If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise:

If you can dream - and not make dreams your master,
If you can think - and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build 'em up with worn-out tools:

If you can make one heap of all your winnings
And risk it all on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on!"

If you can talk with crowds and keep your virtue,
Or walk with kings - nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man, my son!

- Rudyard Kipling

While Kipling's risk management leaves something to be desired (Macro Man doesn't recommend risking everything on one throw of anything), there are some pearls of wisdom contained within the lines above.

Although last week's volatility was a clear change in market environment, it should not have been altogether unexpected. By the same token, it need not usher in months if not years of lower stock prices and economic depression.

Frankly, Macro Man is surprised at the degree of attention that last week's volatility has produced in the mainstream media. After all, this is the fourth year in a row of an ugly correction in the March-May period.

The important thing is to stick to the plan and try, insofar as possible, to "keep your head when all about you are losing theirs." To Macro Man, that means looking for weaker risky asset prices over the next month (with the occasional rally interspersed), with a preparedness to start buying when things look truly grim in, say, early April (though Macro Man reserves the right to change his mind on timing.)

Good luck!

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Click here for comments
March 4, 2007 at 5:40 PM ×

While I see greater risks to growth from the "landing" phase of the US's soft landing, I tend to agree that the current market turmoil eventually should be bought. Some sectors are in trouble, but overall market valuation is fair, valuation confidence by both institutions and individuals is solid while short-term sentiment is deteriorating fast. To me, that sets up a nice opportunity to go levered long some time in the next several weeks. Timing is the big deal, as always.

I am keeping a close eye on that landing, though. The main reason not to buy will be continued bad numbers. If nondefense, nonaircraft capital goods don't snap back and if durables PCE drops back to the worrisome levels it inhabited in 05Q4 and 06Q2-3, I may want to sell any rally rather than buying it.

Macro Man
March 4, 2007 at 6:26 PM ×

I wouldn't argue with that. My view is predicated on the view that current weakness (particularly in core orders/shipments) is a correction in the inventory cycle, which should play itself out over the next month or so.

If that turns out to be the correct view, than the stock market will probably be at its lows of this move just as the data turns, which should, as you suggest, provide a nice opportunity for aggressive longs.

March 4, 2007 at 7:09 PM ×

Things do always turn. I'm short as short can be for now, will move to cash in late March, be aggressive after that if. .things look good again. Wish I had the temperament for FX in pure form, but seem to always mis-time FX, so I'll stick to stocks/bonds US-v-nonUS.

The thing on MBS isn't that bad loans will completely spoil the lot, but will reduce the returns on MBS to where they compete with Treasuries, for equity invested. Little banks and pension funds will have some explaining to do to their investors. In each MBS are several loan-package tranches, and a small equity tranche which is sold off separately to "qualified investors." This very small tranche can vote to collapse the entire set of Notes which comprise a MBS - call it due in other words.

Such equity investors count on a certain rate of spoilage of mortgage loans in the MBS, and if that rate increases as it is doing now and in 2007, they can trigger the calling of the entire lot early rather than waiting the usual 5-7 years projected. I see "vibrations" in the financial market in the US, rather than outright collapses, which is limited to junk-mortgage originators. OldVet

Macro Man
March 4, 2007 at 7:37 PM ×

My understanding is that it is only the really crappy tranches of MBS that were showing distress, and that this was not sufficient to threaten calling. However, I am very much an amateur in this market and defer to your superior knowledge.

As for FX...judging by the performance of various currency trading indices over the past few years, it appears that many FX people don't have the temperament or the ability to time currencies either!