We had a bear market. We still may be in a bear market. We will have bear market rallies. We will have pullbacks. Buy on the pullbacks. The market will definitely be up in a few years. Thats all we all know. Everyone. From Warren Buffet on down. No one knows more. No one knows less. And thats a problem.
The reality is that when it comes to the risks of the market, we have learned absolutely nothing from the past 2 years. Just as we learned absolutely nothing from the tech bubble and the calamities of markets past.
So I ask you. What is it about the stock market and those who dominate the money flows in and out of the market that has changed? Will people be any less interested in making money? Will mutual fund or hedge fund managers desire to make less money than they did 3 years ago?
It all comes down to this. What will cause anyone on Wall Street to take fewer risks in the market going forward than they did before? Might they not take greater risks as they try to recapture their losses from the last couple years? I guess you could argue that leverage to the biggest risk takers of the past 5 years is less available today than it was before, but for how long? As liquidity becomes more available, why wouldn’t financial engineers find every way possible to use it in the market?
Maybe I missed it, but has there been any structural, regulatory or systemic changes in the stock market that can prevent what we just went through from happening again? Quickly?
Nothing has changed over the past couple years. Its all going to happen again. Which is exactly what Wall Street wants. The market is up 36pct in 2 months. Everyone is making money again.
Until they aren’t. So what should we do? I will repeat what I wrote last October: The Cause of Bubbles: Investment vs Financial Engineering