Monday, 15 June 2009

Don't fight the guys who have the power to print money

There is a very good post from Michael Murphy regarding the psychology of the typical investor in regard to the emergence of bull markets in the midst of widespread skepticism. Murphy is of the view that a new bull market is under way and that the typical punter is going to miss out on it as is usually the case. His characterization of the process is familiar:
As you can tell if you read the comments on Yahoo Finance, new bull markets have a way of keeping undisciplined investors on the sidelines. Near the bottom, the pain gets too great and they sell their stocks to go to cash. As the market starts up, they buy some Ultrashort exchange-traded funds to make back some money when the “little bear market rally” falls apart. After taking a 30% loss on those, they start posting angry messages about how this is a garbage stock rally, a bubble manipulated by the hedge funds or a sucker's rally doomed to fail. They're not going to get sucked in, no siree.

After the market has recaptured some key levels, they decide it looks like the economy is starting to recover, and they would be willing to buy some stocks except that everything has gone up too much from the lows. Their fear of a weakening economy is replaced by a fear of buying too late, and getting caught at the top of a bear market rally. So they wait, hoping each consolidation down is the start of something big that will let them get back in gracefully. They forget that the market's job is not to make us all look graceful, it is to make us all look stupid. By the time they decide this is a bull market, not a bear market rally, and start nibbling, make some money, and build up their courage to get fully invested – the market is ready to top. Happens every time.
One comment which does lend great plausibility to his stance is the notion that one should never fight the Fed or as he puts it "there is no point in getting into a financial war with the guys who have the power to print money."

The moral of the story perhaps is that the long side is the place to be while they are printing money and that applies to equities, and especially to commodities but the long side is not the place to be for US Treasuries.

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