Hedge Fund CIO: "This Is The One Question Traders Must Always Ask"

Submitted by Eric Peters, CIO of One River Asset Management

Highs and Lows:

• In 1980 someone paid 6995 for the Nikkei 225 equity index. Japan’s bull lurched upward. By 1989 the Imperial Palace was appraised at a value exceeding the totality of California. In Dec 1989, someone paid 38957 for the Nikkei — it remains the all-time high. In 2008, a few weeks after Lehman’s collapse, the Nikkei fell to 6995 (revisiting the price first seen in 1980), which now marks a 38yr low. Today, the Nikkei trades for 22930 (almost exactly the middle of that 38yr range), unchanged from the price that first traded 31yrs ago in 1987.
• In 1996 someone paid 1765 for the Euro Stoxx equity index. The bull market raged. Then in 2000, someone paid 5432 for Euro Stoxx. It remains the all-time high. In 2003, Euro Stoxx touched 1851. By the summer of 2007, it failed to regain that 2000 dotcom all-time high, and topped at 4753. In Mar 2009, Euro Stoxx returned to 1765, the level first hit in 1996, which now marks the 22yr low. Today, Euro Stoxx trades for 3573 (almost exactly the middle of that 22yr range), unchanged from the price that first traded 20yrs ago in 1998.
• In 1999 someone paid 1665 for the Shanghai Composite equity index. Stocks had woken from their agrarian slumber. Someone paid a high of 2245 in the summer of 2001, in excited anticipation of the Dec 11th admission into the WTO. After falling to 998 in 2005, the index surged to 6124 in 2007 – it remains the all-time high. In 2008, weeks after Lehman failed, it fell to 1665, the level hit in 1999. Today, the Shanghai Comp trades for 3193 (in the upper half of an 11yr range), unchanged from the price that first traded in 2007.

Not Like the Other:

• On Apr 8, 1987 when someone paid 22930 for the Nikkei equity index, the S&P 500 equity index traded 297. Today the Nikkei is unchanged from that day in 1987, while the S&P 500 is +814%.
• On Jul 14, 1998 when someone paid 3573 for the Euro Stoxx, the S&P 500 traded 1175. Today Euro Stoxx is unchanged from that day in 1998, while the S&P 500 is +131%.
• On Mar 29, 2007 when someone paid 3193 for the Shanghai Comp, the S&P 500 traded 1422. Today the Shanghai Comp is unchanged from that day in 2006, and the S&P 500 is +91%.

Anecdote

On he walked. So many charts swirling in his mind, each its own story, all somehow connected, everything is. Major highs and lows are rare moments of wild hope or great fear, vivid, mistaken. He’d lived the 1989 Nikkei high, that euphoria, the hysteria, Japan’s Rockefeller Center purchase. He’d experienced every turn since. While it’s impossible to pick a high or low, the character of each is distinct.

In 1989, with the Imperial Palace appraised at a value exceeding the totality of California, was it so hard to imagine the Nikkei approached a major top? If you could have only been patient, was it not a near certainty that you’d have a chance to buy Japanese stocks far lower at some future date? It’s been 29yrs and we’re still nowhere close to that high.

At the turn of the century, with sock puppet billionaires and Y2K buildouts, what were the odds you’d never have a chance to buy equities materially cheaper? That’s always the question to ask.

It helps you step back from the month-to-month pressure to perform, and think about where you are in the cycle:

• After the March 2000 dotcom bubble high, investors could have bought the S&P more cheaply for 7yrs.
• After the Oct 2007 housing bubble high, investors could have bought the S&P more cheaply for 6yrs.
• And at the 666 low in Mar 2009, wasn’t it a near certainty that with patience, you would’ve be able to sell much higher prices in the years to come?

He considered today. Japan, Europe and Chinese stocks mired in multi-decade ranges.

The S&P 500 is the only major market to have defied gravity, lifted by the financialization of America’s economy, whereby artificially cheap interest rates fueled stock buybacks, and desperate pensions turbocharged a leveraged private equity boom.

With the Fed now reversing course, will we not have a chance to buy stocks materially cheaper?