash, or sell at the bottom before a 100% rally. Short term the effect is the same; longer term, mean reversion goes to the top ticker.

  8. budhak0n says:

    The ‘hook’ . This may just be the best sentence you’ve written BR. Sense you’re not someone who gawks at the literary value, yet a great sentence. One that surmises a talent at the top of his game. Have a great weekend.

    • Which sentence would that be?

      • VennData says:

        If poster means “the narrative has failed” then I agree.

        The GOP said Clinton’s tax hikes would ruin the economy. So when they said the same thing about Obama’s stimulus, health insurance deal, etc., I was able to stick to my asset allocation and rebalance as needed in ’09.

        My knee jerk GOP buddies refuse to adapt. We have evidence down the street at the Field Museum of big ole lizard named Sue from long ago who did the same.

        Their egos won’t let them adapt. They didn’t give themselves an out. They will buy books and watch TV that will be resurrecting Bush and blaming Obama for their skin cancer.

        It’s a good business, stroking right wing egos, like a true escort service, show the hottie off to the maitre de and the bus boy, but at the end of the night you don’t get any.

  9. killben says:


    What I fail to understand is since all of what Cullen Roche says (The economy continues to do okay, the stock market is hitting all-time highs every day, real estate is back on the up and up) is true, why does the Fed (and all Central Banks-BOJ, BOE, PBOC, ECB et. al) have to now and then come and say “we will do whatever it takes”, where are the feral hogs etc. Why do they start scrambling when the market shows a drop of say 5%? Why cannot these guys let the market in peace if things are so great?

  10. BennyProfane says:

    I’d feel a whole lot better if (a) 75 million Boomers, the most profligate spenders in history, weren’t marching into the end game with no savings and a lot of debt, (b) Europe wasn’t in such horrible shape with no real hope of growth in sight as Brussels plays the violin, and (c) China wasn’t slowing dramatically into what looks like a very shaky transition period from investment to consuming. And, yeah, it doesn’t help that Detroit is now officially bankrupt with some other large to small American cities and probably a few states to follow over the next decade. And yet, I’m up 8% this year, some of which I have to thank you and your writing for. I’m too old to afford another disaster, though. And the financial foxholes and bunkers that my father’s generation used for cover (hell, just a few years ago) are disappearing as even treasuries are a losing proposition.

  11. grandwazoo says:

    The narrative I tend to follow with regard to investing is the reversion to the mean idea — over the course of human history this is one that holds up pretty well even back to ancient records where they exist. Human beings like easy to explain simple narratives in order to explain complex things, the problem is they are often wrong imo, we want there to be a reason and look for one even when one does not exist or is too complicated to understand or pin down. So I am often wary of any narratives at all just for that reason. To me it’s better to look at long periods of history and realize that there is balance over the long run rather than someone’s over simplified narrative of the situation.

  12. rww says:

    Cognitive dissonance no doubt explains the rage of those who could have participated in the rally and didnt. But cognitive assonance explains why you think everyone was in a position to participate. Net worth is at all time highs? I think you need to broaden your circle of friends.

    • BennyProfane says:

      “Net worth is at all time highs? I think you need to broaden your circle of friends.”

      Yeah, with most residential real estate, which is, after all, most of American’s “net worth”, still down 25-30% from the highs, I still don’t get that one. The top 5-10% are doing just peachy, it seems, so, does that skew the numbers that much? If so, nothing to celebrate.

  13. mbrmd says:

    Perhaps what you describe is just a manifestation of where our society is today, alas.

    With a nod to the crapola lately oozing out of the mouths of folks named Clapper, Alexander, Brennan and (former and now ‘well-invested’) Hayden, I offer a paraphrase your last few sentences:

    “All of these secret initiatives represent the same cognitive foible: Conducting national security by a well told if erroneous and unsupported story (of fear).

  14. Moss says:

    Lots of noise, peddling is a good way to put it. There is no shortage of gullibility.

  15. MV says:

    BR — Wholeheartedly agree on the blind spots that have caused some to miss the rally, and in some cases their angst is nothing more than a case of sour grapes. However, there are some thoughtful exceptions out there. First, there are sober observers like Hussman who, although wrong in his timing so far, may prove to be correct that this rally will eventually prove to be built on fairy dust. Second, there is a much larger group of folks who have simply become disillusioned with stocks. They have seen legitimate cracks in the system, many of which you have pointed out (2 bubbles / crashes in 13 years, unfair banking rules / bailouts, zero interest for savings, and HFT mysteries), and they just don’t trust it as a place for their money. Maybe that’s not a bad thing. Some of these people are starting businesses, investing in land / tangible assets, and paying down debt.

    Finally, maybe there’s an assumption that people need to be in stocks. A bigger philosophical question might be: Why does everyone “need” to be in the stock market? How has the stock market, in a few generations, become a repository for millions of retirement accounts?

  16. scone says:

    It’s not just the political arm of the right wing. The religious right has fueled the “end of the world” narrative, e.g., The Rapture, “Left Behind,” Y2K, Obama as Anti-Christ, etc. When you start pumping on that visceral lizard brain level, the narrative becomes extremely powerful, and some become True Believers (as Eric Hoffer said). At the extremes, failure only makes some people more fanatical, and resistance to reason is seen as a test of faith. Any lingering doubts are turned to rage against “unbelievers.”

    So I think it’s a mass psychology issue, not an investing issue per se.The movement will have to burn itself down over time, like other “madness of crowds” delusions. In the meantime, de-programming a few fanatics can’t hurt. ;)

  17. tagyoureit says:

    The narrative I’m following is income inequality will continue to increase, affordability of health insurance will decrease, the percentage of US income spent on food and energy will increase while spending for everything else will decrease on a per capita basis. “Safe” investments will have zero to negative returns, “risky” investments will return 6% or less over the long term. Limited Warfare will continue and increase as a share of government spending, Social spending will erode. Monetary policy will remain “accommodative” by some mechanism indefinitely. Automation of working will progress slowly to the extent that its R&D is funded.

  18. Conan says:

    “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” ― Warren Buffett

    So I ask have we run the cycle of “Be greedy when others are fearful” and now we should consider the thought of being “Fearful when others are greedy” ???

    So far the numbers say no to being Fearful, but every leg of a cycle has it day and time in the sun. So we maybe closer to the end of the Greedy cycle than we think. No one can accurately tell with foresight the turning points. Thus you need to have in your investment plan a scenario to contemplate what you will do in either cycle. Now that we haven’t turned yet is the best time to plan.

  19. themusesmuse says:

    do you think a technically-based trading strategy and strict adherence to pre-determined trading rules decreases the chance of falling into this trap (assuming, which is in many cases, can be a large assumption, that you strictly follow your trading rules [e.g. stops, risk reward measurement prior to putting on the trade, etc.])?

  20. Internet Tourettes says:

    We live in a time when the popular narrative addresses the hippocampus (fight or flight response) as opposed to the neocortex (analytical thinking). I don’t know why most of the popular media has become the equivalent of a Mexican Wrestling league, maybe it’s because of 9/11, or the great recession, or perhaps the repeal of the FCC fairness doctrine and the “outraged” talking heads (on both the right and left) that fill the airwaves and tubes that make up the internet. The net effect is that fear and the feeling of not being ready for the next big stock market crash, terrorist attack, or housing bust has overtaken the focus of a long term steady financial strategy. Most of the investors (Individual as opposed to institutional) I talk with all want to be John Paulson as opposed to Warren Buffet winning big on the outlier event as opposed to consistent incremental gains. Even if you were totally screwed in the fall of 2008, if you continued to invest you could have made substantial gains on funds invested 2009-13 and your initial principal from 08 should have been recovered by now (unless you were greedy or stupid). I just hope that just as the economy very slowly strengthens that people are rational as to the debt they assume and the investments they make.

  21. peterkrause says:

    Bill Gross suggested that he may be only an average investor. Most of his success comes from having played in a bull market for bonds. And over the years, I’d have to say my own “genius” moments and self-directed high five events can be credited to a stock market that rises over long periods. Its most important to play. That might be the hardest lesson that I fight to learn and re-learn. My number one long term goal is to be fully invested and I resist, have resisted, mightily.
    As to the fear trade, I’ve wondered since 2008 how the millions who’ve lost jobs have gotten by. How those who have had to spend down their savings, accepted less pay, delayed retirement and put on the orange apron, made do with less. The simple math of how 70% of GDP (consumer spending) maintains an upward glide path escapes me, when the consumers doing the spending are suffering financial repression.

    But if you turn the M6 on its head, it means that a good 85% of the workforce is still happily doing the heavy lifting. I don’t have to understand it to play. So I play.

  22. peterkrause says:

    I was on a small scaffold the other day, helping some glazers replace glass on the roof of a Pella porch. And even in this heat the conversation stayed lively. Both these guys were explaining to me, or trying to, how to write covered calls.

  23. coachin2au says:

    You cannot pound this point hard enough, and you are a minority voice on this opinion.

    When I see the comments that follow any “your narrative is f’ing you up” post, I can’t figure out if it is irony, satire or ignorance that people are aiming to deliver when they then point the finger at one party or the other (e.g. Fox, Koch brothers, Obama this, Bush that, ACLU, activist judges, Tea Party, etc).

    So long as you see the problem “out there” with the other side, you’re not getting the point of this post. And that is why you’ll continue to suffer angst and frustration because the facts will remain a set of puzzle pieces to a different picture than you are looking at.

  24. BusSchDean says:

    I participated in quite a few NYC meetings with investors and others over the past few months. Discussions a somewhat odd topic (MLMs, Herbalife, pyramid schemes) brought out an overwhelming sense that how we create wealth matters little; what matters is only that we create wealth. Excitement over positive numbers seems to wash over all else.

  25. Here is another

    Hume, Causation & Science (January 14th, 2012)

  26. Oral Hazard says:

    Barry, I’m revising my own narrative to factor in mass inertia and human indifference. You are writing to an above-average intelligent and educated audience, many of whom have significant responsibilities around investing OPM.

    I have revised my thinking around the derogatory “sheeple” term that frustrated observers so often throw around. Sheep don’t buy into dopey ideologies, not heart and soul, anyway. They go along to get along, and I think warnings about sacrificing liberty for security get shrill around this issue. PRISM only serves to confirm that, and of course, to an extent I share those concerns.

    But the fact that sheep do what they do regardless of what happens around them can actually put the brakes on radical change, and that’s not always such a bad thing. Maybe the inner sheep in all of us know on a deeper level that so much of what happens around us is noise, sound and fury signifying nothing in the long sweep of human history and evolution.

    To illustrate, how many people think PRISM is more likely to be misused through corruption to sell personal information to large corporate cronies, as opposed to using it to plan when the scary Men In Black in black helicopters rappel into your windows to cart you off to the Big Brother gulag in the middle of the night? How many people think it’s likely that NSA is now sitting on an unprecedented shitload of personally identifiable data they haven’t got the brains or creative talent to make good use of? Your covert tax dollars hard at work: “I know! Let’s use it for marketing!”

    So my new narrative thinks that a big part of the reason things continue to muddle along in a somewhat positive direction has to do with our inner sheep doing what they do. Intellectuals overestimate the impact of ideas, frankly, and are so quick to denigrate the stupid American Idol-watching masses that they don’t see the value of what’s right in front of them: sheep quietly and obstinately chewing their cud as demagogues spew their poisonous crap.

    • VennData says:

      The “sheep” I know are adopting the cloud, buying shale-oil product, taking innovative drugs and consuming delightful ebooks, having great travel experiences and thinking about a Prius, Tesla or Volt.

      Monty Python’s ‘Life of Brian’ when the sheep were ‘following the shoe, following the gourd,” Brian screamed “you don’t need to follow anybody” so I ask, WHY DO YOU NEED A NARRATIVE!

  27. Hallsto says:

    Because there’s no cognitive dissonance associated with declaring the all clear the day after the market tops. Look at a 10 year of the S&P, more rises and falls than the Millennium Force. The narrative Barry seems to want to put the kibosh on has little to do with financial markets. What we’re witnessing is an expression of frustration with the inequity in society. As much as Barry’s world might be improved, a handful of green shoots aren’t going to solve this.

    The sun rises tomorrow. Let’s be sure to stay in the moment, observe what it brings in an honest fashion, and consider our position. The truth just may be that every narrative is just that, an expression of an individual perspective. It is a fragment of truth, like observing the moon from various angles. Neither the doom and gloom, the wide eyed hope, or any gradient in between is accurate, it is the tapestry they form together which derives truth.

    • No, no, no.

      I am wriitng about investing so you DONT HAVE TO EAT CAT FOOD IN RETIREMENT.

      And I have been writing about this, as the “Previously” suggests, for several years. So if coincidentally the market tops THIS TIME, it will be just that, a coincidence.

  28. pdzxc says:

    I am invested in financial assets, rather conservatively, but invested. Like Charles Prince I learned that you have to dance while the music is playing when I largely abstained from the stock market bubble of the late ’90s. So I have benefited by increase in asset values since 2009 – I’ve been conservative so could have done better, but I have joined the dance. So I am not angry or fearful because I have missed the party. But I have some fear, and some anger because I feel that the current situation with interest rate suppression by Japanese, US, and the ECB will not end without a lot of pain for those invested in financial assets. If the reversion to the mean theory holds, and I believe it does, ZIRP and central bank massive purchasing of bonds will come to an ugly end at some point. “The Narrative Fails” fails to address this strain of fear/anger, which I feel is a major contributor to the angst described in this post.

  29. ch says:


    The narratives you mentioned failed because they were based on gross misunderstandings of the way money & currency systems work. The narratives failed b/c they were the wrong narratives.

    Most things going on in the US financial markets are classic symptoms of a developing currency crisis in the US, but most investors think its a bull market rather than the ongoing & accelerating replacement of a dying currency system. On the surface, it is difficult to distinguish the two. The people that were negative & wrong were wrong b/c they didn’t understand that when currency systems break, prices of equities & bonds & energy & food rises, not falls.

    If people would read history books, they would see with crystal clear eyes what is going on…this has all happened before…when currency systems die, the prices of everything non-discretionary go up, not down, most particularly food & energy….

    So if the price of everything is rising, why is gold dropping? Another case of the “wrong narrative.”

    B/c the gold price on the screen is not gold, it is a gold derivative. Gold was & still is a “bubble”, but not for the reason you think. It’s b/c the price was set in a paper derivative market. No one talks about the fact that physical supplies are falling at record rates, like GLD’s inventory which YTD has dropped at a 65% rate…people aren’t asking where is that gold going & why?…They should be. If the price of gold is set off a massively leveraged derivative that purports to represent “gold”, but then big money realizes that the currency system is dying & wants actual physical bullion to hedge that, guess what happens to the price of the derivative? The price of the gold derivative that cannot be used to acquire gold should collapse, maybe to zero. That is what is happening.

    A drop in gold prices at the same time there is the biggest run on physical gold in history doesn’t fit the “doom” narrative, but it fits perfectly into the “currency system” change.

    So does slowing growth in emerging markets, record high bond & equity prices in the US in the face of worsening economic outlooks, etc. So does the fact that even the brightest stars of the hedge fund industry are having a hard time outperforming index funds…

    Many US investors are known for their exceptionalist, ethnocentric view of the world & their complete ignorance of economic history…the inability for most to recognize the correct narrative for what is going on right now is a perfect example…

    • So your position is the currency system is dying?

      Sounds like a narrative AND a forecast to me.

      • ch says:

        Observations of where factual data are leading…the path is still under construction, but here’s where we are now, I’ll leave it up to you as to where you think the sign posts are leading:

        Since 2001, oil prices have risen from $20 to $100. A US Treasury at face value bought 50 barrels of oil in 2001, 10 today. That’s 80% loss of purchasing power, over 12 years.

        This isa negative 6-7% interest rate to US creditors relative to their critical imports of food & oil…but up until 2007, they got a ~5% coupon, so the deal was close enough to neutral as to make sense.

        Since 2008, ZIRP means that global creditors have had to finance the US’s consumption at a (6-7%) real interest rate relative to critical food & energy imports. Ask Egypt, Turkey, Libya, etc. how losing 6-7% of their purchasing power for food & oil is working out for them…no one minded in 08-09 b/c it was in no one’s interest to see the current system collapse quickly…an alternative had to be established 1st.

        Let’s compare creditor nations saving in ZIRP UST’s v. saving in gold: In 2001, 1 oz of gold bought you around 12 barrels of oil, & now it buys you around 12 barrels of oil…and this holds true since 1971…gold & oil have correlated well to each other & have massively outperformed stocks, bonds, inflation, housing, most everything else:

        Yes, gold has no coupon, but neither do Treasuries. But gold holds its value v. oil; ZIRP UST’s, not so much.

        So if you are a creditor, you can either keep financing the US at negative (6-7%) interest rates forever to keep buying your stuff & risk increasing political strife in your own nation from rising food & energy costs, or you can start shifting your reserve assets to something that preserves its purchasing power of the only inputs that matter from a political standpoint to most of the world: Food & energy…

        And what China, Germany, Venezuela, etc. are telling you is they are moving towards the latter…that’s why they want their physical gold back. China bought almost 100% of global supply in May & June…

        US could stem this by raising UST rates back to 2007 rates again…but i doubt that is possible given debt levels & housing realities (housing with a 6.5% mortgage rate is a very different world than one w/a 4.3% coupon)…and 5% rates would add $600-700B to the US deficit just interest expense, assuming no economic impact to tax revenues…

        So that’s where we are now…there are a couple ways this path can go, but the narrative of “the Fed can QE forever so the US is best positioned” isn’t exactly true…if people open their eyes to what is going on among the US’s creditors, which they aren’t, yet…

      • That is a fantastic narrative. I dont disagree with any of it.


      • ch says:

        It’s all about maintaining a broad, inclusive view of the implications of the narrative. :)

        Gold this year has sucked. Thank goodness I’ve also been long stocks & a highly-levered diversified portfolio of real estate along with the gold since QE1, & I haven’t shorted a stock since late 2010, when my suspicions that QE can mathematically never end were confirmed. I have a long term time horizon & no particular investment mandate (it’s my money.)

        Economic history books are very clear: The way to play this is to own a bunch of gold & then borrow a bunch of money & buy a bunch of hard assets & equities with the borrowings, & then let the gold & equity appreciation pay off your debt for you.

        The dollar is a debt-backed currency. Deflation is not an option. Once we got to ZIRP, it’s really that easy. It’s sort of intellectually offensive, but it’s reality. It will stay that way till our creditors pull the plug, per above. When they do eventually (next week, 10 yrs from now?), the price of gold is going to shock people…

        I don’t like the game, but I don’t have any say in the rules. I can only play the game as the rules say. I do my best to try to help friends & family who aren’t as financially sophisticated to understand the rules of the game as well…

        If you haven’t read “Lords of Finance” by Liaquat Ahamed, you really should. History doesn’t repeat, but it sure is rhyming. Turns out global sovereign bond crises happen fairly regularly…but at intervals that ensure that no one alive has ever experienced one. This book is a great recounting of what happens & how to invest when everyone is massively in debt & no one can pay any of it back.

    • VennData says:

      What”history books” are talking about? The Rogoff Reinhart one? The book actually eschewed data to fit their narrative.

  30. large J says:

    While it may be dangerous to stick to a failed narrative i do not see how you reconcile that point with the fact that contrarian investing by definition requires strict adherence to an apparently failed narrative. If all investing was reversion to the mean then we would just let the monkeys do it. Specifically, Michael Bury and Paulson et al in the subprime short or anyone that did the work on Enron etc etc. The gold story is far from over individuals with gold exposure are not necessarily 100% in gold or Apple for that matter.

    You are one of the best bloggers out there but my guess would be that your portfolios are designed to hug a benchmark rather than generate actual alpha. Still in all I thank you for some of the best work on the web.

    • We run an asset allocation model, so we aim for Beta not Alpha (recall this presentation last month)

      The contrarian investing ends up creating little if any Alpha for the vast majority of its practitioners. Bury & Pelligrini are the exceptions; Paulson waited til his AUM was $36B before losing half of it — he is a perfect example of an epic pseudo-contrarian fail.

      And note that MOST OF THE TIME, the investing crowd IS THE MARKET. Being a contrarian only makes you money at the key reversal points once a twice a decade — not every day.

      Whatever Alpha I have created in my career has been a combination of some skill, sharp insight and a whole lot of luck (See this). I’ve gotten more right than wrong but I still wouldn’t swear that it wasn’t a large degree of chance involved . . .

  31. b_thunder says:

    Google stock is up 50% ($600 to$900) over last 12 months
    Google earnings are DOWN Q/Q (before tax, after tax, and EPS)
    Google PE is significantly above 20
    Google EPS near-term growth is single-digit positive to single-digit negative.

    I think the stock should be down not 3% but 33%, to where it was 12 months ago, if not lower. That’s what would have happened in a “normal”, pre-QE liquidity-driven market. Does anyone disagree?

    But this is not just about Google: GOOG is a microcosm of the entire stock (and until recently the bond) market: historically overpriced, with negative earnings growth (while EPS boosted by buybacks and other accounting tools) where every negative “surprise” swallowed by trillions of liquid cash. GOOG’s entire move up 50% form $600 to $900 is not warranted by any fundamental metrics, just as the market’s last 500 points (from 1200 to almost 1700.) And for those who will say the market is forward-looking, I say that GOOG has been “missing” for 2 years now. How far forward do I need to look? Because historically there’s a recession every 4.5 years and surely there will be a chance to buy GOOG lower then!
    But if you manage OPM you absolutely can’t miss this 50% MOVE!

    Cognitive Dissonance or something different:
    Yes, it probably is Cognitive Dissonance… But maybe it’s a good thing? Especially for those of us who don’t need to show monthly and quarterly P&Ls to justify our existence? Can the irrational stock valuations last forever? Are the new rules in place permanently? Is this time really DIFFERENT? If you say “it’s never different” then you have no explanation for the current valuations. The only rational thing is to step away and wait for 2000-like crash. And if this time is REALLY different and the Fed wull never stop “extraordinary asset prices ramp up” then gold (that’s by the way down 30%) has to be considered…
    10 year treasury @2.5% or GOOG up 50% on declining EPS or GLD down 30%? Hmmm…

    • One cherry picked stock does not prove much (except about that one stock) — look at the entire market.

      Dan Greenhaus did a study showing markets and earnings running about the same amount since the March 2009 lows.

      How does that conform to your views?

    • VennData says:

      b-thunder, allow me to point out that Google has an unmatched portfolio of investments that are geared for future payoffs. If ones narrative is that current 10K ratios are the best way to invest, then you’ll never be a VC-type innovator in any way.

      Do not invest in what you do not understand, and sorry about your GOOG short, but you do not understand their investments.

  32. Robespierre says:

    Talking about narrative. This is the historic data leading to the bottom of the S&P500 (2009):
    U6 unemployment between 2008 to 2009 when the S&P 500 hit bottom:
    2008 = 13.6
    2009 = 17.1
    Housing “equity” 2009: “If our home-price forecast is correct, roughly one in two mortgage borrowers and one in three homeowners will owe more than their home is worth,”
    Food stamps: 2008 about 28M people; 2009 about 38M people
    Money Income of Families (2009) percentage of families with income less than $150K about %90

    So BR most people’s (the bottom %90) economic conditions were deteriorating rapidly going into the bottom of the S&P 500 and were in no position to “plunge” whatever meager savings they had into the stock market to “take advantage” of as you call it: “A large source of angst is from those who missed the 146% rally to all time highs”

    Of course you don’t understand why Americans may be angry. After all if they couldn’t buy bread it is their fault they didn’t switch to cake!

    • The discussion as to why the “bottom 90% of America” is angry would make for an interesting discussion.

      However, that is not remotely what this post is about.

  33. What is my narrative? The first answer that came to mind is “I don’t know.” The first answer is usually the correct one. Therefore, I am relieved to discover that humility and openness are primary descriptors for my narrative, my perspective, my world view.

    “A man’s knowledge is like an expanding sphere, the surface corresponding to the boundary between the known and the unknown. As the sphere grows, so does its surface; the more a man learns, the more he realizes he doesn’t know. Hence, the most ignorant man thinks he knows it all.” ~ L. Sprague de Camp

    “The perfect man uses his mind as a mirror. It grasps nothing, it rejects nothing. It receives but does not keep.” ~ Chuang tzu

    • Kent,

      it is ‘too funny’, or, maybe, simpatico/ matter…

      though, as I was reading through the responses to BR’s Post, I was reflecting upon one, of his, from a couple of days ago (of a similar vein)..

      /thinking/ ~”BR, you keep asking people to Think, then Think Critically…or, to Question, yet not to be Sure…(or, Both)”

      was recalling the lack of understanding, generally, of many of Taleb’s, and his Ilk, *many, readily, find them wanting..

      then, your Post (scrolled up)…

      LSS: Thank you for Thinking. Hopefully, others, seeing the Example, may take Note–Better, will, *finally, follow suit..~

  34. Great post, Barry. This is a really important topic.

    In a way, this kinda reminds me of Larry Kudlow back in like 2005 and 2006. I remember him saying over and over “the greatest story never told” as though the rest of the media was chronically under-reporting how well the economy, labor market, and stock market was performing. George W Bush was in office, of course, so in a way this was an inverse narrative to that of today. But that was also before the Fox perspective had really penetrated the financial media.

    Had Fox been as influential a participant in the financial media back then as it is today, it would have been spinning a completely opposite narrative, echoing Kudlow’s sentiment of “Hey! Ignore everything CNN and MSNBC are telling you, the economy is doing great and we’re creating jobs and George W Bush is responsible!”

    QUESTION: Had Mitt Romney won the election, would that have killed this “Fear Narrative”?

  35. LE2 says:

    There are three types of people in the market:

    those that need to be right – ego gratification

    those that need the action – the gambler at heart

    those that want to make $ (possibly in a risk-aware, i.e. concern about permanent loss of capital) fashion – the investor

    Decide what you’re there for

  36. cuprous says:

    Yes, there was a rally. But let’s not call it a market rally for there is little semblance of a market any more.

    You know very well that without the Fed spewing $80 billion/month into the economy the doomers would be right. So now that you have congratulated yourself on profiting from its ill-conceived largess (which, of course, has done nothing to help the labor force participation rate nor improve the purchasing power of the average American), further consolidating wealth into the top 1%, ask yourself how long this charade can keep going before something breaks? You’re not worried about margin levels being back to where they were in 2007?

    • Its okay to be wrong, it is not okay to stay wrong.

      You seem to be wed to that same narrative — I am not telling you not to criticize the Fed or Congress or whoever — but I am telling you that by sticking with the same erroneous narrative for 5 years, you have set your retirement back 7-10 years.

  37. CyrilD says:

    I confess I got it wrong. I bought into the narrative that said 1/3 of America was past it’s peak consumption years, and our 70% consumption economy was destined for a cool down. I also thought the other demographics would engage in a prolonged deleveraging. While I thought the markets would go up in the search for yield and due to leveraged money on the cheap, I didn’t think it could be sustained for this duration. So I’m one of those who missed out. I am still concerned about bubbles all over the globe popping and a domino effect. But this is the world we live in.

  38. contrabandista13 says:

    Guilty as charged, early in the game… Then I realized, that the path to wealth is, “wholehearted cooperation with the inevitable…”

  39. cliffordbrown says:

    I haven’t posted a comment on a blog in years. For years I regularly visit your site, pragcap, zerohedge, naked capitalism, hussman, tim duy, krugman, project-syndicate et al. I agree with the main thrust of your post, and Cullen’s, which is to say that it is a hard pill to swallow for those who have missed the 150% rally in stocks since 2009. Morever, many not only missed the rally, but invested in assets that have lost value, making it doubly painful.

    Where I disagree is when you attempt to argue that the evidence since 2009 proves that all counter narratives are borne of psychological failing, false reasoning, or dubious rationalization. I find it disingenuous to use “experts” in quotes to malign anyone who didn’t happen to have accepted the mean reversion thesis and been bullish stocks, whom are all grouped monolithically as fear mongers. There are countless legendary and wildly successful investors who chose not to participate in what they viewed and continue to view as rigged markets. There remain very sound and rational reasons to avoid the stock market at this point.

    Those who predicted that the March lows would be a generational low, and a great opportunity to be long were right. And yet I don’t recall much commentary at the time, even among the most bullish about how the S and P would rally 1000 points in 4 years. I seem to remember many non-false narrative “experts” predicting much higher GDP growth as the basis for their bullishness. Certainly no one was envisioning a coordinated global debt monetizing scheme of the magnitude we’ve just witnessed, the consequences of which will take some time and a great deal of volatility to fully play out.

    That is to say, maybe you and Cullen, and others who figured out how it would evolve were right, but I don’t think either of you were expecting us to be here in 2013. Yes you were smart but you were also handed a gift, and as much as the “fear mongers” overplayed their hand, the Panglossian viewers of US equity markets are beginning to display worrying signs of recency bias hubris.

    • 1) I did not say ALL are borne of this cognitive dissonance — but I mentioned the big ones, most of which likely are;

      2) The Cycles of Markets chart I showed in 2009 suggested a 70% snapback was typical. That chart has been in all of my presentations since then.

      3) Earnings from the March low have risen even more than the markets. I’ll dig up that chart and post it next week.

      4) Its not my job to figure out where we will be in 1 or 2 years; My job is to understand where we are today and where we are most likely going to be in 10 years.

    • rd says:

      2009 may not have been the generational low. CAPE and Q were still well above historic generational low values. It would not surprise me to see another leg down in inflation-adjusted returns similar to the third leg of the 1966-1982 secular bear in 1982.

      1929-32 is the only time that we had a 90% stock market drop in one go. Even that was not a real 90% drop because deflation increased the value of a dollar in real terms during that period. If Bernanke’s deflation fears had been realized in 2009-2010 we very well might have seen a repeat of the nominal drop in 1929-1932 but it would have required deflation to kick into gear which it did not.

      However, continuing to dollar-cost average contributions during a major decline, re-invest dividends and interest, and rebalance winners and losers between major asset classes generally results in a significant increase in portfolio value during the see-saw of a secular bear market over a 10-20 year period. Unfortunately, all of the headlines are written about the nominal price of an index, not its accumulated value after dividends and interest have been re-invested. A fully-invested stock portfolio with re-invested dividends would have bounced back to its 1929 peak value long before the nominal peak was passed again two decades later. Continued contributions into the portfolio from the 1929 peak on would have returned even bigger gains.

      • Your forecast notwithstanding, until we breach those March 2009 levels, its a generational low.

        1929-32 was not a straight down shot — check out the charts on this one.

        Here’s CAPE, which would have kept you out of equities in some huge rallies:

      • rd says:

        By straight down I meant that the 90% drop occurred in the same approximate time frame (1.5-3 years) as a typical bear market as opposed to something that dragged out for years to get the inflation-adjusted bottom like 1966-1982.

        From a nominal standpoint it has been long enough now that 2009 could very well be the nominal low even if we get another serious slide. The final CAPE and Q in 1982 were significantly lower than in 1974 but the nominal market value was about the same.

  40. [...] Ideologically driven investors are mad because they have missed the rally.  (Big Picture) [...]

  41. BenE says:

    This is a good post but it is quite boomer-centric.

    For a large part of the younger global population, there are good reasons to be upset about economic prospects other than having missed the stock market rally. At the center of our worries is persistent high unemployment or underemployment but there is also high costs of living especially rent in areas where there are jobs and rising costs of securing a retirement.

  42. pekoe says:

    Your article was about angst and its origins. I think the origins are more than just a missed rally in markets. My lifespan has seen an unprecedented speed in the cycling of societal changes coupled with a devolution of collective responsibility onto individual responsibility. Industries rise and fall in less than 2 decades, and entire communities see themselves in boom-bust cycles that come faster and faster. People in my line of work (I am a scientist) used to work insanely hard and focused on their careers, and when they were done they had a good pension. It may not have been the best—who knows?–but that was one area of your life that was not your own burden. Now, you are supposed to be your own financial expert (instead of having supportive institutional relationships), a medical expert (“take command of your health!”) a real estate expert, etc. So you work insanely as before but your focus is distracted by your own now crushing expanded set of responsibilities for your families current and future financial status. And when the criminal class on wall street nuke your future without any accountability, you see the financial world explode, your very security put a risk and “its all your own fault” because maybe you zigged when you should have zagged. You naturally listen to self proclaimed experts for guidance and if you perchance follow the wrong advice, “its all your own fault”—again, even though you worked hard, saved consistently, etc. THAT is why people are crazy pissed off, and rightfully so. Its not just missing a rally in the stock market—shit, that seems to happen every decade of so now.

    • rd says:

      Modern medicine,the provision of clean drinking water, and improved working conditions have meant that much of the population has a prospect of actually retiring for an extended period of time that can be measured as a decade or more. This is a fairly new concept that really only dates back to the 1940s.

      The post-war years were a golden age which had increasing life expectancy, demographics that drove a robust economy, and numerous provisions for retirement income in much of the developed world. That period lasted about 40 years. Now, the implied costs of that are catching up and those promises are starting to fade.

      We are moving into a new period when we have the increased life expectancy that began in the 1940s, some of the retirement safety nets (SS and Medicare) but will be increasingly reliant on our ability to plan. The uncertainties about employment that you mention are a very good argument for planning your own savings (along with any corproate matches) because pensions are only of high value if you can put enough years in at any one firm or union. The modern world is changing fast enough that this is no longer a feasible model for most people. I suspect it is even starting to change for the last bastion, which is government employees.

    • VennData says:

      Your flaw here is listening to “the experts” for financial advice. How did you decide they were experts?

      Investing is easy: set an asset allocation, use index funds, rebalance to your targets annually. That’s it. If you cant do that find some who will assist you to do that. If they do not want to do that, then they ARE NOT AN EXPERT and their past performance will prove this.

  43. DrFish says:

    CAPE 25 and CAPE15(2009) are useful numbers. What irritates me is that in 2009 I didn’t know CAPE from shinola

  44. DeDude says:

    The problem is that at any given time there are always a large number of things that could drag the economy and/or markets down and a large number that could push them up. If you like “metrics” there are always some that are way above average and others that are way below average.

    Your link yesterday to the New Yorker article about how scientific truth has to overcome our genetically encoded “intuitive truth”, may have a part of the explanation of why angst perists in spite of facts. Many people may have strong intuitive truths of “prepare for the worst”. But in order to overcome your “intuitive truth” you not only have to desire to find the real truth but also be able to – which is very hard when at any given time there is data to make a convincing argument either way.

    I think this angst is probably one of the most strongly and hard to overcome “intuitive truths” hanging around in our lizard brains (for obvious reasons). Furthermore, if you are so inclined, you will be able to constantly see it confirmed one way or another.

    • Anyone invested in Equities should be aware that 10% drops occur once a year and 20% falls occur on average more than once every 3 years.

      Ideally, you want to be able to discern between ordinary corrections and the down 50% collapses. I am not convinced many people can.

      • bartoncreek says:

        It doesn’t matter if it always reverts to the mean and gains back 150% in 4 years though, right? I would rather by at the discount of 20-30% off and risk “losing” another 20% (only lose when you sell) instead of piling in now and buying after 150% gains (risking 75% loses and a bad taste that makes me sell).

        As long as my time horizon is a few years out I always, historically recover that 20% lose at risk plus the 20-30% discount I bought at plus extra juice of inflation in the return.

        Buy the valleys sell the peaks, right? And if you miss the base and climb of another peak on the back of a previous peak then so be it, wait for a pullback even if it takes 4 more years. As long as you are young time is on your side and no need to press at market extremes, unless you are buying at lows…….

      • Best of luck trying to follow that approach !

      • rd says:

        Mark Hulbert has an interesting column today looking at the various market timer advisor services since 2000 and their records versus some simple buy and hold portfolios.

        The conclusion is that simple buy and hold portfolios can lead to better returns with less volatility than many of the market timing services.

      • here’s a little secret: If you have an awesome market timing service, you dont sell it as a newsletter — you use it to manage assets

  45. bartoncreek says:


    I am a younger reader and began my career in 2004 (IT Systems Administrator). Maxed out 401K and put extra into an after tax broker account. I was full in equities until the end of 2011. Went to cash (80%) and short term bond fund (20%). Even with the 2008 recession I have done well (~250K savings). I bought a house in 2009 and have $85K in equity (Austin, TX). I paid cash for a used 2008 Audi Q7 in 2010 and can sell it for what I paid for it (39,000 miles on it).

    So your narrative does not apply as I did not “miss” anything. I am in cash though and can sleep well at night.

    Me and several of my co-workers are in the same position. Our thought is that we made out like bandits with little to know foresight (luck). So we are sitting in cash for 2012 and 2013 “missing the boat” but keeping the large gains of 2009, 2010, and 2011 in tact. Now that rates will begin rising as cash becomes worth something we are finding returns of 4-5% outside of the market. Used car lending to friends, rental houses, FSBO tax deed property etc. Next up will be buying bonds being dumped by people jumping back to equities.

    The purpose is to be where others are not right? Nobody was in equities so we made a killing. So if everybody was late and is now rushing in, that leaves a hole in were they had been? Cash will not be available in a bank account now (People who missed fully invested and can’t liquidate) and instead people will have to pay banks lender for it’s use again right?

    Getting out of equities and going to cash, and get back into more lending money market CD’s type of investment at 4-5%. On a 25 yr investment plan it still averages out without being thrown into the “missed the boat” category.

    My next thought now that rates are rising back to historical norm’s is wait it out in cash with no risk and then buy something safe that pays 3-4% for a few years (2016-2019). Then go back full on in equities in the 2020 area after another economic blip?

    • rd says:

      “Now that rates will begin rising …”

      You have made a major assumption about what will happen over the next few years. Expecting rates to rise is a reasonable assumption but there are a lot of counter-arguments to be made about why rates will not rise anywhere near as much as people think.

      A well-planned diversified investment strategy allows for all-weather portfolios to be developed to help achieve lifetime goals. $250k is nowhere near enough money to retire on with a good standard of living and cash at 0% is not going to help improve that.

      BR has provided a lot of commentary on this site about assembling successful portfolios for average investor conditions and timeframes. Here are a couple of interesting recent columns by others that show a couple of dramatically different approaches to achieving good long-term results with low volatility. However, what they have in common are diversified, often uncorrelated assets that each have specific rationales for inclusion in the mix. They do require discipline to make them work though as they require selling popular assets to buy unpopular ones at the very times when all the commentators are saying “Don’t do it”.

    • DeDude says:

      You are making a lot of presumptions with your “all or none” type of investment strategy. Some sounds reasonable and could be right but some or all could also be dead wrong. Remember that the people whom you are playing aginst in the game of picking winners, are people who spend all their time collecting and analyzing data to pick those winning investments and strategies (they are pros with no other daytime job). Very smart and knowledgable people like Barry are on the other side of the trades made by individual investors like you, some of them with additional advantages of insider knowledge that you would never get access to. It’s like a 5’10” guy playing basketball against a group of 7 foot guys, whos gonner win and whos gonner lose? That is why the standard advice to people like you is to get a diversified “weatherproof” investment portfolio and rebalance it regularly.

      • bartoncreek says:

        Good point, let me clarify. I think I have a diversified approach just with the inclusion of a “third rail” which is sit still and be patient for home runs. You have bonds, real estate, commodities, equities, and cash. Historically they roll in and out of favor and can be tracked with flows. EXCEPT for the last few years when all except cash returned.

        I understand I have looked stupid for being in cash for 2012 and 2013, missed 25% move. My bet is the market slows down around DOW 16K and S&P 1800. If it sells off, great time to buy. If it stays stable during the transition bonds look good. The guaranteed thing is the FED WILL stop buying bonds in the next 18 months and market interest rates for money will come back, unless there is a market sell off, so either way I am ready as long as I am patient.

        Ma and Pa see diversification as re-balance (shift winners to losers) and make your 7%.

        I sit in cash and wait for no brainer’s like “once in a lifetime lows” of which we have had two just in the last ten yrs. am pretty sure going back 100 years there two or more up and down cycles every ten years.

        So I sit back and wait for those 7′ guys to expend all their energy (marketing, jabbering, and media hacking) to get massive flows to move in a direction and jump on board for a bit (20-30%) and then jump off.

        The majority of my peers are getting used to working crap jobs and being happy with less. So missing out on 10% growth or losing 20% principal does not really bother them. Most of them have no plans to buy a house either, even the ones with kids. They love renting. Pack and move whenever they want.

  46. ellidc says:

    There are narratives and there are narratives. “The mathematics of mean reversion are inescapable” is a narrative, as is the assertion that “asset classes eventually recover.” Depending on your data set you can lose a lot of money waiting for the reversion or counting on the wrong mean or betting on something to recover that is dead. Your narrative is more meta than the hyperinflation blah blah, but has many of the same foibles and cognitive blinkers. Shouldn’t someone following the narrative of mean reversion have been troubled by this chart and what it suggested about asset prices?

    • Not exactly:

      Mathematics is non-narrative in nature. There is no neat tale, no compelling story with heroes and villains. It does not appeal to your emotional center. There is data that supports it. They have been empirically proven time and again, with a rich academic literature that demonstrates conclusively it is correct.

      On the other hand are narratives that have already been proven false. They have little or no data; they appeal to fear.

      You are falling into the trap of the classic false equivalency.

      • ellidc says:

        Mathematics is non narrative, but using mathematics to forecast what returns are going to do requires a narrative. I wouldn’t say either that there was no data at all to support the doom and gloom narrative. If you look at charts of the purchasing power of the dollar, changes to the Fed’s balance sheet and look at historical relationships between the monetary base and inflation, there was actual data out there to support the idea that something unprecedented and bad was a possibility.

        I believe also the idea that mathematics is clean and pure and always right and not a narrative does actually set up statistics and mathematics itself as the emotional hero and played a part in LTCM style investing and VAR models leading some portfolios over a cliff.

        I did not mean to suggest the two narratives are equivalent as some narratives are a lot more impervious to reason, just that you cannot really escape building some narrative about why things happen the way they do and that any narrative is going to be wrong sometimes but still loved.

      • No one here is forecasting returns.

        As I have said before, Investing in capital markets is about making the best probabilistic decisions using imperfect information about an unknowable future.

      • rd says:

        We don’t have a Newton’s Law of Gravity or Einstein’s Theory of Relativity narrative for financial markets or the economy. It has been pretty clear that many of the narratives that have driven public policy over the past three decades have been spectacularly wrong (trickle-down supply side economics as an obvious one).

        So at the moment there is very little cause and effect narrative that is really effective because of the complex chaotic interplay of political, social, economic, and monetary forces at play. However, there are historical data sets that do show that when certain conditions are in place the long-term trends of what occurs afterwards tend to be in certain ranges. Much more certainty than that is a pipe dream.

        A couple of interesting reads on the societal aspect of risk as it applies to various markets were written by Bill Bernstein a few years ago:

      • theLorax says:

        How does the Gaussian copula fit into your narrative that “Mathematics is non-narrative in nature”? Mathematics is pure enough but the context in which it is used rarely is. We always need a narrative to support the idea that the mathematics being used (be it about mean reversion or whatever) is appropriate and rationale. That that narrative doesn’t get passed around a lot between people (say between advisers and clients) doesn’t mean that the narrative doesn’t exist or that it is infallible. Clearly the narrative attached to the Gaussian copula was messed up.

      • Exactly — the math is complex, but the way it was applied is a straight forward narrative:


        Gaussian Copula was a flawed formula that sought to turn lead into gold — to reduce risk and correlation to a single number. It has been called a “brilliant simplification of an intractable problem.”

        Alchemy, plain and simple. That is a classic narrative — the snakeoil salesman used a great story to get it past risk managers and others — thats not math!

      • theLorax says:

        Agree that the narrative attached to math is not math per se. Would argue that math can’t be applied without a narrative accompanying it. It is always there even if not widely circulated. I don’t think it possible to go post-narrative with math when you need a narrative to use it. There are other examples: Black-Scholes and LTCM.

  47. Willy2 says:

    I still follow the 1926 – 1932 narrative. And my indicators confirm that narrative. Who would have guessed that reckless bankers would add so much (monetary) fuel to the fire. It only makes a giant collapse even more likely and more painful.

    Although in this regard Cullen Roche is right, he has some weird thoughts about e.g. the monetary system. And then he wrongfully thinks the US can’t go broke or won’t default on its $ 16+ trillion debt. He’s also (wrongfully IMO) an optimist on the US (as so many US citizens are) and continues to play a game called “Bash Europe”. He was right about Hyper-Inflation not occurring but for the wrong reasons. And he has a number of other weird thoughts that he invented to fit his own US centric view of the world.

    So, his narrative was right but for the wrong reasons.

    • My entire point is to lose the narrative, focus on the data — so your argument that right narrative wrong reasons does not resonate with me.


      That you failed to even notice this is a function of your bias — and apparently, your indicators seem to have confirmation bias too (“my indicators confirm that narrative”)


      • Willy2 says:

        No, those indicators don’t have a confirmation bias. Mr. Market & Mr. Margin determine what those indicators do and don’t do. And central bankers are only ONE force, among many others, in any economy. And therefore they will not “Save the day” like so many (e.g. Cullen Roche)wrongfully believe. If Mr. Market doesn’t want “to play ball” then a central bank is powerless, an emperor without clothes.

        One of those indicators went down by ~ 50% in 1918 & 1919 rightfully predicting the strong deflationary period of 1920 & 1921.
        That same indicator already started to weaken in very late 1928 BEFORE the stockmarket peaked in september 1929 and completely collapsed with the crash in 1929. The same indicator started to weaken in the 2nd half of 2007 BEFORE the stockmarket peaked in november 2007 and nosedived about 1 week before Lehman Bros. went bankrupt. That same indicator gave the same early warning signal (weakening ~ 15% in one week) when in october 2011 MF Global folded.
        In november/december 2012 that same indicator peaked for the last time and has drifted lower ever since. IN SPITE OF all the monetary fuel the ECB, BOJ & the FED poured onto the markets.

        That indicator already started to recover in february 2009 BEFORE the market bottomed in march 2009.

        Unfortunately, I only became aware of this indicators in 2011.
        More and more of my indicators are turning/moving into the wrong direction. I am waiting for only 2 or 3 indicators to take a turn into the wrong direction. And then it’s “Katie, bar the door”.

  48. lalaland says:

    My narrative is to hell with the market; I’ll reinvest my profits in my own business and community rather than trying to hope that I can invest in other businesses without the market monkeys messing the whole thing up again. I personally just don’t trust the damn thing; Nanex LLC and Taleb have poisoned the well for me.

    • If you have a business that compounds over time, then I cannot object to your strategy. Best of luck with it — though I suspect you if are reading this blog, you have more than a passing interest in investing

  49. peterkrause says:

    I hate to say it, but Bartoncreek didnt have to tell us he’s a young reader. The complete lack of ability to write grammatical sentences gives it away. Barry you get a pass for your syntactical transgressions for keeping so many balls in the air with deadlines to boot. But my point is not about youth or writing skill, it is about investing wisely. My advice is to read read read, text less, take the long view, and adhere to proven broadstroke principles (yes, backed up by math). It really is not as complicated as so many TBP readers make it.

  50. boveri says:

    Great blog and with a lively pen!

  51. [...] epoch has been amazing: a once-in-a-generation batch marketplace rally, and a stability delight of money over fear. The people who’ve been presaging doom given 2008 are still waiting. Wall Street is removing [...]

  52. V says:

    Whose narrative is failing though? The Fed is still pumping like crazy, if things are going so well why don’t they ‘taper’. Th mere suggestion of which triggered a correction.

    Of course things are easy when you have the CB at your back.

    • VennData says:

      They are “tapering” by saying we may taper, which is different then the prior statements when there was no commentary suggesting taper. The fact that the Bond market gains a hundred basis points proves that they took the first step so as BR says “Yours” BR’s suggesting yout narrative is wrong because out of the gate you reject the fact of the ten year price changes

  53. heywally says:

    My way of dealing with all of the potential doom of the last five years — much of it makes logical sense and in fact, could still happen, hindsight be darned — is to try and ignore the falling off the cliff potential and the unsettling global news (factoring in a media with a prime directive of selling advertising via negative pieces with little rigor) and simply use a very active trading approach (requires far too much screen time though) of buying dips and selling rips (as my friend the (sometimes) Bear, Doug Kass would say) via indexes in a hybrid day/swing trade approach, keeping long inventory at a conservative level just in case … no stops. You have to have some capital though. “Funniest” site – Zero Hedge. :)

  54. killben says:


    I agree with you that policy should be taken as it is.

    What I meant was the Fed’s action of always riding in creates a fear that the economy is a house of sand (leading to a negation of what Cullen Roche says) and thus a fear in being invested. If the Fed were not to ride in we could more easily take a drop in the market in our stride. How do you avoid this bias?

    Should we just stay invested believing that even if market comes down the Fed will come riding in before long?

  55. TheSaint68 says:

    I know two things;

    1.) The market and the economy are much smarter than me.

    2.) No guts no glory.

    Diversified index fund approach rebalanced once a year and that is the only day you should know the password to your account. A lot of pundits make their living by writing their opinion, who absolutely cares. Everything is a ‘Black Swan’ these days when if you think about the next true ‘Black Swan’ say an out of control pandemic with a 40% mortality rate is it really going to matter where you have your money? Bloomberg radio in the AM is littered with ridiculous ads for everything that is not conducive to long term investing but for short term pundit prosperity.

  56. VennData says:

    “..yet we did nothing to set the issues that led us to that point straight. Instead, we huffed, and we puffed…”
    We have taken the steps, it’s called Dodd-Frank. US Bancorp has fully implemented it, so anyone who says it is impossible or will ruin you, is lying.

    The other guys who are lying are the “huff and puffers” …the end of cuts job creation.

    If you just ignore the GOP fear mongering, your personal narrative can conform to the facts.

    Oh and the Detroit BK, is a good thing like GM etc…

  57. Greg0658 says:

    I wanted to say something like this yesterday – but I didn’t
    an instrument is an instrument till it isn’t
    Detroit – a nuke station – a chemical plant
    stocks empower the corporation for its benefit .. and if they share that is their prerogative

  58. VennData says:

    You right wing narrative lovers crack me up. You finally are getting the laughs you always wanted.

    Aw, you’ll be safe back at the cracker barrel, go ahead, and find that safe cracker barrel to stand around and rile yourself up, linking to the angry Congresscracker from Texas.

    Please forward me the Koch-financed, large, colored-font, unattributed, unsigned email they send you convincing you they are still right. You will buy it hook line and sinker. Swallow for ‘em. You just could never go back and say you were wrong, could you?

    Found. The narrative has failed is found to be true.

  59. “As many of the narratives have failed, rather than admit the error and face the music, the rationales have morphed into a waiting game. Dow 5000 will happen eventually, Collapse of the Dollar — and all fiat currencies — is coming; Hyper-inflation (any day now), Gold will hit $10,000 (sold to you), Great Recession 2, Oil $200, etc.” DOW 5,000? I’m still waiting to for DOW 36,000…………..


    BR: This discussion is about the current idiots, not the idiots from 1999
    However, you are free to choose which ever idiots you like, however IRRELEVANT THEY MAY BE TO THE CURRENT CIRCUMSTANCES and conversation.

  60. coleyc says:

    One can attribute ones bullish success to his empirical analysis, his acute understanding of portfolio diversification and how to trim a little here and there to re-balance, and finally to his erudite understanding of philosophy. One may even, in a sincere effort at humility, admit to minor errors in execution that his “sciences” failed to avoid. He may think he stands at a new horizon calling us forth to follow him out of the wilderness in to HIS new founded Post Narrative promised land, Or, perhaps the central bankers just printed a bunch money.

    The thing about puts, those infinite that belong to individual stocks, bonds and futures or that ONE that belongs to the FED is I am sorry to say, is that they all expire. The FED’s put firmly in place is why bulls got it right and why most Macro Tourists and Cognitive Dissidents completely underestimating its power, got it dead wrong. To the winners go the spoils and also the cliches. Diversify,re-balance, buy when there is blood…etc. and finally the FED’s put, like ever child’s super hero will surely save the day.

    History seems to have a certain distaste for scoffers. For the self-righteous, come-uppance is the bitterest of pills to swallow. When I read threads like this, although fully invested myself through it all, I begin to wonder if a new time is coming where the real post narrative will torch any other post narratives before it. Because surely, “Whoever undertakes to set himself up as a judge of Truth and Knowledge is shipwrecked by the laughter of the gods.”

  61. [...] last week’s discussion on narratives, I want to direct your attention to the charts [...]

  62. [...] The Big Picture blog (h/t Abnormal Returns), Ritholtz examines why, with stocks at all-time highs and the worst [...]