Birth of the Perma-Bear
Although I didn’t place my first trade until a few years later, I wrote & backtested my first trading system some time around 1998. My father & his three brothers were all actively trading the bubbling dot-com boom. My father, the cynic, successfully forecasted the dot-com bust, and the subsequent crash in global equities. In late 1999, my father & I went to our TD Bank financial advisor to liquidate the mutual funds my family had put away for my education. The advisor not only attempted to convince us out of it, but recommended to my father that he re-mortgage his house, and invest the proceeds in the stock market.
As the market topped and came crashing down, my father bought Dow futures puts. He cited many of the same concerns that we’ve heard more recently: the spread between Eastern & Western/developing & developed standard of living was too wide, our outsourced manufacturing replaced with current account, government & private sector deficits, and the over financialisation of the economy.
He was right on every count. His puts made a tonne of money.
Ultimately, my father thought that our Western economy was trapped in a death spiral, and that the stock market was going much lower. He was probably right about the former, but he continued to hold his puts through the recovery, and negated the winnings he made on the way down. That was his evolution into a perma-bear.
There are a couple of problems with the perma-bear scenario. The principle arguments revolve around indebtness & the standard of living (perhaps around cars). Here’s the thing: if the equity markets gave a single greenish-brown floater about the plight of the common man, we’d be in a 40 year bear market. Every facet of American life is inferior with the exception of technology: the quality of our food, our disposable income, the cost of energy, our moral superiority, our economic prospects, the number of hours we work, our buying power…
How can all of those things decline — and in some cases, fall off a cliff — while the market posts 9% yearly returns?
The answer is that the economy changes. Stock market prices are a simple combination of available capital, an appetite for risk, and corporate earnings. Where the common man loses in quality of food, or disposable income, corporate earnings can gain. As long as the central bank keeps printing money (which it does), there will never be a long shortages of capital. This leaves us with the most important factor: appetite for risk. That’s all that really matters.
The conclusion isn’t that the equities are going to 0: I think it’s more correct to say that our booms are getting shorter, and our busts are prolonged.
9 years after my father & I went to our TD Bank financial advisor to liquidate my mutual funds, I shorted stocks, and bought precious metals because everything I knew about the financial world was ending. The spread between the developing & developed standard of livings had finally reached the tipping point. The current account imbalances, debt balloon and financialisation of the economy had finally boiled over. Our global currency system was irreparably broken.
My father has since reconciled with the up-side. It took me until June of 2009 before I jumped back into equities. Even now, my exposure is pretty low: I own a few equities, but mostly write some options & wait for the chaos to return so I can do what is more intellectually comforting to me: shorting the spread between the East and the West. I have that nagging feeling, though: am I now a perma-bear? Like father like son?
Well, at least on the last part: definitely.
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