I'm Capitulating

Buffett: I'm buying stocks

"Fears regarding the long-term prosperity of the nation's many sound companies make no sense," wrote Buffett. "Most major companies will be setting new profit records 5, 10 and 20 years from now."

I started this blog on August 31, 2007.

The Dow was 13,357.74.
The S&P 500 was 1,473.99.
The Nasdaq was 2,596.36.

I'm suspending this blog on October 17, 2008.

The Dow is 8,972.33 (down 33%).
The S&P 500 is 947.87 (down 36%).
The Nasdaq is 1,734.47 (down 33%).

I'm taking the cowards way out and locking in my anti-prosperity thoughts while the locking in is good.

I guess that means I'm long-term prosperity neutral right now. I'd certainly never bet against Warren Buffett. I won't be buying stocks though. I'm fine with the real yields that TIPS currently offer. I will also continue to hoard toilet paper. Some habits may never die, lol.

That being said, I'm encouraged that commodities and oil have sold off, that real interest rates have risen (much to my surprise), that the euro and China have been discredited as superior safe havens (not to my surprise), that stock prices have come down to more reasonable levels (as opposed to hyperinflated), and most of all that Caterpillar (a stock I sold in 2004) has seemingly finally ended its "sure thing" only goes up ride. I do think the situation is somewhat different now. I simply never bought into the idea that a commodity boom would be good for prosperity (much like it wasn't in the 1970s). That was a major reason for my bearishness.

Our country still faces many challenges, but so do all the other countries of the world. I continue to believe that things will get worse before they get better (perhaps much worse), but that's a definite improvement from what I once believed. Namely, that things might not ever get better.

Deep down, I think I saw this day coming. I haven't created charts in a long time. That's partly because I didn't think much new relevant "bearish" information could be offered. Sure, the charts would look ugly, but we kind of knew they would be. What's more important is what they will look like in the distant future, and I'm not all that convinced one way or another.

This global commodity selloff feels like the real deal to me. The reason I think it might be different this time (very scary to predict such things) is because real yields have risen so much. Higher real yields choke demand for hoarding commodities. That was not the case in previous selloffs. Here's the chart that I feel best shows that something might be different this time.

TIP vs. IEF (2 year chart)

Note that the two funds (inflation protected vs. no inflation protection) tracked each other very closely but then diverged recently, in a major way. You will also note that I was/am on the wrong side of that trade. Fortunately, the modest pain in recent days (especially compared to what stock investors were feeling) is offset by the pleasure over the last year . Higher inflation was generating high distributions to me, which is not reflected in the chart. Using hindsight, I would have done just as well in the past year simply burying that paper money in the backyard though. Go figure.

I will continue to monitor the comments section of this post for those who wish to continue to chit chat into the distant future. It has been a pleasure.

Also feel free to email me directly at markm0722_0001@comcast.net.

The blog is suspended. You will note that it is not deleted. I reserve the right to return even more bearish than ever in the future, should conditions warrant it. Don't even get me started on how we're planning to fund Social Security and Medicare.

Stocks-Go-Round (Musical Tribute)

Using spreadsheets, tracking Wall Street
Bulls opt to buy, say bears crossed the line
Tightened our belts, forced to sell
No payday, bought canned goods for our shelves
On layaway, to our dismay
Stocks oversold, was time to buy yet again
They dropped too much, banks dropped too much
Sold in vain, bulls said

We're told it's the seventh inning
So they can end up winning
Bears sold right at the start
But then the bulls did outsmart

Stocks-Go-Round
With cash pumped in today we're forced to buy
Stocks-Go-Round
But what goes up might go down
I do not lie

Dig

You can't argue, bulls say with glee
The way charts move, the curve was easy to see
Using 20/20 hindsight
Deflation's downplayed, they're gonna prove they were right
Increase the leverage, increase the bets
Use last dimes, to buy land mines
Stocks dropped too much, banks dropped too much
It's time for fame, bulls said

We're told it's the seventh inning
So they can end up winning
Bears sold right at the start
But then the bulls did outsmart

Stocks-Go-Round
With cash pumped in today we're forced to buy
Stocks-Go-Round
But what goes up might go down
I do not lie

Yeah!

Using spreadsheets, tracking Wall Street
Bulls opt to buy, say bears crossed the line
Tightened our belts, forced to sell
No payday, bought canned goods for our shelves

Stocks-Go-Round
With cash pumped in today we're forced to buy
Stocks-Go-Round
But what goes up might go down
I do not lie

Stocks-Go-Round
With cash pumped in today we're forced to buy, buy, buy, buy
Stocks-Go-Round
But what goes up might go down
I do not lie, lie, lie, lie
Stocks-Go-Round

Gold Old Yellered (Part 2)

Gold ends slightly lower amid market uncertainty

"People currently seem to prefer to sit on cash," said Jon Nadler, senior analyst at Kitco Bullion Dealers. "Another reason [gold isn't rising] is that investors are scrambling to meet margin calls," thus they have to sell even their gold investment.

When I listen to the deflationist camp I tend to nod in agreement. They've been accurately predicting bubbles and their crashes for nearly a decade. First it was the dotcom bubble and then there was the housing/credit bubble.

Deflation seems a perfectly good reason to sell gold.

Some analysts, however, said it's only a matter of time before gold rises.
"An extraordinary amount of liquidity has been pumped into the system this year," said Peter Grant, senior analyst at USAGOLD. "I anticipate further debasement of all currencies, including the dollar, which will ultimately drive gold prices higher."

When I listen to the inflationist camp I also tend to nod in agreement. They did accurately predict what an extraordinary amount of liquidity could do in the dotcom bubble's aftermath. They are now predicting what an extraordinary amount of liquidity could do in the housing/credit bubble's aftermath.

Inflation seems a perfectly good reason to buy gold.

Is it any wonder I'm seemingly stuck between the two camps, in some sort of twisted paper stagflationist long-term middleground neverending nightmare? It has been four full years since I turned bearish. Not only do I not see the light at the end of the tunnel, I can't even see the frickin' tunnel. I think we might have sold it to the Chinese, not that it is helping their economy right now, lol.

Gallows humor for the win (or lack thereof).

Gold Old Yellered

Gold is finally reacting to the deflationary credit crisis conditions.

Gold Falls in London as Investors Seek Cash Amid Bank Turmoil

I think the headline pretty much says it all.

It is apparently not the miracle metal that can protect you in both an inflationary environment and a deflationary environment.

The optimistic bulls had it easy. They could simply buy with conviction and know that all will work out fine (it didn't though). The pessimistic bears did not have it so easy. We had to decide between deflation and inflation. If serious deflation was coming, you'd want cash and long-term treasuries. If serious inflation is coming, that's the last thing you want. You'd want hard assets instead. I tried to ride the line between the two camps by being in paper inflation protected assets (TIPS). I just wasn't all that sure what we'd be getting. I'm still not all that sure.

What we have now is clearly a deflationary/disinflationary environment. Today's CPI came out flat. How long it lasts is anyone's guess. I think once it is over we'll probably be going back to more stagflation, but I certainly can't prove it.

The key to gold's drop as far as I'm concerned was watching the price of oil and the price of the other precious metals prices. Oil's dropping again today. Platinum is also down big again to $875. Keep in mind it was over $2,200 earlier this year. How could some deflationists possibly think that gold's price could rocket past platinum's price (a precious metal that's much rarer)? I never could understand that line of reasoning.

Then there's palladium. It peaked at just under $600 an ounce earlier this year. It's now just $165. No joke. That's a jaw dropping drop.

January 26, 2007
Gold and the K-Cycle

Those that thinks gold always acts as an inflation hedge are simply mistaken.

Yes, but what's the point? Those who thought real estate (at any price!) always acts as an inflation hedge were similarly mistaken. Yet, real estate is generally a pretty good inflation hedge. Too bad deflation is the word of the day.

One quick glance at the above chart should be proof enough.

This statement really got my goat. A quick glance at a chart is one of the things that got us into this mess in the first place. In 2000, a quick glance at stock charts showed stocks only go up. In 2005, a quick glance at housing charts showed that real estate only goes up. A quick glance at a chart should NEVER be proof of anything. Heaven help me if I ever start to believe any of my charts actually prove anything.

Did we experience inflation from 1980 to 2000? Did gold fall from over 800 to 250 anyway?

Once again, what's the point? Did gold rise during the massive inflation of the 1970s? Yes. Did people buy gold in the 1970s because they were concerned about that inflation? Yes. Did it enter a bubble? Yes. When inflation finally did recede to more normal levels did gold sell off? Yes. Unlike the 1970s, did real interest rates remain positive throughout the 1980s and 1990s? Yes. Were people happy to earn positive real returns on paper assets in the 1980s and 1990s? Yes. Are real interest rates positive right now? Yes. Is gold well off its highs right now? Yes.

Obviously the answer to both questions is yes, and that disproves the idea that gold is always some sort of inflation hedge.

This disproves nothing. Of course gold is not always some sort of inflation hedge though. It is certainly not proof that gold is therefore a deflation hedge. In my opinion, like every other hard asset what really matters is the price it was bought at. If bought low (say $250 an ounce several years ago), it has been an excellent inflation hedge. If bought high (say $1000 an ounce recently), well, not so much lately.

This usually brings up the question of Japan and gold and why gold fell when Japan went into deflation. The answer is that Japan was one season out of sync with the entire rest of the world. When Japan was in deflation (Winter) the rest of the world was pretty much in disinflation (Autumn). It was the rest of the world that dictated what happened to the price of gold, not Japan.

The entire world is in sync right now. The entire world is attempting to fend off deflation right now. Gold's world price is tanking right now. It is breaking under the weight of falling oil, platinum, palladium, and silver prices. I do not offer this as proof though. It is simply an observation. Should my money wish to chase hard assets again at some point, based on today's prices I'd probably chase silver and/or platinum over gold. I don't wish to chase them though. I'm content on the sidelines.

To see how gold shares might act in the upcoming credit crunch, please consider a chart of Homestake Mining in the 1930's courtesy of Gold Eagle.

I think it is safe to say that we've been experiencing a very serious credit crunch over the last three months. Expectations, meet realizations.

Barrick, Goldcorp, Newmont, Kinross, AngloGold

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.

Banking Bathwater and Financial Innovation

No talk of bathwater would be complete without first speaking of babies, so let's start there.

Raising your $299,000 baby

If you're self-employed, you can deduct 50% of your meals and entertainment, if business related. If your children refer clients or customers to you, you can deduct the cost of taking them to a restaurant if business is discussed.

Dad, how's business? Son, business stinks. Thanks for asking.

*Badum ching!*

Okay, now on to our regularly scheduled bathwater programming. The following article was written when the Dow was 10,325.38 (closing price on October 3, 2008). The Dow is now 8,577.91. If you are a long time reader of this blog then surely you can feel the pent up hindsight sarcasm about to flow. I sure can. Oh yeah baby, here comes the bathwater!

October 5, 2008
Don’t throw the banks out with the bathwater

There is need for some calm reflection, however. Capitalism is not dead and banking is not a fundamentally evil and immoral business. Capitalism is not perfect, but it is still the only viable economic system - a view even China’s communist party is prepared to accept. Banking, as history shows, has been responsible for enormous growth in the global economy over the last few centuries.

Capitalism is not dead. Hurray! There won't be any need for the government that has the reserve currency of the world to start buying stakes in its top nine banks then. As a side note, it must really stink to be bank #10 right now. You simply weren't big enough to make the cut.

The problems we are facing today are not due to a fundamental flaw in banking, but to excesses that have arisen in particular parts of the system. The fact that sub-prime lending has been found to be lacking does not invalidate a wide range of other banking practices which are fundamental to the financing of a broad range of economic activities.

There's no fundamental flaw in banking. As with Vegas, what happens in sub-prime stays in sub-prime. Uh huh, right. There's nothing to see here. Please disperse.

The 19th and 20th centuries were further characterised by periodic banking crashes, the most notable of which occurred in the US, producing the Great Depression.

Banking crashes and Great Depressions seem to be something the US is rather good at.

These banking crashes and financial disturbances arose because of the permanent tension that exists between financial prudence and financial innovation.

Say what? Doesn't that imply that financial innovation is somewhat the opposite of financial prudence? Interesting. That's not quite what we've been told. If I didn't know any better, I'd start to suspect that financial innovation is another way to describe a financial scam. Surely there must be some example of what financial innovation might be and how it might help to prevent future problems though. I must be misunderstanding the concept entirely.

For example, it was a major financial innovation to move from the gold- and silver-based monetary system to a paper money and credit system. This metamorphosis of the monetary system enabled credit to become more freely available to a wide range of borrowers.

Financial innovation is falling off a gold standard in the 1970s because we could no longer afford to stay on one? Seriously? Wow, thanks for offering such a great example. So financial innovation really is a scam. Got it. I now have a much greater respect for its power of financial destruction. In fact, I can't wait to see how the hundreds of trillions of dollars in exponentially growing derivatives financial innovation plays out. They're what Warren Buffett calls financial weapons of mass destruction. One wonders if they are powerful enough to obliterate capitalism entirely. That's just crazy talk though, for crazy times.

This all makes sense now. This is not the death of capitalism at all. Not even close. This is innovation in action. As with the "major financial innovation" of falling off of the gold standard, we're simply falling off the capitalism standard because we can no longer afford to stay on it either. Brilliant!

Gold Standard

However, under the fiscal strain of the Vietnam War, President Richard Nixon eliminated the fixed gold price in 1971, causing the system to break down.

Major financial innovation for the win!

It could be worse I suppose. What if we find out that it isn't actually bathwater we've been drinking? I've seen dogs drink from another water source in the bathroom and I'll tell you this... it is not pretty.

Markets Hammered (Musical Tribute)

You can't sell this
You can't sell this
You can't sell this
You can't sell this
You can't sell this

My, my, my, my...

Housing hit us so hard
Makes me scream, "OMG!"
Thank you for shopping sprees
But a margin call and it repeats
It feels good? When your stocks are down?
A super bargain buy that turned facedown
And they ring the bell
Has bulls feelin' heat, but you can't sell

I sold your home boy (You can't sell this)
Yeah, that's where you're living and you know (You can't sell this)
Look at the buys, man (You can't sell this)
Yo, let me bust the f'd up housing (You can't sell this)

Fresh new cash, advance
You gotta like that, now you can refinance
So buy, before banks cheat
And lease pickups, don't be downbeat
While it's rolling, back up truck
Pump stocks a bit and sell them no, it's going up
Buy this, buy that
Sold in a heartbeat as they fall back
Sell them now, all is not well
And you're feeling beat, but you can't sell

Yo, I sold it (You can't sell this)
What you holding bagman? (You can't sell this)
Yo, rang the bell, market's not in, sucka (You can't sell this)

Banks sell debt, logarithms
But they sweat, as they are caving in now
Banks sold
You talking about hammered you just lookin' to borrow
That's hype, go light
Bankers are sweating so pass them a wipe
Check the tape, to learn
What's cash gonna take in the 70's to burn
The charts? Legit
You can't sell hard but you also can't quit

Absurd, because you're told...

You can't sell this
You can't sell this

Breaking now!
Stocks, hammer time!

Stocks in a funk, it is said
That if you can't prove earnings then you probably are dead
The Fed drop's cash from the air
Bust a few banks, fund investors in despair
This is "it", no more dinner
With no job and you're gonna get thinner
Quick, time to dump
Just for a minute let's all be like Donald Trump

Yeah (You can't sell this)
Took, man (You can't sell this)
You listened to hype, boy, before you sold (You can't sell this)
Rang the bell, market's back in (You can't sell this)

Breaking now!
Stocks, hammer time!

You can't sell this
You can't sell this
You can't sell this

Breaking now!
Stocks, hammer time!

Every time you buy them
They're hammered after hyped
Going to the floor if interest rates are hiked
Now why would they ever, pretend all is well
Banks are taking homes that really just won't sell
They're clogged around the world, from London to the Bay
It's hammered, got hammered, really hammered, yeah hammered
And the stocks were sold today

You can't sell this
You can't sell this
You can't sell this
You can't sell this
You can't sell this
You can't sell this
You can't sell this
You can't sell this

Cash in my Backyard (Musical Tribute)

If I could hoard cash in my backyard
The first central banking taboo
Is to save all my pay
Until hyperinflation decays
Just to hoard it with you

If I could dig these holes forever
If holes could make value hold true
I'd bury my pay like a treasure and then
Again, I would hoard it with you

But there always seems to be too much cash
Drops from helicopters flying by
Once you dig holes
I've looked at what we've borrowed
Stagflation might be the combo
Can't dismiss

If I had a vault just for silver
And deflation really comes true
The vault would be empty
Except for the money
All the trillions funded by you!

But there always seems to be too much cash
Drops from helicopters flying by
Once you dig holes
I've looked at what we've borrowed
Stagflation might be the combo
Can't dismiss

As Banking 'Fairy Tale' Ends, Iceland Looks Back to the Sea

Today, Iceland's swollen banks are ruined. In the space of a few days, practically the entire banking system has been seized by the government. The largest bank of all, Kaupthing Bank, was seized Thursday, and trading was suspended on the stock exchange until Monday. The krona has ceased functioning as a currency outside Iceland.

Inflation and debt payments are soaring, and trade has been crippled in a country heavily dependent on imports. The U.K. and Netherlands are suing over frozen deposits held by their citizens, while the government is trying to arrange more foreign loans to help stave off national bankruptcy.