A Game of Chicken

Since the mid-80s, playing the stock market has essentially been a game of chicken. The market's normal condition is one of overboughtness and overvaluation. Naturally there are times when it is more overbought and more overvalued than at other times, but the game has been to stay long and stay the course (and hope you can get to the exit before the music stops). This was logically underpinned by technological revolution, a generally robust economic environment, and the ideas of free market liberalism. Unfortunately, the period was also marked by a significant increase in leverage among governments, corporations and consumers. All good things must come to end, and it would appear that the financial crisis, sweeping electoral victory of Barack Obama, and coincidental recession of 2008-09 mark the end of that era. It remains to be seen what the future holds, but the early money is upon higher savings, lower consumption, higher taxes, increased govt spending, and greater regulatory constraint. Not a particularly exciting mix. But companies will still grow and make money, and investors will still be able to derive a decent return on investment (a 60% mark-down in asset prices does wonders for long term expected returns). However, the transitional pains of recalibrating from one state to another imply greater dislocation within and among economies, with a concomitant increase in volatility effecting asset prices and asset markets. Welcome to the new game of chicken.