Is it the end of the financial world?Think about what happens when the end of the world doesn't come? People go, oh, gee, well, I'm still here. Maybe I outta buy some of the stuff that I was selling at such stupidly low prices just two weeks ago. The problem of course is telling when the end of the world is supposed to come and when it doesn't arrive. You really need to know when the spaceships are supposed to arrive and take everyone away from the mountaintop because otherwise you don't really know when it is all over.
You know I love sarcasm! Well done Jim Jubak!
I definitely believe that at least some things have been sold indiscriminately this week. At some point, I have to believe that people are going to look at all the paper fiat money in their hands and wonder, "Now what?" It reminds me a bit of when I turned bearish in 2004. I sold stocks. Within a day I realized that cash didn't look all that attractive either. Interest rates were just 1%. I ended up (at least partially) in gold and silver for a few years. Things are somewhat different now though. There's a 3% real yield on TIPS. Stocks are over 40% down from their peak. The market's having a half-price sale on oil.
If nothing else, just look how many Panic Musical Tributes I've had to create lately. It's reached daily routine mode. I can't speak for the market's selling, but I'm certainly nearing an exhaustion point.
The saying goes that if one must panic, panic early. I can't say much, but I can say that those panicking now are most certainly not panicking early. I do think things will get worse, but that doesn't mean they aren't already priced into the markets. Who knows?
TIP vs. StocksLong time readers of this blog know that I like TIPS (Treasury Inflation Protected Securities). Much of them I bought directly from the government and will be holding until maturity. Some of my money is in TIP (a fund composed solely of TIPS). I'm certainly taking damage lately, just not as much as some.
As I see it, there are three reasons I'm taking collateral damage (pun intended). They are all somewhat related.
1. Real yields are rising dramatically. The Great Depression saw very high real yields. Buried cash yielded a good 10% as prices were falling at that rate. Deflation does that. These days, we're seeing asset prices fall quite dramatically as well. Oil and other commodities are well off their highs. Housing prices are down significantly. The malls are bracing for a horrible Christmas shopping season. The stock market has been seriously deflating lately. Too bad I couldn't have predicted the stock market meltdown. I was very bearish but I wasn't THAT bearish.
2. There's an unprecedented flight to liquidity/safety. Just look at the VIX. Long-term TIPS are not all that liquid. The market price of them also generally tends to be quite volatile, which is especially true these days. No doubt some are being shaken free from the wild ride.
Inflation Expectations: How the Market SpeaksSecond, TIPS yields contain a liquidity premium. While the market for TIPS is growing, it is still relatively small compared to the market for conventional Treasuries. Therefore, to the extent that TIPS are less liquid than Treasuries, investors would demand a liquidity premium for holding TIPS over conventional Treasuries.
3. The concept of "buy and hold" died, at least temporarily. I actually agree with some of the bulls on this one. Babies and bathwater are all the same these days. Everything must go! (Sounds like a Linens 'N Things economy to me.)The U.S. Treasury's Inflation-Protected Securities : market reactions and policy effects - TIPSIn one sense, these securities should not be as liquid as conventional securities, because the Treasury's target market is the "buy and hold" investor.I am a "buy and hold" investor. As my TIPS mature, I'll be buying more. My next purchase is planned for January's auction. If I liked TIPS with a 2% real yield, you can bet that I'll like them with a 3% real yield (over reported inflation). I'm not holding my breath that I'll be able to keep getting that rate for the rest of my life though. I think that at some point in the future, people will be kicking themselves for not locking in a rate like that (especially if the government's response to the crisis ends up fueling future inflation). I could be wrong of course. If I am, then the American taxpayers will be kicking themselves for paying me an excessive "safe" rate of return. In fact, they should be especially brutal with the kicks if we actually do enter a 0% inflationary environment (think Japan's deflationary mess) and I'm being paid 3% annually for the privilege.
Once again, this is not investment advice. For one thing, my goals are and have been capital preservation. I don't have a job. I can't afford to take on any additional risk. Investing in the full faith and credit of the United States Government through inflation protected securities, especially these days, is just about as much risk as I can stomach. Trust me on this. I can just barely stomach it. It simply seems somewhat better than many alternatives.
October 17, 2005Housing market: America's 'weakest link'Morgan Stanley economist Andy Xie believes a global housing crash is a serious possibility.
"Either you have a big adjustment like a 20 percent or 30 percent decline, or you have a big recession, or you have a slow decline in property prices or several years of no growth," said Xie, based in Hong Kong.Hindsight has been very kind.October 12, 2006Morgan Stanley Fallout From Andy Xie Costs More Jobs (Update1)Xie, a Shanghai-born economist who worked at Morgan Stanley for nine years, sent the e-mail to his colleagues after attending the International Monetary Fund and World Bank annual meetings last month in the Southeast Asian island state. The economist questioned why Singapore was chosen to host the conference, and said delegates ``were competing with each other to praise Singapore as the success story of globalization.''
``Actually, Singapore's success came mostly from being the money laundering center for corrupt Indonesian businessmen and government officials,'' Xie wrote in the e-mail. ``Indonesia has no money. So Singapore isn't doing well.''Based on the stock price of Morgan Stanley today, I'm guessing he's not all that upset over losing his job for speaking his mind in what was intended to be an internal e-mail. Call me silly but perhaps the entire "success story of globalization" is being called into question right now.
Apr 30, 2007
Andy Xie warns of China crash"I think it's going to be bust very soon," Xie said, adding that a combination of excess liquidity, rising inflation and rich valuations would result in a global crash soon.
"People will be surprised. When the end comes, it's going to be pretty bad," Xie added.I think it is safe to say, using hindsight, that most investors were surprised and it's been pretty bad.
So what's Andy Xie saying now?
October 8, 2008Obama or McCain: The Dollar Will WeakenThe US property-cum-credit bubble results from a desire to maintain a living standard higher than its fundamentals could support. The bursting of the bubble should have made the US face up to reality. But it is not doing so. The current administration is using the central bank to lend to failing financial institutions to keep them alive. Unless political changes lead to a different approach, the US will likely stagnate, like Japan in the 1990s, and with the added problem of inflation.Since my blog is named Illusion of Prosperity, it is probably not needing a huge leap of faith to guess where I stand on that prediction.The policies that both Democrats and Republicans have promised in their campaigns are not really addressing the fundamental problems. One US politician recently asked me what I thought the US should do. I opined that the US should spend less and produce more. With the policy circle talking up another fiscal stimulus package, my idea took him by surprise. But the US got into the current situation by spending too much money – how can spending more solve the problem? Both parties are promising more money for healthcare and education, bailouts for delinquent mortgage borrowers, and tax cuts; exactly the opposite of what’s required.
As stagflation takes hold, the US will become much more defensive with regard to globalization. The Doha Round of free trade talks failed due to opposition from developing countries. The next US government won’t do anything to revive it. Further, it may back away from existing free trade arrangements, such as the North America Free Trade Agreement (NAFTA) between Canada, Mexico, and the US. The direction on free trade is clearly backwards.Since stagflation is in my name as a seemingly permanent fixture, you can pretty much bet that I believe in that outlook as well.Regardless of who wins, it will be extremely difficult to turn the economy around. The US has been living in a debt bubble. Greenspan kept interest rates continually low during his 18-year reign at the Fed, didn’t rigorously regulate derivatives, and tolerated the subprime surge. Wall Street concocted complex products with assumed, not real, reduction in risk, and sold them to credulous investors. But this bubble-conducive environment wouldn’t necessarily have led to a bubble unless American households were eager to borrow. Once again, no big leap of faith needed.
The US economy is facing its biggest crisis since the Great Depression, one that will require considerable sacrifice to solve. But politicians are talking the other way and promising more goodies. The dollar is the fallback plan. Printing money spreads the pain for all dollar holders, and many are foreigners. This is the last tool that the US has to not pay the full cost on. Eventually, foreigners will realize this and run. When the dollar goes into free-fall, America will finally have to wake up to reality.I suspected the American dream would soon become a nightmare when I started this blog late last summer. Want to bet that I've changed my mind? I'll give you 50 to 1 odds and I'll even allow you to use 30 to 1 leverage to sweeten the deal. I will need to see the money up front though. This is the New America. I don't want to assume any counterparty risk on the off chance you lose.
Nuttier Than a Stuckey's Pecan Log RollTo that end, he suggested buying American Express (AXP: 32.14, -3.20, -9.0%) , Capital One Financial (COF: 46.78, -4.64, -9.0%) and Discover Financial Services (DFS: 12.96, -0.82, -5.9%) , noting that of the three he is the most optimistic about the fortunes of American Express.Oh what a difference a week makes. Here's an update on those falling prices.
AXP: 24.00, -25.3%
COF: 33.41, -28.6%
DFS: 9.63, -25.7%That's in addition to the drop on that first day.Anyone who recommends buying stock in a credit card company in this environment is nuttier than a Stuckey's pecan log roll. - TokyoPlumber
Who Killed Capitalism?Jeremy Siegel, finance professor at the University of Pennsylvania´s Wharton School of Finance commented, “Two weeks ago was the first time in my life that I was worried about the very stability of the United States financial system.”I guess the image finally made it to the rear view mirror. Welcome to the party, pal. No wonder I haven't been seeing as many of Jeremy Siegel's Wisdomtree commercials on TV these days. You know the ads. They're the ones that tell us of earnings and dividend weighted funds and attempt to make us feel somewhat stupid for not being wise to what should be common sense.
Something has gone horribly wrong though. Banks certainly once had a lot of earnings and dividends. They don't now though. Oops.
It's like a variant of the dotcom bubble gone bad. Investors were once burned by a lack of earnings but no future earnings either. Now they're being burned by huge past earnings but no future earnings. There's a common theme here. It's a lack of future earnings. This somewhat backs my theory that it will be increasingly difficult to make money off of money in the future. Perhaps we should consider reliance on an authority greater than ourselves—an invisible hand that is both benevolent and omniscient. What the world needs now is a cool head, a commitment to move forward, and the character to temper our self-preservation instincts.
This kind of peace and resolution stems from only one source. Currency is merely a symbol of the value we imbue to our economic and political systems. So when our systems fail and our wealth becomes vapor, where can we turn for stability and assurance? Look no further than the pleasant phrase printed on every U.S. coin: “In God We Trust.”
I say the following only half-jokingly and somewhat tongue-in-cheek. If that's the plan to deal with vaporized wealth and the death of capitalism in America, then welcome to the financial apocalypse. I see four horsemen on the horizon and they want their prosperity back.
August 15, 2006
WisdomTree High-Yield ETF Stands ApartDHS is loaded with mega-cap stocks like Bank of America (BAC Quote - Cramer on BAC - Stock Picks), at 6.8% of the fund, Citigroup (C Quote - Cramer on C - Stock Picks) at 6.4% and General Electric (GE Quote - Cramer on GE - Stock Picks) with a 6.2% weighting. The top 10 actually accounts for 44.5% of the fund, which may draw some criticism considering that SDY has 28.1% of its weight in its top 10 and DVY has just 26%. The issue here, if there is one, is that having top holdings with 6% weights instead of 3% makes DHS more susceptible to single-stock risk.Single-stock risk? If only we could be so lucky. Try the entire financial sector.December 4, 2007The Downside of Fundamental IndexingDHS, like most broad-based dividend-weighted ETFs, has a very large weight in the financial sector. DHS allocates 35.41% to financials, compared with just 18.66% for the S&P 500.DHS Performance
Sweet Thursday
We're selling all the stocks
We're selling all the houses
Also selling bonds
Great Depression for us
And so "it" just keeps tanking
It seems "they" couldn't help us
But Ben the dove is crying
As "they" offer tax breaks
We'll walk back to the 'burbs
No gallons... minivans
There's no jobs on Wall Street
There's no jobs at the malls
We'll pay just like forefathers
Back in 1929
And so we stopped our driving
We had no oil to fuel them
The dust bowl it reminds us
Of Hoover's plans before us
Just short a trillion
Dollars will be spent
Sweet Thursday's repoing my new backed up margin truck
Backed up margin truck
As bankers started hedging
"They" took the house "they" loaned me
Foreclosure kept reminding
Of pages in history
Sweet Thursday's repoing my new backed up margin truck
Backed up margin truck
Wednesday Soundstage '03 Live in Chicago
Nothing much to fear
Stocks are dropping far down somewhat foolish
There's "still" some work to be done
Just a margin call
Not so silent banking of our pensions
Call it tankin' on a Wednesday
Cash is dropped from year to year
With secrets Ben's been keeping
Seems he's got a central banking plan
Seems we are spiraling
For very different reasons
But one day there's no more cash to lend
Is tapped the wallet
I left on the nightstand
I start the day
In the usual way
Then think, well why not
And stop at a Starbucks
Then begin to recall
I just can't pay
Market found the floor?
Pure prosperity? Perhaps illusion?
I agree with this in part
Something has harmed us
I can't put my finger on
This overleveraged crisis on a Wednesday
So cash drops from year to year
With secrets Ben's been keeping
Seems he's got a central banking plan
So they often tell us to cheer up
We suspect they're underwater
Because there's still no more cash to lend
Is tapped the wallet
I left on the nightstand
I start the day
In the usual way
Then think, well why not
And stop at a Starbucks
Then begin to recall
I just can't pay
Who bought with courage?
And bust they lost again
Fed starts humming, "When doves cry"
Can someone help us?
I think that we've lost here
Lost in a place called Cramerica
Poll: 60% say depression 'likely'And Banerji said that the increasingly grim view of the economy will by itself lead to cutbacks in spending by both consumers and businesses. That in turn will result in greater job losses and more economic pain.
"The fact that the majority of people believe we are going into a depression ensures that the recession will get worse," Banerji said.The public herd continues to trample the contrarians.December 2, 2007
Contrarians Make a Case for Gains in the Recent TurmoilDON’T be too upset by the stock market’s recent decline. It may have been painful, but it’s probably just a stumble by a bull market that still has room to run.
That, at least, is the message that comes from contrarian analysis of investor sentiment — an approach to market timing that relies on the propensity of the average investor to get the market’s near-term direction dead wrong most of the time.The DJIA closed at 13,371.72 on Friday, November 30, 2007. It is now 9,258.10. That's a 30% loss.
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