Tuesday, March 31, 2009

Nothing Has Changed?

That's what I heard while watching Kudlow's show today. It was said by an older gentleman who said that he's looked at 100 years of American stock market returns. He expects the next 100 years to be more of the same. He brought up the Great Depression and the World Wars. He said we'd been through hard times before and that nothing has changed.

Here are some changes that are apparently deemed insignificant when looking at a simplistic chart of historical stock market returns.

1. 100 years ago we did not speak of non-farm payrolls. Fewer people are actually needed in the farming industry these days. Capitalism continues to
automate jobs away (read link at own risk, very disturbing).

2. 100 years ago we did not speak of
Made in China. If you picked up a random item in your house it was most likely manufactured in the United States. Globalization continues to outsource our jobs away. We simply cannot compete with billions of people who will work for far less money than we will. Our solution? Let them.

3. 100 years ago we did not have an
unsustainable trade deficit. That's what happens when we send freshly printed paper money overseas in exchange for real goods.

4. 100 years ago we did not rely on
imported oil. We did not rely on the Middle East. We were not fighting a war in Iraq. We were not reading about China-Iran Gas Deals.

5. 100 years ago we were on a
gold standard. In 1933, we fell off of it a little bit and in 1971 we fell off of it the rest of the way. We simply could not afford to stay on it. We certainly won't be able to fall off of it again in order to boost our economy. We're done.

6. 100 years ago we had more common sense. I am basing this opinion on one simple theory. If we were using the same level of
common sense back then as we are currently using, then we surely would not have had 100 years of prosperity.

The Future of Investing: Evolution or Revolution?

What then does commonsense tell us about future asset returns? Let’s revisit our previous conclusions on the developing environment for some clues. They include: delevering, deglobalization, reregulation leading to slow global growth, a heightened risk aversion, a distrust of conventional investment model portfolios, and a greater emphasis on surviving as opposed to thriving. If valid, then an investor or an investment committee would likely stress the bird in the hand – as opposed to the one in the bush; stable and secure income – as opposed to uncertain capital gains; a government-regulated utility model – as opposed to innovative yet risky venture capital investments.

That paragraph describes my beliefs and outlook perfectly. Starting in 2004...

1. "Heightened risk aversion"
2. "Distrust of conventional investment model portfolios"
3. "Greater emphasis on surviving as opposed to thriving"
4. "Bird in the hand"
5. "Stable and secure income"

Further, this is not a cyclical change in my behavior. It is a permanent secular change. I'm retired. I simply can't afford to risk my nest egg on long-shots.

Worse, using hindsight I was actually rewarded for the behavior change. I did not expect to be. 2004 to 2009 was a horrible era for taking on extra risk, trusting conventional investment model portfolios, emphasizing thriving over surviving, and levering up some seriously volatile and risky income. Put another way, about the only investors who managed to get two birds from Bush's economy were those who shorted the heck out of it.

I'm just as bearish now as I was 5 years ago. Here's my reasoning in three words or less.

Nothing has changed.


Financial Rescue Nears GDP as Pledges Top $12.8 Trillion (Update1)

March 31 (Bloomberg) -- The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

You will note that the $12.8 trillion doesn't address any of my structural change issues (even in the slightest). All it does is help patch up existing holes in our Titanic. We will continue to automate jobs away. We will continue to buy goods made in China. We will continue to have an unsustainable trade deficit. We will continue to rely on imported oil. We will continue to abuse our faith based currency ($12.8 trillion does a very good job of that!). We will continue to lack common sense.

That's my bearish opinion, and I'm sticking to it. I'm not a religious person, but seriously, heaven help us all.

12 comments:

dearieme said...

Some well-informed people saw what was coming. Scroll down to the post about the Bank of England's pension fund at
http://www.order-order.com/

Stagflationary Mark said...

dearieme,

Very interesting link! Well, I'm roughly 95% planted in long-term TIPS and I-Bonds. There's no way I'll be betting on heavy deflation at any point in my lifetime. When in Rome, do as the Romans do. Litrerally!

You know, watch the empire decline as we attempt to print our way back to prosperity.

mab said...

The goal is to get banks lending again, so families can get basic consumer loans, auto loans, student loans, (and so on) that small businesses are able to finance themselves, and we can start getting this economy moving again - President Obama

That's some goal. It seems at odds with the fact that most are flat broke. Perhaps there is more to it:

http://research.stlouisfed.org/fred2/series/CP?cid=109

Lets see. We can face reality and watch all the false wealth disappear or we can prolong the party - again.

Hmmmm. I thought Obama was all about change???

This party won't end until the cops show up. Who are the cops? I have no idea. Mother Nature? The rest of the world? Green men from outer space?

Stagflationary Mark said...

mab,

Hmmmm. I thought Obama was all about change???

Rumor has it that he actually said he was all about "pocket" change. He just said it so fast that nobody noticed.

AllanF said...

Wow, that BoE link is pretty remarkable. Those are no mere asset rebalances. Those are huge, one-sided directional bets.

I wonder if we can get a tracking ETF: the Proshares BoE Pension 3X.

Someone please let me know if they start buying gold.

mab said...

Allan F,

Someone please let me know if they start buying gold.

The BOE sold their gold during the tech bubble. No joke.

Stag, AllanF, Dearieme,

Speaking of pension funds and asset allocations, here's two interesting charts:

http://pensionpulse.blogspot.com/2009/03/giant-experiment.html

It seems stocks go up when people decide to dump money into stocks. Go figure. How we can all get rich on 2% real growth is beyond me. Especially when investment fees and taxes are likely > than 2%! The new math is beyond me.

Here's a good one - Today's CEOs are worth way more than CEOs of prior generations.

Stagflationary Mark said...

AllanF,

Thanks to the "largest-ever federal cigarette tax increase" perhaps the BoE should have been hoarding American cigarettes!

Stagflationary Mark said...

mab,

The BOE sold their gold during the tech bubble. No joke.

I was aware of that, lol.

Gordon Brown managed to sell the gold at roughly $250 an ounce, just before the bottom unfell out of it.

http://www.timesonline.co.uk/tol/news/politics/article1654931.ece

They have revealed that Bank of England officials had serious misgivings over the chancellor’s determination to sell 400 tons of bullion in a series of auctions between 1999 and 2002, when the price was at a 20-year low. Since then the price has almost trebled, meaning the decision cost the taxpayer an estimated £2 billion.

Hey AllanF,

Is there a way to make money off of this in the future? I'm picturing some sort of ProShares UltraShort Gordon Brown fund.

AllanF said...

Ah, but the BoE is not the BoE pension board.

AllanF said...

Yeah, I remember the BoE sales as well. I was not quite liquid enough to take the other side and buy gold, but boy was I wishing I could.

Anonymous said...
This comment has been removed by a blog administrator.
Stagflationary Mark said...

Spam deleted.