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11 comments:
These kinds of analyses remind me that one can drown in a river that averages six inches in depth. If one is looking for investment opportunities, averaging together 500 stocks and looking backwards makes no sense whatsoever.
Thanks for another set of eyes, Roger.
Good Morning Roger,
I hope all is well. Generally I would not refer to a link in your blog comments however I came across this podcast interview with Tyler Durden (Zero Hedge) and Shedlock which was conducted by Andy Horowitz a few weeks ago. If you have time fast forward to the 55 minute mark or so and listen to the interview with Tyler as it is quite interesting. In brief summary, Tyler discusses the "non-normal" trading behavior which has been occurring in the last trading hour, quant fund liquidity issues and his advice is to stay perfectly hedged at this time and have high cash levels since the capital markets have extreme risk and are just as likely to have an extreme move up as they are down... His advice to individual investors is to have high cash levels and invest in treasuries and TIPs until the capital markets function more normally again. also, advises that one cannot trade based on fundamentals and that buy hold of any duration is dead.
http://www.thedisciplinedinvestor.com/blog/2009/04/26/tdi-podcast-106-zerohedge-and-mish-o-nomics/#podcast
Roger,
You posted a few days ago about the possibility of inflation and you listed some funds to include gld, wip, etc. With what the FEd has done of the last two years and what they are currently doing in regards to Treasuries how can we avoid inflation. Commodity prices recently seem to be foreshadowing this in gold, oil, copper and some grains. It seems only prudent to invest now in energy, tips, gold, etc. What is your feeling on this now! Who knows what the time frame is, but 6 - 12 months seems reasonable.
bwjr
Evaluating the yield of a stock investment does not occur in a vacuum, stocks are compared to anticipated returns (AKA yield) from other sources such as bonds or real estate or what have you; e.g., single digit multiples in a low interest rate environment would not be the most likely scenario because equity yields do not have to be high to compete with the yield from bonds or other investments.
With low yields in virtually all readily accessible investment sources, low double digit PE multiples would be the most likely floor for stocks in the current environment, all other things being equal (which they never really are, natch). No prediction, just a probability distribution, with single digit multiples in the tail but freely admitting the tail that could get a lot fatter if another financial shock significantly alters risk evaluation.
Good stuff today RR. Of course the guy you were quoting was quite misguided - which made it easier for you to look so smart.
I wonder if, in your continuing role as educator of the rest of us, you might consider recommending some reading material for your class.
The example that comes to mind on our need for education is that I see readers malign you for your thoughts on utilizing the 200 day moving average of an index to make decisions. Which may very well sound like vodoo upon initial exposure to the idea, until you educate yourself about the history of same.
Roger,
you bring out how most people look at things in a very mistaken way. Markets can stay irrational for a long time, longer than you and I want them to be. Very good post, Roger. On Thursday I posted two links about sovereign defaults cycles. I like to get your take on that. There has been lots of books and articles about cyclicality of markets, commodities but never seen any thing about where every 100 years or less, there are one half of world sovereign countries default. Are we getting to such a state and how one can protect one self?
Best,
Jeff from Milan, Italy
Another reality lesson - financial advisors simply "sell" people on chasing "assets" with thier "wages" because assets inflate faster.
Central bankers are savvy enough to know that while they can create money, they cannot create wealth. To bind money to wealth, central bankers must fight inflation as if it were a financial plague. But the first law of growth economics states that to create wealth through growth, some inflation must be tolerated. The solution then is to make the working poor pay for the pain of inflation by giving the rich a bigger share of the monetized wealth created via inflation, so that the loss of purchasing power from inflation is mostly borne by the low- wage working poor, and not by the owners of capital the monetary value of which is protected from inflation.
Inflation is deemed benign as long as wages rise at a slower pace than asset prices.That has been the basic problem of the global economy for the past three decades. Low wages have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble that finally imploded in July 2007. The whole world is now producing goods and services made by low-wage workers who cannot afford to buy what they make except by taking on debt on which they eventually will default.
Public service announcement on how the market really works. Hint: it has nothing to do with portfolio theory.
There is a structural reason that the housing bubble replaced the high-tech bubble. Houses cannot be imported like manufactured goods, although much of the content in houses, such as furniture, hardware, windows, kitchen equipment and bath fixtures, is manufactured overseas. Construction jobs cannot be outsourced overseas to take advantage of cross-border wage arbitrage. Instead, some non-skilled jobs are filled by low-wage illegal immigrants.
Total outstanding home mortgages in 1999 were US$4.45 trillion and by 2004 this amount grew to $7.56 trillion, and by 2007, $11.2 trillion, most of which was absorbed by refinancing of higher home prices at lower interest rates. When Greenspan took over at the Fed in 1987, total outstanding home mortgages stood only at $1.82 trillion. On his watch, outstanding home mortgages quadrupled. Much of this money has been printed by the Fed, exported through the trade deficit and re-imported as debt.
BWJR, how can it not be inflation? While I think that is likely to come you can read Mish for a great explanation of the deflation case. ron Insana has, I believe, spelled out a case for deflation as well.
anon 10:13 i'm sorry I dont have much in the way of book recommendations. I just don't get to a lot of books. I've read all sorts of things over the years including some of the must reads but my approach, for good or for bad, has not really come from books.
Besides my jaw gets tired when I read too long (think about it, wait, it's funny).
jeff i will try to get to those links.
Roger, with all due respect, once again you've spent almost 10 minutes saying virtually nothing helpful to the listener. To say that "markets recover eventually" isn't saying anything at all. This market may not see the highs again for 14 months, or perhaps 14 years or 140 years. If the markets "recover" no less than 140 years from now, then that won't do much good for us mere mortals today. In the future, it would be helpful if you were to provide SOME range of recovery.
I guess the recovery will be slower .. something which Japan has witnessed over the last 2 decades.
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