God is perfect, therefore he is immutable. Perfection is a stable state and any change of this state is a priori impossible and inconceivable. Divine immutability is supported by Greek philosophy, by Augustine, by Anselm, by Thomas and by modern theism, practically by the entire western canon. An evolving God is instead present in the Old Testament, in the Gnostic tradition, in the Islamic philosophy of Al Ghazali, in Teilhard de Chardin and in Mormon theology.
Even in the idea of happiness the demarcation between those who consider it a stable state and those who describe it as an evolutionary process is clearly visible. The blessed who populate the Candida Rosa in the Divine Comedy enjoy for eternity, in the Platonic tradition, the beatific vision of God. In Zen, happiness is not in fullness but in emptiness and emptiness, like fullness, is eternally equal to himself.
In contrast, in libertine hedonism, happiness requires the satisfaction of ever-growing desires and is an endless path full of tension, not a goal of appeasement.
Unresolved, in its small way, is also the dispute between those who argue that a perfect economy justifies only a stock market at permanently high levels and those who instead, letting themselves go, sing the praises of stock markets where the perfection of the macro picture translates into multiples in continuous expansion and excellent opportunities for everyone, including last minute buyers.
Some will say that the problem does not concern us since the global economy is anything but perfect. Japan, for example, has entered its third recession since 2008. Europe is failing to lift itself from the stagnation. China is in a mature phase of its cycle, perhaps senile. Russia and Brazil are in a state of full malaise. America is fine, all right, but this justifies the rise in its stock market, not that of all, and even the American rise must respect the laws of physics and remain grounded.
And yet it is not so. In fact, seen from the markets, the world (at least the developed world) is perfect. Stock market truth, like procedural truth, is a reconstruction, not a reflection of reality.
At the micro level, when a company needs to report disappointing earnings (or even losses), simply include the announcement of a large share buyback program in the release to quell the market. At the macro level, disappointing economic data is punctually accompanied by increasingly aggressive, unorthodox and risky expansionary monetary or fiscal measures. However one puts it, therefore, the stock market has good reason to be satisfied.
An important part of the perfection of the picture is the fact that the reaction time by policy makers to the malaise of the economy and the markets has collapsed. Like a parent who immediately shows up with new gifts every time the little one shows signs of restlessness, the Fed's Bullard speculates in mid-October an extension of quantitative easing not after a year or six months of stock market declines, but after eight days. Prime Minister Abe, for his part, beats everyone in speed and announces the indefinite postponement of the VAT increase exactly on the same day that Japanese GDP, expected to rise by 2.3 percent for the third quarter, actually comes out down by 1.6. It is no coincidence that stock market declines are always shorter and recoveries, usually much slower than falls, are now just as fast.
Assuming therefore that the world is stock market perfect, the initial question still remains unresolved, the one that will be central in 2015. Stop at the highs or continue inertially to rise?
According to the manual, when an expansion cycle, like the US one, has entered its second half, the multiples should reduce or in any case stop. After all, this is how early cyclicals behave like automotive companies, on which market surveillance is always keeping an eye out. Why, after all, pay ever higher multiples of profits that have ever fewer years of residual life?
The markets, however, do not think with their heads but with their stomachs. The longer the life of a cycle is prolonged, the more the markets think that the cycle, this time, will be eternal. If the years of residual life extend indefinitely, then it becomes rational (in a perverse way) to pay much more for profits that until recently seemed destined for a limited life.
Of course, the debate is always open. Ray Kurzweil, the theorist of life extension and immortality at hand, argues, forcing the numbers a bit, that the living in circulation today in the world are more than the dead of all past eras. The theory according to which we are all mortal, he concludes, is therefore still to be proved.
Those who believe in this logic will confidently buy the immortality of the bull market. Those who believe in the traditional theory, according to which even the big rises (including the current one) sooner or later return to the dust, will be more and more cautious.
We're willing to bet that current equity levels aren't the highs of this cycle. It has never historically happened that the markets have given up on rising until the last moment and stopped in time. The problem is that the second half of a bull market is always a Faustian deal in which, in exchange for a longer life, one accepts greater volatility.
Volatility, in turn, tends to generate errors of evaluation and digestion and cause the vast majority of investors to achieve lower results than those of the index. This, and not a radical pessimism about the fate of the economy and the markets, leads us to recommend a slow and gradual reduction in risk exposure over the next year.
For this end of the year and, probably, for the first weeks of January, it will be possible to remain relatively calm. Every year has its pain and the pains of 2014, in one way or another, we have already metabolized. Those of 2015 appear to us today immersed in the profound future. In a few weeks, they will suddenly seem close to us, clear and distinct.
