One of the most tragic realities of life is the disappointment associated with the realization that something you believed to be the truth was in fact, a lie. It is at that moment that many may begin to question everything they consider real. It is the complete lack of trust in everything and everyone that characterizes a “hopeless life”.
My outright bearishness and distrust of the markets since May of 2011 is documented in the financial media. I was nicknamed the “hopeless bear” by a financial writer I respect immensely, after my statement “a severe market decline is inevitable, the timing of the decline is questionable”. He responded by saying, “I guess you are a hopeless bear”. It was on Fox Business Network in an interview with Lori Rothman and Melissa Francis when I was first referred to as a “hopeless bear”.
I never wanted to be considered a hopeless anything. However, when it came to the stock market, world economy, and governments around the world, I developed significant distrust in the so-called economic recovery. The stock market rally from January, which I considered a fraud, was caused by excessive liquidity provided by the Fed, and last, but certainly not least, the myth that there was, in fact, a quick painless solution to the European debt crisis. I never considered hope to be a good investment strategy, so I willingly accepted my designation as a “hopeless bear” — but not without a price.
In every market rally, there is a level of fear in missing out. My bearishness when the market was soaring, cost me dearly. When everyone was so optimistic, my pessimism was met with incredible hostility. It was evident that some clients and associates became frustrated with me since I stood steadfast in my distrust of the markets and reluctance to chase the rally. They listened to the market cheerleaders from Wall Street institutions that seemed to be dominating the financial media airwaves with their astronomical forecasts of incredible returns and promises of financial windfalls while most likely considering me to be a broken record of gloom and doom.
I get no satisfaction out of the market rally losing all of its gains since January. The thought of investors losing their hard earned money chasing nothing more than false hope, is no cause for celebration. I do however believe, that these recent declines should teach investors the dangers of chasing rallies, believing lies, and the most important lesson of all “hope is not a good investment strategy”.
Unfortunately, the declines we will see in the market are not over, they have just begun. The overriding cause of the next market decline will have greater implications than these recent market declines whereas, despite the complete failure of Europe to come to a solution to their debt problem, an economic downturn in the U. S. and Asia, and the fiscal cliff we are facing in the U.S., as well as a banking collapse in Europe ultimately affecting U.S. banks. We will face an even greater menace than all of these negatives combined.
The Greatest Menace
The greatest menace to the world economy is “lack of trust”. It will be evidenced as investors begin to ignore “positive statements” from Europe and consider them simply as more talk. It will happen when the next inevitable rounds of stimulus from our central banks or central banks around the world are viewed as desperate, quick fix solutions and not as the catalyst for a long term market recovery they have been promised to be. Investors will realize even if the market rallies briefly, that eroding the dollar and artificially inflating stocks, bonds and commodities will create an economic collapse in the future which will undermine our economy for decades. It will be the realization that what investors considered the truth, was a lie which will result in hopelessness.
My strategy underperformed the indexes until of course, now. I was not participating in the market rally from January and actually experienced moderate declines. The two main reasons for the early declines have been two strategies which are firmly established in my portfolios. Since I would rather be early than wrong, these strategies have seemingly underperformed. I have shorted indexes, industries, and certain currencies which declined early in the year when the market was rallying, as well as buying gold and other precious metals. I continue to hold large percentages of cash and will systematically increase my short positions as markets deteriorate.
The mischaracterization of a “hopeless bear” is often complacent, maybe even frightened. These are two characteristics I would never embrace or ascribe to be. I consider being a “hopeless bear” a burden because I desperately want our economy to improve and our stock market to rally. Prosperity and economic freedom are so vital to our future. I am troubled by the resumes which are on my desk of men and women I know personally, who are desperately looking for work to support their families. In the twenty years of managing money, it has become evident that reality rarely coexists with hopeful expectations of our economy and markets. Markets and economies don’t improve simply because we wish they would. In the days ahead as it seems hopeless, it is imperative that to keep from going under, investors embrace the reality of the difficult days ahead. Investment gains will be more difficult to achieve, however, through a relentless strategy and unwavering commitment, it’s possible to not only protect your portfolio but achieve some of the best investment returns possible. Although the market and economy may seem to be going under, even when you are hopelessly bearish, there is always a way to go over and because of that, we should all be … hopeful.