Insatiate Cormorant

In looking back at the recent bull market, it is universally agreed that during those 18 years the market were in a perfect scenario. Low inflation, rise of an investor class, a world at peace, social stability in the US, increase in productivity driven by technology spending, the commercialization of a new technology (the internet) and interest rates at historic lows both in real and nominal terms.

It is not universally accepted but it is coming to be more accepted that the perfect scenario has given way to less than perfect one or in some minds a perfect storm.

The words insatiate cormorant are taken from John of Gaunt's great speech in Shakespeare's Richard II as John on his death bed condemns Richard for being so greedy that he mortgages the entire kingdom.

I am not one of those Cassandras who goes about wringing my hands about the debt carried by others although I know that it is a problem for some people. In the line following the cormorant John of Gaunt talks about how the ever-hungry bird having consumed its means of living starts to prey upon itself and its peers. Market cycles are like that also.

Bull markets sow the seeds of their own destruction as they advance, through the creation of imbalances. Bull markets and an advancing economy forgive many mistakes and people grow lazy and inattentive. Bull markets, like fire suck in the oxygen (money) needed to support them and they will not be extinguished unless fuel is denied.

The bull market that recently ended was an insatiable cormorant as it sucked in money to ventures that appeared made sense in those halcyon times when annual returns of nearly 20% seemed to be fated to continue forever. Many of these ventures now appear less wise in the face of 8-9% expected returns.

It took a considerable period for the imbalances to be created and it will take longer to unwind them due to investors being unwilling to accept losses. This insures that the markets we currently see will the norm.

To make a meaningful change in the market direction there first must be a destruction of unsound ideas and practices and in fact they must not be merely destroyed they need to go the other way to the point where people will not look at even good ideas out of fear.

We are not there yet. In the meantime, people continue to search for something that will give them that one big hit or that one edge that others are denied. They will find it for a while, and then the insatiable cormorant will devour the means and turn upon itself.

The markets will continue to be dominated by the actions of the increasing number of hedge and private equity funds, most of which are run by people who just before the bull market were asking critical questions like "you want fries with that? Or what kind of car where you driving?"

There are changes occuring that allow investors as opposed to speculators, to make money. Bear markets and dynamic times foster creative destruction.

The choice for many is going to be binary, try to out trade the hedge funds, or to find a good investment course based on long-term trends, preservation of capital and be opportunistic. Hint, you will not out trade the hedge funds the level of stupidity, greed and fearlessness is just too high.