A Tale Of Two Markets

In one of those wonderful dualisms that seem to accompany markets as prices go up people start calling for them to fall. The media of late has been awash with reports from various poorly performing fund managers as to why the market is about to crash.I understand the medias fascination with these voices – negativity is a key media selling tool and is for many their natural default state. The truth is that no one knows and that is the hardest thing for professionals to admit – that they do not know. The future trajectory of markets is completely unknown – the only thing that is certain is that markets will rise and fall and the speed and depth of these movements will at times surprise all of us. What is interesting is that those who make predictions fail to learn from their mistakes – they are what Philip Tetlock would call hedgehogs. Hedgehogs in this context are traditionally bombastic, opinionated, unable to learn from past failures and most disturbingly generally wrong. However, they make good fodder for the media. If we were to look for a traditional hedgehog the Swiss commentator Marc Faber would fit the bill. Faber has been calling for a market crash for years only to see the market march higher and higher . Unable to adapt his thinking he continues to call for a crash of between 20% and 30% every year. Such calls make good headlines but do little for investors.

Domestically our market has been moribund for several years post the GFC and of late has shown signs of life. We are not far from our old pre GFC high as can be seen from the chart below.

There is still a little way to go before we erase all the losses we suffered but simply because a market has gone up does not mean it will automatically go down. Markets do not in any way have to be balanced in their tone – they are not a tide which goes in a certain distance and must go out a certain distance. Consider the chart below of the Nikkei which has been in a long term bear market for a generation.

It does not naturally follow that just because the Nikkei has been broadly tracking down for almost 30 years that it must go up. However, if we apply the logic of many of the local commentators who are currently calling for a correction then by extension the Japanese market should have automatically risen after its collapse in 1988. However, that did not occur because markets are not robotic nor do they response to the over hyped emotional outpourings of value based fund mangers who must be caught in an awful tension when markets rise. On the one had they want their asset prices to go up but they also dont want the overall market to go too far because it brings into sharp repose their inability to their job.

The absolute truth is that no one actually knows what markets will do until after they have done it. Prediction is a terrible folly and you simply end up looking stupid.