The irrational market and Boom-bust cycle

What do we see yesterday? 
The US market is a sea of green! The power of hope of Fed rate cut.

See the headlines...

Bull's case:
Fed will cut rate to stimulate the US economy, businesses won't go bust. Stock prices of the businesses will then continue to chiong up and up.

Bear's case:
Coronavirus is causing worldwide productivity decline and it's nowhere near getting controlled. Economy is already seeing downturn, yield curve inversion's here.
Productivity decline = earnings decline = P/E go over the moon = stock prices would come down.

How will the market be tonight?

“Markets can stay irrational longer than you can stay solvent.” - Keynes


A crash course for you on economy if there's difficulty in grasping what I am trying to say:

My takeaways..

Boom comes when spending increases. Recession comes when spending reduces.

When we are at the beginning of the debt cycle, we should borrow money to increase productivity. That's how businesses can grow. Alternatively, borrowers can use debts (leverage) to acquire assets or securities which naturally grow in values. If you are not earning from the most productive sectors or putting your money in them, you simply lose out.

However, before the deleveraging phase comes, we should do the reverse. Pay back our debts or risk facing bankruptcy. (That's a bit extreme... but yeah, that's the gist.) And of course during the phase, we have to continue working hard in hope there's no retrenchment (unless you have officially FIRE).

Here is a snapshot from on Marks Howard's book Mastering the Market Cycle:

By observation, we would be able to tell where we are in the market cycle. Of course the key word here is "excessive". In mini down cycles, we may not be seeing the traits of excessive low before it oscillates up again.

Bear market comes when there's excessive selling, especially by the BBs. Retail investors are then caught in the bloodbath. :(

So let's continue to stay rational in the irrational market.

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  1. Irrational? Mkt is just made up of winners, losers and regrets.

    1. Hi Uncle8888,

      Winners are the ones who can best navigate the irrationality. Losers are the ones taking the opposite side.

      Regrets are the ones sitting on the sideline thinking that they could be winners, or the losers who missed their bets.


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