Waiting For Godot

The unending trauma of the global financial markets has drained many seasoned investors and participants. In terms of magnitude of pain endured, the 2011-2012 period has far surpassed the 2008-2009 period.

In the 2008-2009 period, markets collapsed so swiftly that most participants were frozen like deer in headlights. The sudden and severe drop in the markets had a surreal feel to them. While some pain was experienced, the intervention by authorities in the US brought back markets with a vengeance in 2009. A lot of investors who were not leveraged and did not get liquidated in the collapse, dismissed the entire episode as an aberration.

In the 2011-2012 period, on the other hand, markets have relentlessly grinded lower with almost non-existent relief rallies and the news has gotten progressively worse. I mentioned in a previous post that a lot of smart people have been caught wrong-footed multiple times and that the destruction of capital has been brutal. What makes this period worse is that it appears that the news and the underlying reality is getting worse. Not only have people endured severe pain, the outlook appears bleak. Participants feel like they are staring into the abyss.

Markets are very good with pricing in available information and expectations of investors (negative and positive). However, in the current environment, there is no way to know what the market is pricing in and how bad the reality can turn out to be.
There is a point when the market prices in even the unknown unknowns. That happens when a large number of participants just quit the game. I believe that a lot of people have indeed quit the game. It does not appear that way to the naked eye, what am I thinking?

Most retail and high networth investors have quit risk markets completely. They have either eroded their capital or a are extremely scared and are hanging on tightly to their scarce remaining capital lest they have to go out and get a real job again (ughhhhh!).

Professional investors will not quit the market till they are fired by their clients. So much money is now institutionalized savings (pension, insurance, endowment, government) that they will likely never be fired by their clients (in aggregate). The job of professional investors, however, is to take risks and deploy capital in what they consider the best risk reward propositions within their individual mandates. The number of professional investors who have thrown in the towel on risk taking and completely allocated to perceived risk free assets (cash, treasuries etc.) is staggering. Even though they continue to occupy their desks, they have in essence quit the game.

Everyone seems to be waiting for the other shoe to drop or waiting for the bogeyman or waiting for something! The manifestation of this is a market where value means nothing and where nothing is worth anything. Everything is suspect and everyone is suspect.

I don't know about you, but to me this does not seem like a place from where prices of assets get worse. Then again, we are all flying blind!