It certaintly does look like deep risk. However, I would point out that you have to factor in dividends and adjust those prices for the deflation rates. In terms of real total returns it will probably look less bad (though still prob still pretty bad). I dont have Japan financial data in my backtestind spreadsheet (I do want it though, especially if it went back to the 40's) so I cant test this. But I'm fairly confident stock investors will eventually be made whole and even profit. So Deep Risk should be called the risk of big losses for extended periods of time, not permanent because only in very rare cases they are permanent
For oustide observers it seems crazy that Brazil will elect Jair Bolsonaro as president in about 1 week, a man who has made many crazy and inflamatory statements in the past. A lot of foreign people are criticizing him and saying that Brazil voters are out of their mind. If you are a foreign, it might seem very puzzling but if you actually live in the Brazil and follow the news and the political scene, is makes quite a bit of sense. Here is an article explaning a lot of what he stands for https://brazilianlawblog.blogspot.c...nt_5YCB5lWkh-70qD3zBAcHDLSosghLEz-vBUSKjRvSIg I particularly liked this part: "As I’m writing this article, about 10 days from the 2nd round of the election, there are many manifestos, declarations and articles, mostly from left-wing thinkers, that condemn Bolsonaro’s economic plans, or that suggest that, despite his plans, his government will turn to dictatorship and eventually ruin Brazilian institutions and international credibility. There are too many of them. But names such as Piketty and media outlets such as The Economist will give the reader an idea of what I’m talking about. Plainly speaking, I deem this kind of criticism utter nonsense. I have read all the material I could find and perceived that there has been very little analysis of Bolsonaro’s actual plans. Most criticism is based on ideology or is, simply put, propaganda. There is no analysis of his actual cabinet members, political base or economic policies. The people who studied the plan and that have skin in the game, such as financial firms, stock brokers and Brazilian banks, approved the proposals and do react positively each time a pool shows that the chances of the candidate are increasing." When I read a lot about the foreign commentary on Brazil, I can't help but to roll my eyes. For instance, the economist magazine was against the impechment of Dilma Rouseff. That position was just so blatantly ridiculous it could only have been made by highly educated folks that are not living in Brazil. I'm sure that when I talk about Turkey or China or Greece, I talk a lot of nonsense as well. Even Druckenmiller talked about in his RealVision interview how he had some bearish bets in Brazil recently (which I'm sure didnt do so well after the recent developments). When people talk about places where they are not following very closely usually nonsense follows. The locals know it best I'm not a big fan of the guy, I think he carries some nasty tail risk of a military dictatorship. but I do think he is much better than the alternative (a lefist that could send the country back into hyperinflation and that is taking orders from a former president who is in jail). Meanwhile, from the interviews that I listened to, Bolsonaro's economic advisor is brillant, he nails the country's problems and the solutions like few do. Since Brazil is coming out of its worst recession ever with very anemic growth, its an easy vote to make
Pot stocks played out as expected, buy before the catalyst, sell at the catalyst (sell the news). Except they took a few more days to really implode, that made me mess up the short trade (made only small profits). My big mistake was not using CGC NBEV TLRY put options. That would make easier to hold, I shorted shares and got shaken out. I really need to improve my options game. I'm mostly out of this sector and I think it will be dead money for a while (except today perhapse for some daytrading bounce setups)
Here is a new indicator I came up with, not sure if someone did it before me. But if take the S&P500 returns AFTER a decline of 6-7% all the way to the next decline of 6-7% and compound it to a capital base, you will get a capital multiple. That is, how much would your capital have grown in between these periods. My theory is that long periods of HIGH CAPITAL GROWTH without a correction, leads to excesses/leverage/crazy behavior that are likely to result in a correction. Indeed from august 1984 to july 1987, there was a gigantic period of capital growth WITHOUT a correction. $1 dollar invested in 84 would have returned $2.43 in 87, in about 3 years. That is, before the crash. The crash was a natural consequence of such dramatic period of overbought conditions. Another remarkable period was in the 20's. I have limited monthly data in the sample (starts in Sep 1926. From the very start to the crash of 29 there was capital growth of 2.73 (a dollar turns into $2.73) in about 3 years. The actual growth was likely larger if I had more data. No wonder it ended in a crash "Party like its 99" was not only true in terms of the Nasdaq, the S&P500 had a capital growth of 1.48 in 22 months. The pre-trump and trump rally (before the collapse in early 2018, which cleared out a lot of the speculation and overbought conditions) lead to a capital growth of 1.57 in about 2 years. Bellow is a table and a ratio for future comparissions. If this theory is correct, its quite unlikely US stocks would experience a crash or big correction at this point in time given that the market cleared a lot of specs/excesses early in the year and only had a very limited capital growth since then. Not to mention the absence of a recession.
I realized that making that ratio makes no sense. Any at typical year stocks earn about 9% in 1 year. Which would lead to a ratio higher than 1929. Since capital growth is a convex function, it would tend to lead to ratio to go down the better it is doing. The indicator should be the capital growth itself. There is already a time element into it by the fact that 6-7% corrections are so common. Its kinda like measuring the record for staying underwater or something I havent run the numbers but I suspect that the avg capital growth before corretions would be something like 1.05 to 1.20. 1929 and 1987 were 2 significant outliers. When I have some time I will calculate the average and standard deviation of that distribution
I added a few more samples to the indicator. The idea is to basically capture very overbought markets where a lot of people have big gains, which they then pile in the sell side to take profits all at once. It seems notable that the only instance where there was a big drop WITHOUT a recession was in 1987, which had a Capital Growth Ratio of 2.43. People had more than doubled their money in stocks in 3 years. The 91-98 period shows that without a recession these things can last a long-time In any event the current capital growth (up until the recent correction) was about 1.20
So what we have here is this, the main causes of a bear market tends to be: -Recession -Overbought markets -Something else The first two seem to be able to be disregarded, recession doesnt seem to be on the horizon and the market is not overbought as measured by my capital growth indicator (or by most other indicators for that matter). The risk of a bear appears to be tied to the chance of a bear market in bonds leading to higher discount rates which stock investors would react to, that would be that "something else". For that reason I plan to purchase some UST bond put options as a hedge against my stock portfolio (I already have some that I purchased a while back but its a quite small position). Right now, that seems about the only thing that could hold back stocks
Notes on that Druckenmiller interview https://macro-ops.com/notes-druckenmiller-real-vision-interview/
TLRY $100 Put Option that expires on Nov 2 2018 is up 500% recently. Nice return high? Except its down massively over the previous weeks In bearish stock bets, timing is already crucial, in high momentum stocks with a high borrow rate, its pretty much the only thing that matters.
I should have made a killing on CGC, TLRY, NBEV put options. I had seen this game in the past, sell the pot news catalyst and bank it big on the short trade. I use to play these back on OTC in previous cycles, this boom happened in the listed markets for the first time. I'm very comfortable trading OTC stocks as its my speciality, I'm not as comfortable with listed names. I find them very choppy and unpredictable. Holding shorts is tough, you tend to doubt the trade a lot and at some point exit. But this put trade was pretty easy, you buy it and forget out it.Even put options going out 1 month doubled or tripled. Its just criminal that I didnt buy Nov $46 CGC or November $100 TLRY puts. But its nice because I learned my lesson. What I find hard about options is that there are so many strikes avaliable that its hard to choose, I get analysis paralysis (it doesnt help that the most likely scenario is a 100% loss of invested capital either) but I'm developing some rules of thumb that will help me with my choices going forward as well as try to recall the pain of missing this trade the next time I dont want to buy the options