STREET DOGS

From Cullen Roche at Pragmatic Capitalism:

There’s a strong tendency in the financial markets to live in the extremes. We often draw a line in the sand. You’re either bullish or bearish. You’re in or you’re out. But like most things in life, the best place to be is often somewhere in the middle. Living on the extremes results in extreme and oftentimes irrational outcomes.

Anyone who’s taken a strong directional bias against the S&P 500 in the last few years, for instance, has obviously made a very bad decision.

The whole permabear perspective based on the idea that QE [quantitative easing] was going to lead to inflation and an irrational stock market rally has so far proven to be wrong. The problem (with this way of thinking) is that it has resulted in a permanent bearish position that has been highly destructive.

It’s fine to be bearish at times. It’s fine to hedge. It’s fine to underperform the S&P 500. But when you take a permanent bearish directional bias on life and the markets, then you’re betting against the most powerful trend in the macro-economy — the fact that more people wake up every day and say, “I am going to be better than I was yesterday” than there are people who say “I am going to make this world a worse place than it was yesterday”. The economy and the markets tend to be in an expansion phase about 80% of the time. Fighting that trend for sustained periods is not only irrational — it’s highly destructive. And if you fall into the short-term bearish trap you have to be willing to change your mind and understand when you’re wrong.

Yes, permabulls are only marginally more rational than permabears. But you don’t want to be a permabear or a permabull. Don’t live on the extremes.