Markets stocks

This Time Was Different. Bears Should Live To Fight Another Day

"It ain’t over yet." Yes it is.

It’s one thing to refuse to concede that you were wrong when what’s at issue admits of some ambiguity. Or when whatever it is that’s being debated is a matter of opinion, with yours representing the out-of-consensus view.

It’s another thing entirely to stare reality in the face and belligerently deny its existence. Mike Pence, for example, stood at a lectern Friday, and told the nation that “all 50 states and territories across this country are opening up, safely and responsibly”. Literally as he spoke, Texas and Florida (where coronavirus cases have surged) announced new restrictions, freezing the reopening process.

Turning to markets, Doug Ramsey (Leuthold Group CIO) is treading dangerously close to reality denial with comments to Bloomberg published Saturday. In late March, Ramsey told clients the following:

It’s popular to say that the market ‘sells the rumor, and buys the fact,’ but we think there will be a phase in which the stock market and economic numbers decline together. We believe it is too early to expect the market to form a major bear market low.

He was hardly alone in suggesting the March nadir would not mark the low point for US equities during the corona crisis. Jeff Gundlach repeatedly said the lows would be either revisited or taken out, and a veritable who’s who of the financial pantheon admitted to being befuddled and/or caught flat-footed by the scope and ferocity of the surge.

For example, Paul Tudor Jones ate “humble pie“, Stan Druckenmiller only managed a 3% gain during a 40% rally, Warren Buffett threw in the towel after incurring a mind-boggling $50 billion paper loss during the first quarter, Jeremy Grantham is incredulous, and Howard Marks doesn’t know what’s going on at all.

So far, only one of those venerated titans (Jones) expressed themselves in terms that paid anything other than lip service to humility.

Going strictly by comments made to Bloomberg, Ramsey seems similarly beset when it comes to being unwilling to concede reality and what it entails for comments delivered in the dark days of March. The reality is that US equities have just seen their best 50-day run ever.

The Nasdaq 100 is on track for one of its best quarters in history.

It’s wholly justifiable to believe another steep swoon tied to the virus is in the offing. Hell, I believe it. That’s my going assumption. But to the extent you’re inclined to view equity markets as a never-ending war (an absurd way to conceptualize things), it’s time to stop laboring in the trenches of April and May. That battle is lost. Live to fight another day, good sir.

But some people just can’t let it go. “For those claiming bragging rights in the recovery, Ramsey has a message: it ain’t over yet”, Sarah Ponczek writes, describing Doug’s defiance. “The very things that made picking the bottom all but impossible make it no easier to know when the top is in”.

To the extent that’s an accurate representation of Ramsey’s position, it means Doug has, in fact, moved on from the notion that March wasn’t the low, which is a tacit admission dressed up as a prognostication. Here’s what he told Bloomberg:

The bulls could be proved right in that the March 23rd low holds, but you could lose a lot of money in a drawdown here. You could still very easily have a drop of 20% from the peak we made on June 8th. Very easily.

With apologies to anyone who needs them, that is patent nonsense. And not because it isn’t correct. Rather because it’s true by definition. It cannot be false. If there’s a drawdown, you can lose money. That’s what a drawdown is. That statement (“…you could lose a lot of money in a drawdown here”) would be equally applicable at any time in the entire history of financial markets. It’s as close to being a tautology as you can get without saying: “We don’t know what we don’t know”.

The second part of Ramsey’s quotable is even sillier. Note how he adds an extra “very easily” on the end as though that makes the contention that we could see a 20% decline more true than it is by definition.

As much as we’d like for it to be, the equity market is not like the weather. People are fond of mocking weathermen, but there are times when we know to listen to them. When a weatherman (or woman) tells us there’s a 40% chance of rain (based on a meteorologist’s model) we might very plausibly ignore that and go on a picnic. But when that very same weatherperson says there’s a 90% or a 100% chance of thundershowers or issues a tornado warning, we generally hesitate before we take the family out to the park. That’s because we understand there is some hard science behind those predictions. So, when the weatherperson says we could “very easily” see a tornado, we know that’s something entirely different from that same television personality telling us there’s a “chance” of afternoon showers. In that instance, it is more true than usual that a tornado is possible.

The same thinking cannot be applied to the stock market. The statement “You could still very easily have a drop of 20%” is utterly meaningless by virtue of being true all the time. And that makes it categorically different from the weather. There are days when it simply can’t rain in your town. The conditions won’t allow it. Similarly, there are days when it is definitively more likely to rain than not. Using traditional methods (fundamental analysis, technical analysis, or simple historical analogs), there is no way to say, definitively, that one outcome in the stock market is more likely than another. Humans have been trying to divine such a foolproof method since the dawn of markets. It does not exist. If it did, and someone has figured it out, rest assured they did not tell anyone about it.

What’s amusing (to me anyway), is that there are dynamics which make it easier to predict swoons in equity markets today than yesteryear. Modern market structure allows us to say, with something approaching scientific authority, that stocks are likely to move in a wider range during a given week, for example. “Spot needs to overcome the gamma wall (made up of the aggregate gamma positions of dealers) and needs to climb over the gamma peak to be able to move freely once again”, SocGen wrote this week, in a volatility outlook piece. “When confronted with a formidable positive gamma wall, any momentum in equity prices gets broken, as daily moves are slowed significantly by the hedging activity of dealers”. The opposite of that dynamic unfolds when dealers’ hedging activity amplifies directional moves. These levels are quantifiable (or at least amenable to approximation).

Another feature of modern markets (and this isn’t strictly applicable to modernity, but it’s certainly more prominent now than it has been in the past) is the relationship between liquidity and volatility. Market depth never recovered after the February 2018 correction — lackluster bottom-up liquidity is now a fixture of markets. “Liquidity in global equity markets continues to be challenged across many sectors, from broad index futures to volatility contracts”, SocGen wrote, in the same cited note.

“Some of this has obviously become a feature rather than a bug – we have demonstrated in previous work that volatility continues to be an input into the liquidity offered on screen (liquidity is withdrawn when volatility picks up)”, the bank went on to say, adding that “the supply of liquidity disappears exactly when a higher volume of futures is trying to make it through ever narrower pipes, thereby exacerbating spot moves, amplifying trends and increasing volatility all at the same time”. If you can only grasp one embedded feature of markets, make that it.


The point is, if you understand modern market structure, you can predict when the distribution of outcomes is likely to be wider, even if you can’t always make a definitive call on the direction.

This is a far preferable method for thinking about near-term market outcomes and formulating tactical strategies. Clearly, fundamentals matter. Indeed, it often requires a macro shock to trigger the various loops embedded in equity markets and the volatility space. There are plenty of candidates (and you can take “candidates” figuratively and literally in this case) for macro shocks in the months ahead.

But those clinging desperately to the notion that historical precedent alone (and do note that the sample size is small – if US recessions are your “n”, you simply do not have enough data to use) is sufficient to make the argument that the March lows won’t ultimately represent the COVID lows, are just reading palms.

As Bloomberg’s Ponczek writes, “such is the ever-present problem with analyses that hinge on history repeating itself, or at least rhyming”.

This time, history didn’t repeat itself. And it didn’t rhyme either.

In short: This time was different. Even if it all crashes and burns Monday, it won’t make folks like Doug Ramsey (or Jeff Gundlach) right. At least not on any sane interpretation of the word “right”. Looking forward to a hypothetical next crash, you cannot possibly expect anyone to take seriously the notion that you “nailed it” if, for example, the Nasdaq falls 20% from here. It already hit new record highs.

Live to fight another day, folks. More often than not, doubling down after being demonstrably wrong on the hope that some new turn of events will make your bad judgement seem less mistaken, is a fool’s errand. That goes for markets, but also for life in general.


11 comments on “This Time Was Different. Bears Should Live To Fight Another Day

  1. Great article. I was cracking up laughing when you said “If it did, and someone has figured it out, rest assured they did not tell anyone about it.” It was the punchline for sure haha

  2. That last paragraph has never been more true than in the last 5 years ( and even more so now ) with the Fed and Treasury setting the default mode for Equities to Permanently UP…..

  3. Anonymous

    So refreshing to see market journalism that’s highly intelligent and seemingly unbiased. Thank you for your work.

  4. “The very things that made picking the bottom all but impossible make it no easier to know when the top is in”
    If he has a surefire way to know when the middle is in I would like to know.

  5. Judging from the Federal Covid 19 response, denying reality seems to be in vogue these days. Not even the Fed knows where this may be heading (check out page 4)

    What is also interesting is Shiller’s survey of investors involved in the ’87 crash is how little of their sentiment was driven more by a “gut feeling” than any technical consideration like the widening trade deficit, dollar decline or the tax legislation that closed LBO loopholes.

    What tends to be forgotten about the ’87 in the DJI was up over 40% from August ’86-August ’87 despite the softening recovery and that the Dow dropped substantially in the three prior sessions (October 14-16). And the selling continued into the Friday close. When Monday rolled around the selling pressure was so intense that trading in a good number of stocks had to be delayed at the open due to such a mismatch between sell and buy orders. What also tends to be forgotten is that October 1987 was a worldwide phenomenon. It may well as be one of the strongest arguments for QE and ZIRP –the Fed provided liquidity to markets (a small trickle in today’s terms) while the Bank of New Zealand steadfastly refused to bail anyone out. The different outcomes were very plain to see.

    Whatever the case, all of these titans are right to be stunned but not whining at being caught flat-footed as the Q2 20 run-up really is without precedent, but no one expected to lose 19% in one day on October 19, 1987 either –or they wouldn’t have. There is a reason why “Uncertainty” has become one of the Fed’s favorite buzz-words and that word does not permit creating a trade algo via a frequency search of the Internet.

  6. Great article. Thank you.

  7. I am thinking this recession is much longer and deeper than most are anticipating at this point and that eventually this will be reflected in the price of equities. Anticipating a long, slow sell off.
    Fiscal aid injected at the bottom of the economic ladder, take the cash back from the top of the economic ladder (taxes).
    Rinse and repeat.

    • Every company has a different point where they start to turn a profit, which is the whole reason for buying equities.

      Maybe Company X can only begin to make a profit in 2020 if they achieve 90% of the 2019 sales and maybe Company Y can only achieve profit In 2020 if they are at 95% of the 2019 sales- because below those levels, Companies X and Y are still covering fixed overhead and probably additional debt service.

      No way this level of detail analysis has been done with any degree of accuracy.

  8. We’re not even into the first full week of summer and we’re looking at Hospitals being swamped with Covid cases. The soldiers in Afghanistan may want to stay there as being safer fighting the Taliban than coming home to a full blown pandemic. If the medical services become overrun and unable to handle the number of cases, even the Republican Governors will have to order stay at home orders and pray the food factories and farmers can maintain enough food to feed the survivors. Equities hitting new highs?? Can’t see it happening under these conditions, specially if the vaccine doesn’t come in time, or worse, doesn’t work. And if there’s a second bigger wave in the fall?? Mexico may have to build the wall to keep Americans from swimming the Rio Grande into Mexico. New lows?? How low can you go?? Will all of this come to pass?? Can’t say no with Pense in charge.

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