August 19, 2014

Smart traders know history of markets

There was just a very good conversation on CNBC's "Squawk Box", which followed an interview with Gloom Boom & Doom Report's Marc Faber. In the discussion Joe Kernen expressed some concerns regarding certain asset prices while Scott "Judge" Wapner suggested that investors should play the hand that they are dealt and go with the upward trend.

It is true that the smart ones play the hand that is dealt. But they are also students of history and recognize that even the best get duped into believing that the music will never stop. This statement applies even more accurately with the (mis)behavior of retail traders and investors.

In 2007 to 2009 some of the greatest hedge-hoggers got badly tripped up by the belief that the contagion of sub-prime loans wouldn't upset the long economic boom and that there was so much liquidity that the global recovery of the mid-2000's would not be disrupted.

Today there are arguably numerous assets that are inflated from policy and have resulted in overvaluations' cousin -- complacency (self-satisfied views that do not consider adverse outcomes). Arguably, these include but are not restricted to select social media stocks, small-caps and midcaps, the U.S. note and bond markets, sovereign debt yields (particularly in peripheral countries of Europe), and junk bonds.

There is also a widespread belief that corporate profit margins are inflated, and there is confidence in the Fed's ability (and for that matter central bankers around the world) to land the economies safely.

Perhaps, as Benjamin Disraeli once wrote, "What we have learned from history is that we haven't learned from history."