The Killing Sword

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by Ando Hiroshige


This de-leveraging feels like a bad colonic. I've never had a colonic, though, so my analogy is not based on any personal experience. But I did see Johnny Nashville (of Jack Ass fame) get one on TV.

They say 'Cash is King'. I don't like to worry about my cash. I'm worried about my cash. I remember the last bout of money market scary stories. One money manager said to buy stock in good companies. Hard to know who is a good company any more--and even the good companies have been bruised and beaten.

GaryK is fond of saying that in a bear market 'You will get no help from Wall Street.' Never has anything resonated so truly as that simple statement--that simple fact. Even Jeff Saut's advice seemed a little risky to me, and I've always considered him an honest and objective commentator. Oh, my opinion hasn't changed, but he noted that it was time to buy again--but responsibly and in 1/3 tranches. Here is part of his July 7 post:

For us, this week represents a critical week. Today is day 33 in the selling-stampede, and unless we are in “crash mode,” our belief is that we are making a “raindrop bottom” on a trading basis.

Even Doug Kass and Dennis Gartman were saying that the financials were looking attractive. Gartman said he was long financials and short the S&P.My question is this: What if we are in crash mode? (I'm not saying this with the whites of my eyes showing).

In the early part of the year, we were told that these financial institutions were at epic buying opportunities. Now so many negative points later, we are in what type of epic? Surely one written by the Waylan or Farley brothers. I saw where the big mutual funds were mouthing support of Fannie and Freddy debt--buying more even. What can they say, really? To say otherwise, they might as well fall on a sword or throw themselves over a bridge.

None of these credit problems should have been a surprise to any. I would have surmised that our leadership would have had a contingency plan in place. I know that I would have. You do the thinking, hand-wringing, analyzing and planning when you can reflect. If bad shit happens, then you calmly pull out your plan and act in accordance with your plan-changing it as needed, for you can never plan it the way it will ultimately happen.

But we are living and breathing the stench of a world-wide systemic risk event. Larger than anything that we've seen. I dare say larger than the events in 1929--I'm sure we've created more wealth since then. It all seems tainted. This is what happens when independent oversight is essentially like a toile drawing. It looks real, but it isn't. The regs are written in lockstep with the industry that they are regulating. That's the benefit of lobbyist. Yes we are in the best democracy that money can buy.

There is this passage in Munenori's book that speaks of rhythm. And there are many natural rhythms in the market which work until they don't: 4 year cyles, presidential cycles, lunations, Mercury retrogrades, overbought, oversold etc.. I'm reminded that most market surprises come when that rhythm is broken: oversold does not yield a bounce; overbought becomes a feeding frenzy.

Accordingly, you will see rather immediately my fascination with Munenori's discussion of rhythm in his book, The Book of Family Tradions on the Art of War. It's a slim volume in which there are three chapters:

1. The Killing Sword
2. The Life Giving Sword
3. No Sword

In the Killing Sword there is discussion about the rhythm of the sword. Specifically, he speaks of three rhythms:

One rhythm is a simultaneous strike. Another is to close in and strike when the adversary's sword is raised. The third is to cross over and strike when the adversary's sword is lowered.

Here's what really resonated with me:

Matching rhythm is bad, incongruous rhythm is good.

When we are in seeming rhythm with the market, it is these times when the market tricks us. An oversold bounce is a rhythm--as well as it's overbought sister. And when we anticipate too much, the market sticks its foot out and tricks us, the oversold bounce evaporates into another leg down--which is what we are currently witnessing.

Perhaps I'm being too dramatic considering money in the market as part of Killing Sword rhythmic interplay--but it provided a nice metaphor for me, and I wanted to share it with you.