CANARIES IN THE COAL MINE?

What’s the link between the Chinese stock market and U.S. subprime mortgage market? Nothing, really. Well, almost nothing, except that both had previously been soaring and have recently hit some speed bumps.
That leads us to an astonishing conclusion: markets that have enjoyed long and robust bull markets eventually hit a wall. Bear markets, in short, haven’t been banished, even if it appears otherwise.
Full disclosure: we don’t have a clue about what’s coming. But we do have a firm grasp of history, which is conveniently available for all to see in full clarity.
The fact that China and subprime mortgage markets have slipped may be dismissed as marginal events of no real relevance to the capital markets. But we think such stumbles are early warning signs of things to come. Granted, this is a highly speculative notion and so readers should proceed accordingly. Nonetheless, we think our view has merit if only because bull markets have flourished across the spectrum of asset classes for some time and, well, nothing lasts forever.


As such, we’re keeping a diary of market corrections large and small. If and when they accumulate, the broader investment community may become jittery. It’s virtually impossible to predict market peaks and troughs, but at this late stage in the bull market cycle we’re increasingly anxious and so we’re keeping an eye out for additional warning signs. Having built up a tidy nest egg, we’re in no rush to watch it evaporate. Been there, done that. Wealth preservation, in short, is at the top of our financial priorities at the moment.
It’s never clear what might trigger a broader sell off, but we’re mindful that it could be seemingly low-risk events when the supply of optimism reigns supreme around the world. History suggests no less. No, the financial gods don’t wave flags or ring bells at market tops or bottoms, although sometimes they whisper in your ear and suggest things.
And while we’re confessing to events that have delivered a fresh dose of modesty to our thinking is this morning’s report on durable goods, which slumped 7.8% last month–the biggest monthly drop since July 2000.
The point of all this is not to induce panic. On the contrary, ours is a mission of embracing the Boy Scout motto to “be prepared.” Financially speaking, that arguably translates into having cash at the ready to take advantage of any bargains. Executing such a strategy successfully also requires patience, and lots of it.
Regular readers of this blog know that your editor has been recommending above-average allocations to cash and below-average allocations to almost everything else. That’s been exactly the wrong thing to do, measured by history as of last night. It may prove to be wrong going forward as well, perhaps for years. But we suspect otherwise.
There are many asset classes in the universe, and none of them look particularly appealing as targets for committing new investments. Cash, on the other hand, looks attractive, and it pays a decent waiting fee of 5% or so. No, you won’t get rich with cash. But we think that it may come in handy for picking up assets on the cheap. One day. Maybe. Perhaps.