Jingle-mail rings alarm bells for the US
“Measures to reduce preventable foreclosures could help not only stressed borrowers but also their communities and the broader economy,” Federal Reserve chairman Ben Bernanke told a meeting of community bankers on Tuesday.
But such efforts could be in vain if heavily indebted homeowners see foreclosure as their least worst option.
Behold the era of the least worst options.
Financial advisors look to real yields on TIPS and rightly say they stink. What they fail to realize, in my opinion, is that in a serious bear market the goal is not to make money, but simply lose less. In this age of entitlements, it is not a given right that the average person can make money after inflation. Stinky returns can turn even more stinky, if the 1970s are any indicator.
To offer an analogy, sitting in a liferaft while the Titanic sinks might not seem comfortable, but it somewhat tends to beat the alternatives. It is one of the least worst options. Once again, just my opinion.
Some would argue that the TIPS liferaft isn't safe either. This is true. If it ends up capsizing though, then we're hyperinflating and all hands are going down with the ship.
Stag,
ReplyDeleteMany people know and admire the Notre Dame football story. A program long steeped in a tradition of excellence and success. However, few seem to remember that Notre Dame's only undefeated football coach was also a major embarrassment to the University.
http://www.cbc.ca/sports/story/2001/12/14/oleary011214.html
After resigning in disgrace, Coach George O'Leary's new resume glowed like never before. He was truthfully able to claim that he was indeed Notre Dame's only undefeated coach.
A least worst investing climate hasn't dawned on many and probably won't until it's too late. Though I would argue it has been the best investment style for the last decade. At least on a risk reward basis. Like Coach O'Leary's "new" resume, things are often not as they seem.
MAB,
ReplyDeletePerhaps we should dwell on the most worst instead. I nominate Dennis Kneale (Jim Cramer is the runner up in my opinion).
http://americanprotectionist.com/blog2/2008/01/dennis_kneale_embarrassed_on_c.html
http://dinosaurtrader.blogspot.com/2008/01/dennis-kneale-is-idiot.html
I actually saw Kneale arrogantly heckle a guest recently for missing the ride in tech for the last decade (anyone who can look at a Nasdaq chart can see that ride has gone nowhere). I generally tend to turn the TV off the moment he comes on, simply because he raises my blood pressure.
Lead me to water and hope I drink if you must. That doesn't bother me. But don't go calling it champagne!
Rick Santelli is the one bright spot on CNBC though. He calls a spade a spade. If not for him, I'd never tune in at all.
http://www.youtube.com/watch?v=SGkrNJ19DSU
Stag,
ReplyDeleteThat you tube video of Cramer makes my blood boil. After living in a wall street town through several economic cycles, its clear to me that the average investor can't even be average. Lack of understanding, fees, fraud, poor advice, misaligned pay incentives, bubbles, taxes - it all works against the investor. Amazingly, most of the wall streeters actually buy the B.S. themselves. I'm thoroughly convinced that gullibility and group thinking are pre-requisites for employment.
I believe we need a policy of zero inflation or a neutral system like a gold standard. I can't figure out why we don't even debate the issue.
The amount of leverage in every part of the system really spooks me. And to what end? Liquidity? We never had a problem with liquidity until we leveraged everything to the extreme.
I've met Cramer on several occasions as well as other CNBC regulars and guests. All affable people. All so typical of wall street. The ability to sell is far more important than the ability to deliver. In good times, the economy delivers 3% or 4% real growth. It takes REALLY good salesmanship to convince SO many to expect 8% to 12% annual returns, especially from historically high valuations.
You and other bloggers are beacons of hope.
good post, thanks for taking the time to make some sense out of the daily nonsense MSM puts out.
ReplyDeleteMAB,
ReplyDeleteAmazingly, most of the wall streeters actually buy the B.S. themselves.
I think you are right. We are embracing so many things these days that aren't proven to actually make us more prosperous but simply sound good on "paper."
I get the sense we're very much in the "shorting horses" era. It is easier to spot the losers than the winners these days.
More from Warren Buffett...
http://www.sharpinvestments.com/archive/issue22.htm
This talk of 17-year periods makes me think--incongruously, I admit--of 17-year locusts. What could a current brood of these critters, scheduled to take flight in 2016, expect to encounter? I see them entering a world in which the public is less euphoric about stocks than it is now. Naturally, investors will be feeling disappointment--but only because they started out expecting too much. - Warren Buffett, January 2000
In sharp contrast, Jim Cramer was telling us all about his "Winners of the New World."
http://marketprognosticator.blogspot.com/2007/04/winners-of-new-world-part-i.html
So what's Buffett saying these days? Well, stocks aren't cheap even after this correction. That's what.
http://www.thestar.com/Business/article/308987
Anonymous,
It seems the bill is coming due for all those free lunches we've been getting. So what does the government offer to help? More free lunches! Like THAT is going to work. ;)
Stag,
ReplyDeleteI really enjoyed that article on Buffet's 1999 speech. Hard to believe we're more than half way through the 17 year period.
It's interesting that at least two of the three factors Buffet mentioned as conditions for continued favorable returns have been met, yet returns have still been poor. First, interest rates have fallen. Second, corporate profits as a percentage of GDP have expanded and are at record levels.
Will interest rates continue to fall even as inflation rises? Will corporate profit levels remain at record levels and/or continue to expand? Can you beat the averages after fees, taxes and inflation in the current market?
Maybe, but the odds seem long to me. Just thoughts.
MAB,
ReplyDeleteWill interest rates continue to fall even as inflation rises?
Maybe. I know it sounds counterintuitive but that money has to go somewhere. That's just another way of saying that real yields will continue to fall. I honestly don't know where the bulk of the money will go next, but some of it will probably continue to go into the treasury bond market.
It could be argued...
Commodities are overpriced because they've tripled or more and at the very least they may be due for a correction (assuming we don't hyperinflate, which might not be a great assumption at this point).
Stocks are overpriced because our economic conditions are deteriorating and the stock market hasn't fully priced that in yet. Too many people are dwelling on the P in the P/E ratio without considering where the E might head.
Housing is overpriced because the employment situation is deteriorating. Without new jobs being created, who can afford new and/or existing homes?
Bonds are overpriced because they aren't even keeping up with inflation.
So where is the money going to go?
I would argue that perhaps they can not all be overpriced at the same time. It is more of an underpricing problem on the other side of the equation. There is simply too much money (and it is therefore worth less). Some of it is reflected in our massive trade deficit. We send billions overseas each and every day to fund our something for nothing free trade global economy experiment.
My favorite investment in this environment continues to be toilet paper and other non-perishable goods. It is too small a purchase for the big money to chase.
Stag,
ReplyDeletehttp://www.measuringworth.com/index.html
I agree we have created too many dollars. Too many houses too much debt also.
Stocks aren't cheap. Price to book, price to sales, price to normalized earnings, return on equity are all above historical trends.
Treasuries (short & long) aren't cheap. Clearly a huge flight to safety. Long term investment grade corporates look better, yielding 6% (I use Vanguard funds as a proxy). They could be a decent value depending on the direction of inflation and the future of American businesses. Muni's look similar.
Commodities? The prices seem high to me, but the prospect of continuing negative real rates of interest make this tougher to call. In any event, commodities are volatile and not something I would ever put a large fraction of my investments into. No current income either. I just don't see hyper-inflation.
Real estate. I think both residential and commercial continue to decline. The cheap and easy lending is over and that means fewer buyers and less borrowing against existing real estate. Borrowing against existing collateral is very important in commercial real estate.
Toilet paper looks very cheap. So does the CPI compared to commodities and all the $ we have created.
My best guess really hasn't changed. Stocks grind lower and CPI creeps up. Non treasury bond yields (intermediate & long) creep higher. Short term rates remain low. Basically, we're screwed.
I'm really starting to worry about the safety of money markets. Just too many bad loans out there. Any thoughts?
MAB,
ReplyDeleteI'm really starting to worry about the safety of money markets. Just too many bad loans out there. Any thoughts?
I wouldn't touch a non-FDIC insured investment these days.
Here's one many might not have thought of. I have never liked annuities. I have always wondered what would happen if the insurance company providing me with an annuity simply runs out of money. Who insures the insurance companies? One wonders if it is too late to be asking, now that Ambac and MBIA are center stage.
Let me guess. I'm supposed to have picked an annuity from a company that has a triple A rating both in the past (when I presumably bought it) and now. How was I supposed to know what the rating would be now though? Triple A ratings don't seem to have a lifespan of more than a few minutes these days, lol.
Stag,
ReplyDeleteRe: money markets - I thought that is what you would say. I'm really uncomfortable with banks. The feds repeated panic actions only reinforce my fears. Unpaid debts are losses for someone.
The Vanguard annuities seem fairly safe. You can use a Vanguard TIP fund. My understanding is that Vanguard holds the money and pays a nominal fee to an associated insurer to legally qualify the investment as an annuity. The fees are comparatively low and taxes are defered.
Per the net worth link:
$1000.00 from 1950 vs 2007:
CPI: $8,611
Nominal GDP/capita: $23,659
Share of GDP: $47,120
CPI looks cheap. Toilet paper is probably cheaper yet.
Darn, I meant to list the following in my last comment:
ReplyDelete$1000.00 from 1950 vs 2006:
Unskilled wages: $13,495
As low as unskilled wages in the U.S. are, CPI is even cheaper. Apparently, two bits still goes a long way in China and India.
We better hope the next billion work for as little as the last billion. If not, you may be getting calls from long lost "friends": "Hey Stag, can you spare a few rolls."
MAB,
ReplyDeletehttps://personal.vanguard.com/us/funds/annuities?bc=1
This is the line that concerns me.
Annuity guarantees are based on the claims-paying ability of the underlying insurance companies that issue the annuity.
What if your underlying investments are solid but the insurance company simply can't pay? I pose it as a question because I don't know the answer.
https://personal.vanguard.com/us/content/Funds/FundsAnnuityLowCostAdvantageJSP.jsp
The average annual fee for the Vanguard Variable Annuity is 0.57%, compared with an industry average of 2.39%—a potential savings of over $1,800 a year on a $100,000 contract.
Vanguard does seem like a "least worst" option though. I can't even imagine paying the industry average of 2.39%, especially with the three month treasury bill yielding just 1.35% and inflation (judged by the CPI) pushing 4%. Somebody is clearly paying the 2.39% though. Go figure.
In any event, I'm operating under the theory that the fewer middlemen I involve in my finances the better off I will be long-term. That's yet another reason I like buying I-Bonds directly from the government.
OT- Did you ever think about why they're seventeen year locusts? Quite a number of prey animals have prime number reproductive cycles. Anyway, glad to see you're feeling like posting more frequently.
ReplyDeleteDavid,
ReplyDeleteThese days I think the prey animals have "subprime" number reproductive cycles. ;)