Thursday, July 14, 2011

The New Contagion Risk

July 15, 2011
Why I’m lightening up on stocks for good

Obviously I’ve had a good run and don’t want to push my luck. But more importantly I’ve been looking at some research that defies the conventional wisdom that investors should keep a lot of stock in their portfolios even as they age, because only stocks protect investors against inflation and outliving their nest eggs.

That concept — the need to hold a lot of stock at all stages of life — may be the single most wrong-headed idea in investing now. Retirees who took the advice of many financial planners had 60% to 70% of their assets in stocks when the financial crisis hit. Those who couldn’t hold on may have suffered irreparable losses.

I got completely out in 2004. I have no desire to return. My disease may be spreading.

When I say disease, I mean it literally using the origination of the word. Owning stocks puts me in a "without ease" state. It's uncomfortable. I don't sleep well.


Wisdom Seeker said...

Wait until that feeling of dis-ease gets you no matter what is in your financial portfolio! I have that problem this month. Name just about anything with a ticker or CUSIP, and I'm pretty sure I could tell you very clearly why I think you'll sit through capital losses on it within 2 years, and why I don't think you'd want to hold it for 20 years!

Fortunately, the toilet paper drawer and fridge will need restocking after we get back from the family vacation. And hopefully I'll have a fresh perspective.

But right now I just feel like the selections in the 401(k) and the IRA boil down to "which side of the Titanic would you like to sit on"?? There's a lifeboat but it's already full.

Meanwhile, and the real reason I dropped by: Mark, your job-market analysis chart is now hitting mainstream econ analysis slide decks!

See this from ZeroHedge tonight... look at slide #3!


Stagflationary Mark said...

Wisdom Seeker,

Name just about anything with a ticker or CUSIP, and I'm pretty sure I could tell you very clearly why I think you'll sit through capital losses on it within 2 years, and why I don't think you'd want to hold it for 20 years!

I hear you. I thought the same thing in 2004 when I turned bearish. Everything seems toxic. It's all about picking the least worst poison. I think short-term TIPS are more poisonous. I think there's great risk that real yields will continue to fall even on the long-term bonds. All it would take is a lack of investment alternatives (as seen during World War II and the 1970s). Time will tell.

As Greenspan said in 1966 (and I paraphrase from memory), there is no safe store of value. The financial policy of the welfare state demands that there be no way for owners of wealth to protect themselves. I believe him. No easy answers here.

I draw some hope from I-Bonds though. The very fact that they keep trying to nail those barn doors shut means they might actually intend to honor that debt. Those just investing now though are hit with an annual purchase cap that is 92% lower than just a few years ago AND a real rate of 0.0% that virtually guarantees that purchasing power will be lost after taxes. (And yet I still buy them. Go figure.)

Stagflationary Mark said...

Wisdom Seeker,

One more thought about the employment picture.

Someday somebody in power is going to realize that employment matters and that it is physically impossible to return to the trend that was in place from 1939 to 2000.

That day might have been nearly a decade ago for all we know. It's not like the Fed would tell us!

The bigger concern is what happens when everyone realizes it. Then what?

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one. - Charles Mackay

This to me explains why real investment yields have been "slowly" falling since 2000 and may continue to do so.

nanute said...

Can't sleep? Markets have you rattled? I argued back in Dec. 2010 that QEII would result in a decline in mid to long term interest rates. I was roundly criticized by higher learning, credentialed type economists. Now, I don't know if the recent downward trend is a result of QEII or not; granted. And if the lunatics in charge of the House play roulette with the debt ceiling, I suspect we'll see a serious spike in rates in the short term. Here is your robot of the day:

Mr Slippery said...

I have the disease, too. I doubt this one article is going sway many people, though. The conventional wisdom of investing in stocks for retirement is so ingrained in the culture, there are so many believers, and so much investment in automatic 401k plans that lots of people will drive full speed over the cliff.

Then you've got a whole industry of "financial advisors" that will asset allocate money from even the skeptical back into stocks. Not just independents, but people tied to banks, mutual fund companies, and insurance companies all pushing blind asset allocation (like 110 - age for stocks) and their products.

Here is a modern disease movie for ya,,,

nanute said...

What happened? Blogger ate my comment?

Stagflationary Mark said...


I believe Blogger's SPAM detector is running at near 0% efficiency. It's an anti-productivity miracle. Your comment was considered SPAM for some reason and of course it wasn't. Like a politician in the 11th hour working on the debt crisis, I heroically rescued it. Let loose the confetti! Start up the marching bands! ;)

It would not surprise me to see a short-term serious spike in TIPS rates for a variety of reasons. We could deflate a bit again. All this mainstream debt talk could spook retail investors (some of it justifiably perhaps).

It would surprise me to see a long-term serious spike in TIPS rates. It could happen though. To think otherwise would imply that I think TIPS are 100% safe. I do not. I just believe they are less poisonous than most. That's all. I think that when the dust settles long-term investment rates in general will be lower in a few years than they are now. It's just all a part of my "harder to make money off of money" theory. It's just a theory though.

Stagflationary Mark said...

Mr. Slippery,

I have the disease, too. I doubt this one article is going sway many people, though.

Agreed. Going back to the Charles Mackay quote I offered, I'd expect it to possibly sway one at a time.

Stagflationary Mark said...
This comment has been removed by the author.
getyourselfconnected said...

I think people have figured out a low return is better than 10-15% for 5 years then a 80% loss in 2 months every 5 years or so. Who said people are dumb?

Stagflationary Mark said...

nanute & Mr Slippery,

Your links need hard links so everyone else can share the joy.

I'm a sucker for creepy robotics and contagion movies.

Last night I watched a movie that was the combo of the two.


In 2067, an unknown disease struck the Japan and was countered by an experimental vaccine. Actually, the disease was created by Daiwa and the "vaccine" was used as an excuse for Daiwa to begin testing experimental nanotechnology. Every Japanese citizen was converted into a form of synthetic life. But there were unforeseen side effects.

So we've got that going for us! ;)

P.S. I blew a link the first time. Here's attempt #2.

Stagflationary Mark said...


I think people have figured out a low return is better...

I think SOME people have figured out a low return is better. The rest are still hoping for "normal" returns and/or "normal" employment. Good luck on that one! D'oh!

nanute said...

I'm a Luddite. I don't know how to do hard links. Is there a simple way to accomplish this? (Word verification is duabl.)

Stagflationary Mark said...


I have Luddite tendencies. I'm trying to become the last person on the planet to own a cell phone. Seriously! ;)

We'll work you through this. I figure an example is worth a thousand words.

<#a href=>Google<#/a>

Simply remove the two # symbols and the above turns into this.


To make a link of your own, simply replace "" with your own link and change "Google" to be your description of that link.

Stagflationary Mark said...


The # symbols need to be removed in order for it to work. If I removed them myself then a link would be created and you would not be able to see what I typed.