August 17, 2015

Most of us are not as fortunate as Warren Buffett to hold stocks forever

Investors have in essence been the central bank's slaves for the better part of a decade, but monetary policy's influence is waning and almost all of the monetary levers have been pulled. And as the curtain separating the Wizard of Oz from Emerald City is opened, our social and other vulnerabilities and weak foundation of economic growth are being uncovered.

A week ago I argued that the "Big Short" might finally be at hand, and that a return to natural price discovery in global stock markets is likely after seven years of artificial pricing served up by the world's central bankers.

The market deterioration/bifurcation that's surfaced and recently accelerated, coupled with the eroding global economic picture (a world essentially short of demand and facing deflationary influences) underscore my belief that a flight to safety might be upon us. In the face of already subpar growth, that means a flight out of stocks.

China, the engine and driver of global economic growth, has stalled.

Now, there's little difference to me between the Chinese and U.S. authorities that have both cajoled investors into buying equities -- except that one has done it explicitly and the other implicitly.

Unfortunately, neither group will have our back when things get out of control, as they appear to be doing right now.

In today's leveraged investment world, the knock-on effects to economic growth (i.e., a "negative wealth effect") are real and should be considered. They're now on the front burner.

T.I.N.A. is B.S.

Yesterday's market schmeissing brought on more arguments from the business media that "there is no alternative" to stocks (the "T.I.N.A." hypothesis), and that inestors should buy on the recent market dip.

Well, I think T.I.N.A. is B.S., as cash is an asset class and performs the job of insulating one's portfolio from wild gyrations and drawdowns.

I watched numerous commentators suggest on TV yesterday that the market would rebound in the days ahead.

It might or might not, but I would remind all of you that those who are self-confident of view and offer advice in the business media often don't take material risks to capital themselves.

They should be seen as investment commentators, not as investment coaches. Always be independent of view and weigh upside vs. downside according to your own risk profile and timeframe.

An interconnected world holds risks

With little margin of safety remaining at current valuations and a bull market in complacency among us, the market decline appears real.

As I have repeatedly noted, we in America live in a flat, networked and interconnected world (see the three questions I ask every morning at the beginning of today's opening missive). As such, the notion that America can maintain itself as an oasis of prosperity in a troubled world seems far-fetched.

The near-universal message in the media yesterday was that the global markets' reaction to China's currency devaluation was an overreaction and not likely to have a sustainable influence on equities.

Respectfully, those observers are ignoring the historic impact of lesser influences on markets (i.e., the Thai baht, Long Term Capital Management, Greece, Latin America, etc.). They're also ignoring the vulnerability of a tepid global recovery.

Warren Buffett and Berkshire Hathaway are among the few that have the luxury (and the devoted limited partners and investors that think "forever") to be unconcerned with the next three to five years. But most of us don't have that luxury.