They’re Conditioning You — Beware

Lost In Space Robot

Danger Will Robinson

In short, I need to get smarter and less childish about my retirement finances. Next year is The Year of the Adult and adult begins with withstanding some measure of loss in the stock market.

What if the loss is permanent?

Or close enough to it to be indistinguishable from permanent.

Can’t happen, right?  Never has happened before, right?


1929.  It happened.  And it was a hell of a long time — for all intents and purposes among most peoplepermanent — before that loss was recovered.

But, you protest, that will not happen again in the United States and hasn’t in the world since, certainly not amongdeveloped, first-world nations.

Wrong again.

Japan.  Nikkei 225 was right near 40,000 in 1989.  It has never traded there since and today stands at about 15,000, a ~60% permanent loss.

In addition the Nasdaq 100 hit 4816.35 in 2000.  It has never seen that value since; today it stands at 3470, a28% permanent (so far) loss nearly 14 years later.

Corrections and Bear Markets are what we all hear from people like Tom Keene, and we’re also told that it “always” comes back.

The latter may be true but the question is always over what timeframe?

See, once you get to retirement where you need the money your sands of time to wait for a recovery have run out.  And while historically speaking it is relatively rare to have a market collapse and not recover over the space of a handful of years (single-digit years) there are multiple occasions where the “recovery” has occurred so far into the future that for your purposes it can be considered to be “never.”

In order for us to calibrate the level of risk of such a thing happening we should probably look at how outrageously-stretched valuation metrics are compared against history.  After all, that’s a reasonable way to know whether one of those “outlier” events is likely — right?

Equity valuations (blue line) compared against tangible assets less debt (purple line) stand at the highest level recorded in modern history in the United States.  You in fact have not been able to buy stocks at either parity or a discount to that level since 1990!  The only question since that time has been by how much have you been overpaying, and as we’ve seen the relative level of instability since then has risen dramatically as well with two massive, wealth-destroying crashes since.

If equity prices were to fall by 50% and the asset:liability picture were not to be damaged by that event (very unlikely!) we would only bring that relationship back to approximately where it was in 2005 — a damn good year by most people’s figuring and during the building of the last bubble.  To get back to unencumbered asset levels of valuation equity prices would have to fall more than 80%.

In other words, simply on the numbers, the drawdown not only could be “permanent” for all intents and purposes it could be materially worse than 50% as well.

The Market Ticker

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