Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Wednesday, 2 January 2013

Thoughts to start the New Year

A happy start to the new year for all risky asset owners. The world looks a better place but that may just be the aftereffects of my month long vacation. However, 2012 was the year of dogded bullets. China's PMIs started improving just as bears were starting to smell blood, Greece got more money to burn but more importantly the Eurozone not only made it in one piece but the outlook seems as sunny as the Mediterranean. Even the US fiscal cliff was "resolved" albeit a day after 2012.

So what will 2013 bring? Without writing several hundred pages on some 'Outlook for <insert asset class> in 2013', the most accurate prediction I can make is that the market may go up or down in a small or a big way. 

Broadly there are two forces battling for supremacy. The first is economic with slumping growth and steady long-term impairment of productive potential in the west. Against it is the political will to get re-elected and preserve grandiose visions at all costs. The central bank bazooka brigade ensured that the latter had the upper hand in 2012. Whether it can continue and for how long are questions whose answers separate impoverished blog writers from titans of finance. 

There are only two things worth noting. The first is that economic forces do not act on a calendar year basis, only investors do. Macroeconomic trends and variables are not reset like P&L and return targets. Therefore investment theses should not flip purely based on the date and the expected price action due to the change in date. (A very wise and experienced trader once told me that the new year usually brings a hopium rush).

The second is that economies have an inbuilt tendency to recover. The progress of human civilisation is a testament to it. Therefore for most part short sellers are fighting against this natural trend. In addition, policies usually retard or accelerate this trend only in a small way as long as they remain within a certain bound. However, current policies are pushing the boundaries significantly and their effects are going to be large and unknown. In terms of physics, economic systems have a certain resilience to outside forces but beyond a point internal stresses increase exponentially leading to catastrophic failure. Therefore chasing returns under the assumption of linearity when we are probably already in the non-linear zone is going to prove costly.

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