Last night I spoke to a group of equity managers and consultants to equity market investors. Dinner was in the Melbourne aquarium and we diners were surrounded by sharks, stingrays and fish with surprisingly human faces circling slowly. Our group cheered the contrarians swimming in the opposite direction to the mob.
My theme was the many past booms and busts in equity prices, themselves perhaps the most reliable overall measure of a nation's state of confidence.
Naturally I felt constrained to point out what I regard as the massive inconsistencies in current and recent economic policies.
US monetary policy flooding the global economy with US dollars - the nearest thing there is to a global currency, albeit a currency managed without discipline and with an inflationary bias.
Fiscal policy set to maximum stimulus three years ago, now major nations, notably the USA and the Eurozone, wringing hands over excessive debt levels.
Lack of a consistent bailout policy which in 2008 led to a 'Lehman moment' that froze financial markets and brought the world to the brink of depression. Now of course, people are worried about the consequences of failing to bail out Greece, and the possibilities of other sovereign dominoes falling along with severe financial stress for Eurozone banks.
Fund managers (especially equity managers) and consultants typically say 'time in the market beats market timing'.
Exhibit one is US Dow Jones Industrial share index for 1925 to 1939.
What would you have done with, say, 1 million dollars in 1925? Put it into the market and let it fructify? If you had, by 1939 you would have received dividends but your capital would be intact but without growth.
Compare an active policy of taking a profit as the market rose, quitting entirely during the mad boom of 1929.
Then, if patient sitting on cash (and provided your bank did not fail!), you reentered the market in 1933, by 1939 you might well have been far richer.
Exhibit two compares 1925 - 1950 with the current experience since 1995.
The madness of the boom in 1929 is clearly evident. The peak value in this experience is in 2008 and the subsequent fall is far less dramatic than in 1930 - 33, so far at least.
Presumably all the stimulus is at least partly responsible for current equity markets defying gravity so effectively. Also the China factor has limited the downside even for USA and the Eurozone, whose bipolar downturns fed off each over in the early 1930s.
One questioner asked how the US Fed could get back to 'normal' interest rates, a powerful question pointing to future systematic downward pressure on equity prices.
Needless to say, a new 'Lehman moment' with Eurozone would bring equity market correction far more abruptly, or Rouriel Roubini's (overhyped) 'hard landing' in China.
My point was that not even equity managers can ignore the macro tides and tsunamis. I expected this to be extremely controversial but it was not.
The problem of course is that macros tides and tsunamis can only be predicted with total accuracy ten or twenty years after the event.
One distressed middle-aged equity manager took me aside after questions had been asked and answered. 'I am 41 years old and have always been an equity manager. Now it's all about macro.'
It was a cry for help, and I suspect anyone who can plausibly connect the dots between macro tides and tsunamis and equity market gyrations will die as a rich man.
More on all this in www.greatcrisesofcapitalism.com