Sunday, April 06, 2008
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.