The timing may be tricky, but such severe distortions in valuation as shown in the chart below can often set up special opportunities for investment profits when the eventual reversion to the mean, or norm, occurs.
I think it may be more difficult to trade on these sorts of sweeping macro changes now because of the pervasive corruption and insider operations in the markets which prey on the mispricing of risk and the calculated asymmetry of information. I am comparing this to my own investment decisions on behalf of my family in the early 1980s, that pre-HFT period when the customers' man still thanked you for your order, when it became obvious to most informed observers that Volcker's interest rate policy had peaked at twenty percent, and the long decline in rates had begun. I remember a colleague coming in to my laboratory and writing the date and rate on my chalkboard, and he was right. For the astute longer term investor, those were the days of zero coupons, high grade and high paying annuities, longer term Treasuries, and high quality dividend DRIPs.
Look at the difficulty one has had investing in the precious metals markets from 2000 until now. I have viewed it as a similar broad macro trend, and consequent bull market, that is so apparent that it has bordered on an IQ test rather than an investment decision. It does however cross the path of the central banks and their policy enhancement apparatus, so it is not quite so benignly tolerated as dealing in fraudulent paper, the times being what they are. The Fed did not say so much back then, but they did not prevaricate and intervene so broadly and frequently either. If the Fed ultimately does cease to be as an institution, its decline and failure will be marked by the Chairmanship of Alan Greenspan.
But for long term investors I think riding this macro trend will still be possible when the tide turns and change comes. And I think I will wait for it, because to be early is to be wrong. And these days trading early is measured in microseconds. And so it is best to wait for positions to be right, and then sit tight.
Chart courtesy of Ralph Dillon at Global Financial Data. The views expressed above about it are my own.
