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Dornbusch’s Law: A Reason Trend Following Works

John Hussman sources a ‘law’:

Dornbusch’s law: “The theorem is that financial crises take much, much longer to come than you think and then they happen much faster than you would have thought. So you have a chance to be wrong twice.”

Hussman himself adds:

“…we’re not quite to the point where we would conclude that a fresh economic downturn is “off the table.” Financial strains tend to come on abruptly. Until we observe debt restructuring and transparent accounting rules (especially some modified version of mark-to-market), it will be dangerous to think of economic risks as being “off the table,” when they are probably just hidden under a napkin.”

I like Hussman. Very bright fundamental guy. However, the theorem he cites, and his own words about the unpredictability of markets, sure makes trend following the prettiest girl available.

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