8 January 2018: John Kenneth Galbraith

Amid the current unprecedented market euphoria, it is getting harder and harder to imagine that this bull market, too, will top out, sooner or later. And that a new bear market may eventually correct the entire rise of late. (A bear market? What was that again? Check it out here.) To put things into perspective, it is always good to ‘zoom out’. One way to do this, is to read about economic cycles, more specifically about the economic phases generally referred to as ‘(market) euphoria’. Canadian-born economist and diplomat John Kenneth Galbraith (1908–2006) wrote many books on this subject matter. In his A Short History of Financial Euphoria (1994), he summarizes six common denominators of speculative episodes:

  1. Extreme brevity of financial memory (investors have forgotten all about the latest market corrections and crashes)
  2. The specious association of money and intelligence (tech billionaires are generally perceived as universally brilliant)
  3. Money as the measure of capital achievement  (the acquisition of money is difficult, therefore possession must be associated with some special genius)
  4. Something new is in the world. In all speculative episodes, there is always an element of pride in discovering what is seemingly new and greatly rewarding (read: internet, social media, e-commerce, smart gadgets, cryptocurrencies)
  5. Leverage gets attached to stocks and real estate (real estate and building projects in booming cities look legendary)
  6. They all crash. According to Galbraith, “This, invariably, will be a time of anger and recrimination.”

For those interested in the answer to the question: “Are we in a speculative episode?”, Smead Capital Management’s recent article titled Today’s Financial Euphoria is a recommended read. Here is a link to the article.

white-chapel-logo-smallDespite a disappointing jobs report and an unanticipated decline in a leading indicator of the services sector, US markets continued their rally on Friday. All major indices gained during Friday’s trading. The S&P 500 added 0.70%, the NASDAQ 0.83%, and the Dow 0.88%. The shortened New Year trading week has been quite a profitable one: the Dow gained 2.33%, the S&P 500 2.60%, and the NASDAQ a whopping 3.38% — all that in just four trading days. The trend of rising volatility we saw in the second half of December (from just below the level of 10, to just above) was abruptly reversed as trading resumed in the New Year. The VIX fell back into single-digit territory on Tuesday, and stayed there for the rest of the week. It closed at 9.22 Friday, exactly flat (0.00%) for the day and -16.5% for the week. Both UVXY ETFs and XIV ETNs moved more or less in line with the VIX Friday: -0.11% for UVXY and +0.08% for XIV.
Though the US markets continued to rally Friday, volatility took a breather that day, and that shows in the results of our four models. They hardly moved at all. Danny Daredevil lost one tenth of a percentage point. His RSS closed at just below -10%. Adventurous Anny is still holding a cash position and her RSS remained unchanged at 23%. Solid Suzy and Lazy Larry advanced fractionally. Their RSS remained at just above 113%.
None of our models gave a trading signal at the end of Friday’s session.

Model Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil UVXY 1 January 2016

-10.20%

-11.95%

-11.95%

-5%

Adventurous Anny Cash 6 March 2017

22.91%

0.00%

0.00%

28%

Solid Suzy XIV 6 March 2017

113.35%

5.82%

5.82%

147%

Lazy Larry
XIV 6 March 2017

113.35%

5.82%

5.82%

147%

RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return

 

RS_v05-small

In The Netherlands, there are 3,046 km of motorways, 1,428 km of access and exit roads as well as connecting roads, 2,749 viaducts, 13 ecoducts, 22 tunnels and 743 bridges (source: Dutch Ministry of Infrastructure and the Environment).
Rijksweg A4 (the A4 Motorway) runs from Amsterdam southwards through the cities of The Hague and Rotterdam, to the Belgian border near Zandvliet, north of the city of Antwerp (Wikipedia). Most of the times, this highway is heavily loaded with traffic. To drive there with no other car in sight, is something that hardly ever occurs. At two points, the A4 crosses a taxiway of Schiphol airport via a tunnel. There is a chance that you will see an airplane crossing your path when you enter one of these tunnels. But that too, is not very likely. So when René was driving on a deserted A4 and a gigantic Boeing 747 taxied right over his head, almost at arm’s length, this gave him a slightly surreal feel.

 

Photo John Kenneth Galbraith by Dijk, Hans van / Anefo [CC BY-SA 3.0 nl (https://creativecommons.org/licenses/by-sa/3.0/nl/deed.en)], via Wikimedia Commons