My First Blogging Day, Revisisted

The following was a post I did the first day I started this blog in August of 2007. It includes my very first economic chart (made a few years prior). One of the reasons I started this blog was to remind myself what I was thinking in the past and to see if my thinking would change over time. So far, my thinking has been fairly consistent.

Historical Dow



In the spirit of what ifs, what could cause the stock market to head back down to the green line? Where do I start?

1. Near record low unemployment. Bulls love it. I wonder what would happen if it reverts to the mean.
2. Near record profit margins. Bulls love it. I wonder what would happen if it reverts to the mean.
3. Credit crisis. Don't think many people love that, myself included.
4. Housing crisis. Let's see. Rising inventory, falling sales, falling prices, rising foreclosures, rising inventory, falling sales, um, I think I just fell into a feedback loop. Sorry about that.
5. Banks. Need I say more? Just how many do we really need?
6. Payday Loan Centers. Didn't I just cover this one as #5? Just how many do we really need? 20,000+? Seriously?
7. China. Just how many more paper dollars can we ship them in exchange for cheap goods? Let the grand experiment continue!

One of those? All of those? Probably not. It will probably be something I wasn't smart enough to think of....

So far, all of those appears to be the correct answer. Believe it or not, this is actually pretty surprising to me. I'm not sure what to make of it. There's really no way to prove that I know what I'm doing, but I think the same could be said of most investment advisors (and I most certainly do not consider myself to be one).

The market has a way of spanking those who begin to think that they know what will happen next. I'm reminded of two prize winning economists at Long Term Capital Management in particular. Fortunately, I'm not sure what will happen next nor am I making any risky bets one way or another. Hopefully that makes me somewhat spank-proof, lol.

I can say this though. I got my haircut today and I asked the guy who cuts my hair how many people have been telling him that they thought the economy would get better. He told me that nobody believes that. Not one. I then told him that contrarians would find that very comforting. Buy when there is panic in the streets they say. I told him that I do not find it comforting at all though. The herd continues to trample contrarians these days. For what it is worth, that got a laugh.

I want to take this one step further though. Let's assume for a moment that the herd is wrong. That does not necessarily mean that the contrarians are right to bet against them though. Picture this. What if the herd isn't too pessimistic. What if the herd simply isn't pessimistic enough? I wasn't pessimistic enough and I was even a bear. Imagine that.

I'm reminded that more money was lost attempting to bottom pick the Great Depression than was lost in the original crash. I bet there were a lot of contrarians then too. Further, if you believe that my chart above has any predictive powers whatsoever (highly questionable), then that green line worst case scenario is still a long ways away. I'd say we're fairly well lined up with the yellow line though, for what that's worth. The markets are certainly cheaper now. Of course, we were fairly well lined up with it in the mid-1960s too. How's that for scary? The next 15+ years weren't so great for stocks. What was seemingly fairly priced (once again in the grand scheme of things), just kept getting cheaper.

October 13, 2008
Grantham: Don't Get Back Into the Market Yet

Jeremy Grantham, chairman of institutional money manager GMO, says it's too early for investors to re-enter the equities market.

"After all this pain … the U.S. equity market is not even cheap," Grantham told Barron's.

"You would imagine that, given the amount of panic, that it would be," he said.

October 15, 2008
Grantham: Stocks Not This Cheap Since 1987

So, add Grantham to the list of sage investors who see this as a huge buying opportunity.

It went from "not even cheap" to "huge buying opportunity" in just two days? Call me somewhat skeptical. Based on my original chart, I could buy the argument that stocks are somewhat fairly priced though, in the ultra long-term scheme of things. That's assuming that past history can predict future returns though, which I am even more deeply skeptical of. Past returns did a lousy job predicting Japan's housing bubble turned bust.

I have a rather long list of reasons to remain bearish. I hope I'm wrong but I'm not willing to bet I am. Let's start with this mythical second half of year recovery that keeps getting postponed. If it wasn't so tragic, it would be funny. Let's discuss the massive amounts of spending and debt it took to create a mostly jobless recovery after the dotcom bust. That's not even remotely funny and it's even more tragic. Let's end with a nation of pessimists (realists?) heading into what could be one of the worst holiday Christmas seasons of the century.

This Age of Turbulence, as Greenspan puts it, does not make me wish to be a hero. I think I'll let others explore the mine field first.