by Cullen Roche, Pragmatic Capitalism
Thereâs a strong tendency in the financial markets to live in the extremes. That is, we often draw a line in the sand. Youâre either bullish ORÂ bearish. Youâre in ORÂ youâre out. Youâre on this side ORÂ that. But like most things in life, the best place to be is often somewhere in the middle. Living on the extremes results in extreme and oftentimes irrational outcomes.
I caused a bit of a stir on Twitter this afternoon when I said that there was $816 million left in the bull market. This was a snide reference to John Hussmanâs assets in the Strategic Growth Fund. Hussman has been famously bearish for the last 6 years and the assets in the fund have quickly drained. In fact, his fund has negative 10 year returns. I hate to see this. I certainly donât root for people to fail and I take no pleasure in pointing out the failure of the fund over the last decade. But the thing is, Hussman has fallen on the extremes over the last 6 years. Heâs taken a strong directional bias against the S&P 500 and itâs obviously been a very bad decision. Â And so his situation actually makes for a good learning experience.
This really doesnât have anything to do with Hussman though and I am sorry if this sounds personal â it certainly isnât. It has to do with a much broader perspective that has persisted over the last 6 years. Itâs the whole permabear perspective based on the idea that QE was going to lead to inflation and an irrational stock market rally. The problem is that this sort of thinking has resulted in a permanent bearish position that has been highly destructive. Â Thinking in this extreme sort of manner has actually hurt a lot of people.
I should be clear â itâs fine to be bearish at times. Itâs fine to hedge. Itâs fine to underperform the S&P 500. But when you take a permanent bearish directional bias on life and the markets then youâre betting against the most powerful trend in the macroeconomy â the fact that more humans wake up every day and say âI am going to be better than I was yesterdayâ than there are people who say âI am going to make this world a worse place than it was yesterdayâ.  This is why permabears always look wrong in the long-run while permabulls only look wrong for relatively short periods of time.  As Iâve noted before, the economy and the markets tend to be in an expansion phase about 80% of the time. Fighting that trend for sustained periods of time is not only irrational â itâs highly destructive. And if you fall into the short-term bearish trap you have to be willing to change your mind and understand when youâre wrong because this powerful long-term macro trend will very likely make you wrong at some point.
Of course, itâs equally irrational to be completely correlated to the S&P 500. After all, if you take my view, that your portfolio is literally comprised of your savings (itâs your savings portfolio), then your portfolio probably shouldnât be correlated perfectly with a high growth high volatility index like the S&P 500. This means that some degree of hedging is totally appropriate. Yes, permabulls are only marginally more rational than permabears. The point is, you donât want to be a permabear or a permabull. Donât live on the extremes.
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