I'm not a big fan of of getting too worked up about why the stock market did something on a particular day. Most people should be focused on longer time periods than one day.
Obviously there is no way to know whether Bove's comments are correct, he has not nailed it WRT sizing up the totality of the crisis but we can infer that the market was caught somewhat off guard by the possibilities raised by Bove.
The rally that started in March is built on three drivers; snapback from an overly frightened reaction, some fundamental improvement versus where things were a few months ago and an overly optimistic assessment of how quickly the US can recover. Someone who is very bullish would attribute most of the rally to the first two and someone who is very bearish would attribute a lot of the rally to the third driver. Bull or bear it comes down to how you weight these three things.
Candidly after the failure of so many financial institutions happening all at once and the generally accepted belief that this was the worst financial event in almost 80 years how could there not be fits and starts along the road to getting healthy? I was never in the GD Part Deux camp when things were at their worst nor am I in the it's all better camp just a few months later. It is much more likely that there will be further shoes to drop in the financial sector and these shoes may or may not stall out the entire market.The bigger macro is that all of this is about the US trying to hold on to the top spot as the economic superpower (repeat theme) versus every other country moving up a little. It has been said that it is much easier to move toward the top spot as opposed to holding on to the top spot.
I would note the extreme measures being taken to hold on to the top spot as discussed by Niall Ferguson here and here. As is usually the case I tend to agree with the direction of these types of comments but not the extreme magnitude of what they see as the result.
To me the path of least resistance is to own more foreign. Many of the countries I've been writing about have proved to be at different points of their cycle versus the US, entered and or emerged from their bear markets on a different timetables than the US and are now on much sounder ground than the US; they appear to have gone through cyclical events versus what might be a secular event in the US (I think it is a secular event).
The observations cited in the last paragraph did not come out of the blue six weeks ago but have been playing out for most of this decade. The simple recognition of what was going on back then and taking action consistent with that recognition should have resulted in a much better result that the decade to date decline of 26% for the S&P 500.
12 comments:
Have to agree with you on more foreign equities. But when the dollar starts increasing in value or a decline in equities starts watch out below. I do not see this happening with current conditions, but as a having most of my money in foreign equities it is the two things I keep track of carefully. That said I do not see a change in the current trends anytime soon.
Roger: Am wondering what your thoughts are on the current action in RYMFX. Commodities have been rising as of late, and it seems that currencies are trending well; nonetheless the fund is not performing well....wondering if you would care to comment....
Thanks! Bob
for Sept the fund disclosed being short heating oil, brent, corn soybeans and wheat. that might account for the performance
Roger, re: path of least resistance being foreign exposure...am wondering if you saw Simon Johnson's Sept. 9 piece in the New Republic. The piece was largely about Fed policy perpetuating a bubble cycle, but it did contain this interesting aside wrt foriegn exposure:
"What will [the next] collapse look like? The bubbles this time will likely appear abroad. Parts of Asia and Latin America, a tiny fraction of the size of the U.S. economy, are experiencing large capital inflows, low interest rates, and the beginnings of a major boom. Countries with intact banking systems and access to global capital markets will lead the next speculative wave"
Thoughts?
i have questioned the rampant use of the word bubble many times here. not every bear market is a bubble.
i have said many times that the evolution underway will require more work than before, not less. from the top down decisions need to be made about countries and taking the approach i do requires blending together countries with different attributes.
I think the next bubbles will be in chewing gum and washing up liquid manufacturers.
Roger: I know you are somewhat of a "theme" investor. Having said that, I was wondering if you would share your thoughts on investing in water resource ETF's(i.e. PIO,PHO,CGW,FIW)as a theme. Admittedly, they have already had a pretty good run.
Max
I've disclosed countless times having bought PHO almost right after it listed have held ever since.
The US is either on the verge of a huge increase in economic activity (or not) or we will follow the trend from the early 1930's, where we had a huge rise in the stock market followed by a more spectacular crash. Problem is, I don't have much confidence in the US. I wasn't around in the 30's so I'm not sure if the feeling is the same.
I see a general lack of excellent leadership ideas from politicians and many, many business leaders. (the excellent business leaders spend all of their time running their companies well but would never get involved in politics).
China has 8% growth rate while we think 4% is not achievable. The US is better at talking up ideas than actually making progress and positive changes. Who would want to invest in this environment...or is this...the wall of worry?
Tanks for the photo link on the previous day.
Sam
The word bubble is used a lot, but I think the word malinvestment is better. With cheap capital flowing, malinvestment is going to happen. This is also why we have such a strong correlation between assets now. It isn't that correlations are breaking down as much as too much liquidity chasing assets.
As far as the comparisons to the 30s and today, I think they are closer to the truth than say comparing to the 80s or 70s, which most gurus are doing. We have too much debt as a nation, deleveraging is taking place, and unemployment is high (the 10% number doesn't include part time employees and those who "stopped" searching for work).
What frightens me is there is this misconception that the Depression was a one way drop after the 29 Crash. It wasn't. This rally has strong similarities in size and duration. Even more, the mood in 1930 was the economy got through the worst. Talk about sideline cash and improving production dominated headlines.
Certainly, it won't be just like the 30s. There are different issues. The US had tariffs that covered 2,000 items and it destroyed trade. Also, there were more family farms back then that were devastated by the drought in the southeast and southwest as well as flooding in the midwest. But, it is the deleveraging that will be the biggest challenge, I think.
Japan is another similar example. Here again, differences exist. We are more entrepreneurial and are allowing some banks and businesses to liquidate unlike Japan. But, they had a better savings rate and trade surplus.
Either way, it will be interesting.
Bryce Canyon National park is my fave. The panorama's are priceless.
The National Park Service is one Fed program (thank you, current and former taxpayers) which has contributed mightily to the quality of, and appreciation for, our country.
T
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