Thursday, January 21, 2016

High Plateau Drifter: "Back To The Future!"

The latest from High Plateau Drifter, who has not been seen in a while:

When I started investing in 1969, there was an oft heard mantra, doubtless held over from previous decades, which went “the longer the base, the more powerful the rally.”

It was to be used after a long decline in the market, and it was useful in the sense that a sharp rebound that begins as a fast down-move was more likely to be a short lived counter trend rally than the start of a new bull market.

But in truth we haven't had a “basing” formation since perhaps July of 2002 to April of 2003 on the SPX and NDX, and that was a very short base. We haven't seen a real basing formation since Greenspan began his tenure and turned into a crowd pleasing maestro. We haven't had anything even approaching a base since. To find a real multi year base you have to go back to 1946 to 1949 or from 1978 to the 1982, both of which were followed by rallies lasting two decades.

I was lucky because beginning in 1969, I invested all of my paychecks in a mutual fund, while wearing a gun for a private security firm and then during my stint in the Army. Then  from 1972 through 1982, I as able to accumulate a house, cars, wife, kids and a very nice stock portfolio at very low prices. In truth, the entire period from 1966 through 1982, which felt like a “permanently high plateau” at the outset as the Dow first hit 1000 in 1966, turned out to be a base with bargains galore in the later years as inflation drove wages and salaries ever higher and kept stock prices in check until Paul Volker's punitive interest rates took over and continued to keep stock prices low and provided true bargains during the last three years through 1982.

In contrast, the central policy of the last 20 years is that there shall never be another opportunity for young investors to accumulate investments at low prices over a period of years. Wealth must be confined to those who already have it. Whenever market distress produces deeply discounted bargains the Fed adopts a policy change which causes the markets to make those bargains disappear quickly in a wild policy driven rally which within a few months pushes prices up to overvalued levels utterly dependent upon continued Fed largess.

But now boomers are beginning to sell stock to maintain their consumption, selling which will continue for the next 20 years, and because the Fed needs to protect the value of the dollar so that banks world wide will keep buying Treasury Debt, the next big drop in stock prices is likely to produce a very long base, something we haven't seen for 34 years. And the key point is that investing in a basing environment like 1966 through 1982 is bi-directional and typically offers a number of 20% to 30% swings in both directirons. In other words you must buy the lows, sell the highs, go short, cover and then go long again.

Of course, if you start to see helicopter cash dropping on main street, then gold, silver and commodities will be the ticket as well.

So look for that “permanently low plateau.”

It could make you very wealthy.
Remember Skeptics to the Ramparts, Fun on the Permanently High Plateau, and Surfing the zero bound along the permanently high plateau.

Note that the titles of HPD's pieces were all sarcastic references to the extended market top that has been in process for more than a year.


AllanF said...

Hmmm. Not sure I completely agree.

There's the matter of interest rates. They've hit bottom. Not saying they must go up from here, but by simply stopping falling business and gov lose the ability to roll the debt, do a little "HELOC" while they're at it, and keep paying the same annual juice. They might be able to keep paying the same juice, but the HELOC window is closed. As Stag Mark (among a few others to be sure) kept pointing out, businesses never deleveraged in '08-'10. Since then, they've floated bond after bond to fund stock buy-backs, ie. increase leverage. I don't see how that simply needs worked-off in the stock market with a 15-20 year base.

On the other hand, if you expand the 20-30% swings to 50%, arguably we've been basing for some 15 years already. And hey, it is a presidential election year again. Time for a(nother) 50% draw-down?

High Plateau Drifter said...


I lack he ability to see into the future, but you are right about seeing the post-2000 period potentially as a long and very volatile basing formation - particularly if you adjust nominal prices by the rate of inflation using 1981 methodologies (house prices back in and hedonics and substitution effects out).

Adjusted for shadowstats inflation, we have been in one extended bear market since year 2000.

In my trading I think of stocks as a volatile form of cash, and my objective is to always increase my cash hoard. It is one of those ways of thinking that prevents me from falling in love with a particularly stock, index or other asset. One of the keys is to stay emotionally detached from particular assets, and it is impossible for any rational man to become attached to our ever depreciating greenback. Thus, one must develop a process and discipline of increasing those greenbacks faster than they depreciate. The mass emotions of our fellow investors are the most important tool to that end.