OK, show of hands, who thinks the Fed has been out in front of the financial crisis accurately calling the various twists and turns in the economy and by extension the capital markets?
(Imagine the sound of crickets chirping in a field)
I got my hands on a report from Merrill Lynch that noted Bernanke conceded contraction was likely and growth may be slow to start up again. So assuming I am correctly interpreting Merrill's interpretation, this makes for an interesting talking point.
Whether it is politics or something else any sort of government anything is always late to acknowledge problems of any sort and always tries to put a positive spin on things as long as possible--my opinion anyway.
So following this line of thinking the Fed will understate the magnitude of the downturn in their comments and possibly their policy. Does this mean that whatever Bernanke said in his testimony is wrong in terms of magnitude and we should prepare for worse?
He was clearly wrong last summer about what was going on, how about now? I don't know.
In terms of managing your portfolio it doesn't have to matter. The way I view the world demand for stocks is either healthy or it is not regardless of the reasons. When demand is unhealthy, like now, some sort of defensive posture is prudent. When demand becomes healthy again the defense much becomes less important.
Whether the bottom comes 50% from the top or is already in doesn't have to matter with a disciplined exit strategy with a decent track record that hopefully doesn't trigger every few weeks. If you really can think about performance over the course of the entire stock market cycle then the goal of being down less will resonate.
This is not easy, especially if you have not thought in these terms before, but if you don't need the money now, then you don't need the money now. If you do need it now then you have made a bad asset allocation decision. John Hussman build a $3 billion mutual fund on this concept and I can recall comments left on this blog taking shots at Hussman's performance that I believe did not understand the goal.
A fifty year old saving for retirement at a normal age does not understand the goal if he has been freaking out over the last few months.
In light of the post on Iceland during the week, the picture is of Reykjavik from the top of the church up the hill. In the upper left is Lake Tjornin, on the right side of the lake is the city hall and to the right of the city hall is the downtown where all the banks and night clubs are.
8 comments:
There are long periods of time (decades) when we are in secular bull markets and it is not worth while selling during cyclical bear markets that occur because your timing will fail and you are just better of staying invested.
Then there are secular bear markets that can also last decades. IMO we started a secular bear market this century. In secular bears you can buy the cyclical bulls and sell the cyclical bears.
This debt market unwinding will not be fun.
The Fed has been caught off guard responding instead of being out in front, but the fed has been responding creatively so we can give them credit for that. But look at credit spreads. The fed does not have things under control, but how could they with a trillion dollars of loses to come before this is all over.
It will be a very interesting ride over the next few years. It will remain "not boring" to put it mildly.
My opinion. The Fed caused the mess we are now in (housing bubble and sub-prime mortgage problems) due to believing the official under-stated inflation rate of 1-3%, or whatever it is at the current time, and lowered their interest rates too low (1%) and kept them there for too long. I am a typical 60-year old, still working but approaching retirement and looking forward to it. I don't have an official guage, but my personal inflation rate feels more like 5-10% based on the things I buy/pay; such as food, energy, health and other types of insurance, taxes, etc. JCarr
No doubt about it, the Feds keeping interest rates too low really messed up all those mortgages keyed to the Fed Funds Rate and perhaps the 30 day TBill. Does anyone actually know of a mortgage housing product keyed to the Fed Funds Rate or a 30day TBill? Fed only influences the short end of the curve, mortgages are ALL at the long end of the curve (5-10 yr and longer). But is it good to beat up on the Fed, they're Civil Servants and we all know instinctively that part of their job is to suffer fools gladly and we're here to prove it. It's all their fault. Inflation is understated.
I think we should stop focusing on the fed. The housing and credit mess was primarily caused by good old-fashion greed and a desire for instant gratification. Let's review.
1). Dot.com bubble as the greedy look for the fast buck.
2). "financial" types take the opportunity to hype IPOs and anything else "tech" until things crash
3). Fed lowers rates
4). The greedy switch to try to take advantage of this environment and pile into real estate.
5). "financial types take advantage of the situation to leverage create a whole new group of products, derivatives, etc. until things crash
6). The fed lower rates, stoking inflation fears.
7). The greedy run to commodities.
8). "financial" types find ways to play the commodities market with etfs, more derivatives, etc.
9). Gee..I wonder if a commodities bubble is forming?
Roger I'm with you...keep diversified and put a little discretionary money with the "fad" early on and against the "fad" when it hits mainstream to try to bring some "alpha" to the portfolio.
I don't know why traders and investors put so much emphasis on what the Fed says (versus what it does). The sub-prime mania will unwind just as other manias of the past did.
The two most interesting questions to me right now is a)when will the commodity/energy bubble begin to deflate? AND b)how big of a problem will inflation be during the next several years?
Btw I just posted my latest models here: www.regimenia.com
The two most interesting questions to me right now is a)when will the commodity/energy bubble begin to deflate? AND b)how big of a problem will inflation be during the next several years?
Tom K,
What makes you certain there is a commodity/energy "bubble"? Maybe we are in the 3rd-5th inning of a long-term upcycle? Inflation-adjuted commodity prices are still much closer to the bottom then to the top. Seems to me there is a bit of an internal contradiction in your points a and b?
I have read this nowhere else, but I wonder if Bernanke's more honest recent assessment of economic conditions may be suggesting that (1) he is going to let the recession come; (2) he has just about finished or has finished lowering rates (they have made little difference anyway); (3) that he feels the Fed has succeeded in keeping markets functioning, at least to some minimal level, and that Those Who Have Leveraged Foolishly had best take advantage of these conditions; and (4) when I compare our Fed with the European Central Bank, I wonder if Bernanke is now going to just focus on getting money to banks and Wall Street. I could be very naive, but I have to think that after BSC, the Fed was embarrassed and takes the issue of moral hazard seriously. And they can see what is happening with inflation, too.
Mike,
I posted a chart of the CRB index with NBER recession overlays here: www.regimenia.com. Recessions tend to coincide with declines in commodity prices.
I don't believe inflation-adjusted commodity prices are very important when looking at this relationship. I also don't believe commodities have to be at inflation adjusted highs in order for a bubble to exist. Over the past 100 years commodities have been unable to keep pace with inflation.
My concern about future inflation stems from the devalued dollar, low interest rates, and high level of debt.
You might be interested in this article - Commodities can't measure inflation:
http://www.thestreet.com/print/story/10249271.html
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