>IDENTIFYING MARKET INFLECTION POINTS (CLSA)

Isn’t history bunk?

• “Progress is cumulative in science and engineering but cyclical in finance” -James Grant (Money of the Mind)
• “. . . for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty” Royal Swedish Academyof Sciences announcing Daniel Kahneman as recipient of 2002 Nobel Prize for Economic Sciences.
• What is financial history if it is not a study of ‘human judgement and decision-making under uncertainty’?
  

So, what practical use is there in history?

• History looks at how markets have worked and not how they should work
• Furthers our understanding of how human decision making under uncertainty works in practice
• To discover some of the lost secrets of our investing ancestors — the pre-Markowitz (1952) wisdom
• To recognise a bear, spend time in its company

Defining g the bottom of a bear market

• When were the best subsequent returns achieved?
• Calculate hindsight value
• August 1921, July 1932, June 1949, and August 1982
• December 1974 would have been the fifth great bottom

Methodology

• Value considerations are not enough to find the bottom — Q ratiorelative to geometric mean — equities get cheap and keep getting cheaper
• Analyse the turning points in these bear markets with the benefit of hindsight
• Analyse the turning points based on contemporary opinion right and wrong
• 70,000 WSJ articles — good sample of contemporary opinion

The bear ends when deflation abates

• Inventory in the system is low
• Some commodity prices start to stabilise
• Demand evident at lower price, particularly for luxury goods or goods in structural demand
• Greater certainty on general price level and valuations more certain
• Corporate bond rally?

Commodity prices bottom with equities

• Commodity prices bottom Aug 1921 with equities
• Commodity prices bottom July 1932 with equities
• Commodity prices bottom July 1949 with equities
• Commodity prices bottom Oct 1982 just after equities
• Copper price bottoms August 1921, June 1932, June 1949 and June 1982

Bonds first, , then equities

• August 1921: May 1920 government bonds, June 1921 Baa corporates, August 1921 commodities.
• July 1932: January 1932 government bonds, May 1932 Baa corporates, July 1932 commodities
• June 1949: October 1948 government bonds, January 1948 corporate bonds, July 1949 commodities
• July 1982: October 1981 government bonds, February 1982 Baa corporates, October 1982 commodities

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