MARKET CONTEMPLATIONS (i)

Ray Dalio has a cool name and it seems that he understands how the Machine (or Mr. Market) works two thirds of the time. Not bad. He is an optimist as W. Buffett because he believes that the core multi century trend is a slow upwards move (2-3%). Then there are intermediary multi decade debt cycles and multi year mood (Fed imposed) swing cycles.

Situation is really bad in the world economy (as evidenced by Baltic Dry index below)...

... and a longer perspective...

..but the market seems to do not care and continues climbing up. What can derail it? Every time when Mr. Market is in doubt, central banks are pulling some new rabbit. Are there any left? At least it seems that they have some old ones, i.e. they can keep on extending the existing facilities (this is probably what Hugh Hendry calls going “nuclear”). There is no point of being angry on Bernanke because he is simply doing his job and Ray Dalio calls the outcome as “beautiful”.

The only credible answer on what can derail this climbing up is “what we do not know at the moment”. We know Portugal / Spain / etc EU, China, Japan, oil.  World is calm – volatility is down.

In Ken Fisher’s book “The Only Three Questions That Count” I found that S&P dropped 30%+ in 1937 because of recession triggered by capital spending & industrial production severe decline. Sounds very mundane but hard to fathom today.

Major indexes are overpriced as compared to the long term trend because of central bank actions. Will there be a run on a central bank or something very trivial like a butterfly flap?