The Myth of the Steady State

Everyone’s waiting for things to get back to normal. The problem is, no one knows what normal looks like.

In August of ‘07, the wheels started to come off the bus. That’s when a year’s worth of real-estate price declines began to tell on the sub-prime mortgage market. First Bear Stearns’ hedge fund blew up. Then sub-prime originators began to fail. Then prime-based originators, and you know the rest.

Now that we’re in a recovery, people are debating what the “new normal” will look like. But for now, we’re in an inventory-rebound. That’s not normal.

But what was normal before the crisis? The run-up to the housing bubble wasn’t normal. Prior to that, we had the escalation and execution of the Iraq war. Prior to that, we had the inflation and pricking of the internet bubble. Prior to that … you see what I mean?

Some say the market is an evolutionary mechanism, always adapting to new conditions. But to me it seems more like quantum physics, with jump conditions and measurement failures and uncertainty principles. And like quantum mechanics, the market frequently violates some of the most elegant mathematical models. As Einstein said, if you want elegance, go see a tailor.

I don’t believe in a past, present, or future equilibrium. The market we see is the market we have. The trick is to prepare for the next market, without going broke.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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