By now you know that a chap named Vincent Reinhart has dubbed the Fed's bailout of Bear Stearns as "the worst policy mistake in a generation."I will leave trying to quantify the consequence to others but it is worth understanding what this could mean if he is right.
His use of the word generation applies a very long term connotation to when we might see the final shoe drop.
Much of the blame, rightly or wrongly, for today's problems is attributed to the Fed having kept rates too low for too long. Assuming that is true it took three years for that to come home to roost.
We must assume that Reinhart thinks the Bear Stearns bailout is worse than that as I assume he knows what the word generation means. If the scope and magnitude are as bad as he says then we might be well into the next decade before this fully unwinds.
In this context many people fear a repeat of the 1970s and of course many have said this is the worst time since the great depression. Regardless of what you think of that, stock market wise we have already looked like both the 1970s and the 1930s (different magnitude from the 1930s of course) which is a very long round trip to nowhere for the stock market.
All three periods (1930s, 1970s and the naughties, heh heh) have plenty of differences too. In this current round trip to nowhere there have been plenty of places to make money. I suspect that if we have a 15 or 20 year, W-shaped round trip to nowhere there will be plenty of places to make money in the second half of the W.
Something I have mentioned before is that people in Japan have financial goals that they are saving and investing for. Since 1989 a local investor in Japan has had no reasonable shot of reaching any far off financial goal in their stock market. This forced them to one way or another seek out closer to normal returns elsewhere.
I don't believe the US will be the quagmire that Japan has been but if it takes another ten years for the market to get right then we all need to figure out what to do, we need to be resourceful enough to find normal returns elsewhere. Hopefully you have done some of this over the last few years.
In the post the other day about not caring about how much Greenspan is to blame, someone on Seeking Alpha heckled me with oh right, so the only thing that matters is the money in your portfolio. You are one good citizen.
Agreeing with the heckler, which is valid, seems to be more about solving the world's problems. My take portfolio wise is more about each of us solving our own problems or better yet preventing our problems from happening. When this site started I was talking about seeing myself at 50% foreign in the coming years which would be an effort to avoid a problem--that being below normal returns from the home market.
Regardless of whether the US market and economy are great or lousy over the next 20 years we still need to save and plan.
7 comments:
I do wonder what would have happened if the Fed had bailed out Bear Stears but hadn't opened the liquidity spigot so dang far.
I'm still scanning the news stories for an economist, analyst, or journalist who apologized for hyping the U.S. "recession" incorrectly (or at least early.) Not surprisingly, I haven't found one yet, and I'm sure I won't.
To your point, though, investors need to manage through the current rough patch and beyond. One of the interesting facts from the Yale portfolio allocation is that of the 25% that Swensen has allocated to straight equities, more than half (14%) is international. Assets in his other categories likely include equites too, but the point is that he may be leaning even more internationally than the 50% that you were projecting.
I guess you are pro motherhood as well.
Save more and invest is your standard theme so you can not be wrong, but I just do not see any beneficial edge here. Maybe I am being to tough on you as lord knows too many Americans are not saving enough or at all. Maybe this is a revelation to many, but I am saving a lot already.
As for foreign investment I think your targets have always been low and 50% next year will also probably be low. Although the dollar sell off may have been over done and the dollar will look ok for 3 to 9 months.
I guess I would like to see more than motherhood in your blog. of course it is your blog so who cares what I think. None the less it is my take on your post
"You are one good citizen."
Indeed, the problems we have will be solved one good citizen at a time.
"I guess you are pro motherhood as well."
Passive aggressive is the new black. It just doesn't work for me.
A prolonged weak economy in the USA could have international implications, as well. Canada, Mexico, Japan, UK, China, Germany and Korea are all major exporters to the USA.
Have one who admits he may be wrong.
http://www.peternavarro.com/dailyblog.html
Is one of my few must reads. From latest post:
"That said, my claim for the past several weeks that the strength of U.S. markets has been merely reflective of a “technical bounce” must be reevaluated in light of recent economic data showing at least a slowing rate of job losses. If it turns out that we are headed more for a “shallow V” recession than the “deep U” many are worried about, that would certainly be bullish. Stay tuned."
Maybe this is why I consider him indespensable.
Initially I was furious about the BSC bailout and wanted to see how the market naturally dealt with the situation. However, since then I have realized that it may have been the lesser of two evils just because of the counterparty risk situation at the time when many of the big players were stressed although some continue to be in a similar situation. Bear Sterns was made an example of when the FED said $5-10 per share is too much and an offer of $2 was initially agreed upon (shortly after raised to $10). To be totally fair though Bear was never a clean firm, in fact most of their strategies and dealings were subpar (some fraudulent). The risk model the firm was playing with was unsound and therefore eventually going bust was a likely scenario even though someone would have an interest in their clearing business. Larry Kudlow claims BSC was a sacrificial lamb but applauded the FED for preventing a run on the entire banking sector. At least JPM continues the legacy of being the savor of Wall Street by writing another page in the history books. The FEDs interventions and further initiatives regarding reforming the financial sector are critical and well overdue. Mr. Bernanke and Paulson have an enormous task in front of them. Will their actions be a blessing or a curse? As the Zen Master says, “We will see.”
Regarding US and world equity returns globalization is still the dominant theme. I figure most intelligent investors have the sense that equity returns will be much lower over the next 5-10 years especially in the US. The main reasons for lower returns will be currency related, higher inflation, volatile commodities pricing, lower corporate profit margins, etc. There is still a lot of problems with this market not only financial related. The amount of froth and speculation is absurd and should ultimately be corrected. However, with lower expectation there will come along fantastic opportunities in a variety of industries and countries. People are always going to invest in stocks because historically they produce a greater total return than any other asset on a yearly basis.
Post a Comment