Without their [he means the Fed] actions, we would be in a huge depression at the moment. IMHO,
I think there is a different outcome that could have been possible. Things happened the way they happened so it is all that we know but all along I supported taking a tougher route but one that I believe would have been much faster.
There were several instances in the early aftermath of the crisis the Fed/Treasury bailed out equity and debt holders of financial institutions. There was an instance where Goldman Sachs got 100 cents on the dollar for AIG paper that it held (I believe it was on AIG paper, please leave a comment if I have that wrong) as just one example.
I would be all for bailing out depositors through FDIC or SIPC as the case may be but not market participants aka equity holders and debt holders. I would also be for bailing out people whose brokerage accounts get caught up in a firm that shuts down which is different than bailing out someone who owned Wamu, Wachovia, Fannie and Freddie.
Whether for political reasons or other reasons our Fed and our Government have tried to repeal the economic cycle which has only delayed a resolution until who knows when. To make a rather blunt comparison, I have disclosed in the past that when I was in highschool I had a very rare form of cancer--thank god it was easily treated. The best treatment back then was 48 very rough weeks that went by quickly an a couple of years later I was going to college in San Diego and playing a lot of beach volleyball and being sick was a speck in the rearview. The tough treatment was clearly the best treatment.
Collectively we are not willing to do the tough thing. People seem unwilling to endure hard times (for not being able to look forward to the other side of the hard times?) and politicians seem unwilling to tell voters about doing the difficult thing because obviously they care more about getting reelected than anything else.
Occasionally in life we need to do difficult things and that is just how it is. My own life experiences tell me that short cuts or things that try to avoid doing the difficult thing only makes it worse.
As for the picture; a heavy post so a light picture.
16 comments:
I agree with Roger.
False market creation ultimately will have negative consequences. The prime unknown is whom the public will blame - and what punishment will be delivered at the polls, or in the streets.
Perhaps the college students writing for Seeking Alpha can give me the answers I need to overcome our ongoing economic adversity.....
T
Roger
An interesting tidbit from one of James Grant's recent newsletters
If Chairman Bernanke were in the room, I would respectfully ask him why this persistent harking back to the Great Depression? It is one cyclical episode, but there are many others. I myself draw more instruction from the depression of 1920-21, a slump as ugly and steep in its way as that of 1929-33, but with the simple and interesting difference that it ended. Top to bottom, spring 1920 to summer 1921, nominal GDP fell by 23.9%, wholesale prices by 40.8% and the CPI by 8.3%. Unemployment, as it was inexactly measured, topped out at about 14% from a pre-bust low of as little as 2%. And how did the administration of Warren G. Harding meet this macroeconomic calamity? Why, it balanced the budget, the president declaring in 1921, as the economy seemed to be falling apart, “There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures.” And the fledgling Fed, face to face with its first big slump, what did it do? Why, it tightened, pushing up short rates in mid-depression to as high as 8.13% from a business cycle peak of 6%. It was the one and only time in the history of this institution that money rates at the trough of a cycle were higher than rates at the peak, according to Allan Meltzer.
But then something wonderful happened: Markets cleared, and a vibrant recovery began. There were plenty of bankruptcies and no few brickbats launched in the direction of the governor of the New York Fed, Benjamin Strong, for the deflation that cut an especially wide and devastating swath through the American farm economy. But in 1922, the first full year of recovery, the Fed’s index of industrial production leapt by 27.3%. By 1923, the unemployment rate was back to 3.2%. The 1920s began to roar.
Hi Roger.
Re : Tue 11th article, 60/40 or 40/60.
Stocks on average are the best performing asset in 50% of years. If something wins 50% of the time it makes sense to weight exposure to that to 50%. There is some variance in that and at times stocks might be winning 60% of the time, at other times maybe only winning 40% of the time. Japan since 1972 for instance has stocks winning in 45% of years, gold winning 18% of years. US since 1926 is closer to stocks 50%, gold 15%.
Re : Thurs 13th 10/90 risky/safe asset weightings.
A third of the amount in a 3x ETF as you might have invested in a 1x, with the surplus invested in 2 year treasury's, will generally achieve similar overall rewards to 100% in the 1x assuming you periodically (perhaps once yearly) rebalance back to 33.3/66.6 3x/2 yr T weightings.
1926 - 2008
Small value stocks: 13.4%
S&P 500: 9.6%
Source: Ibbotson SBBI 2009 Classic Yearbook
Small cap value stocks are bit like a 1.4x leveraged S&P500 (13.4 / 9.6 = 1.4). More volatile, more rewarding.
50% total stock market divided by 3 if using a 3x and divided by 1.4 if using small cap value, reduces 'risk' exposure down to just under 12% i.e. potentially 12% in a 3x small cap value investment, 88% in perhaps a 10 year treasury ladder, could yield similar reward to a 50-50, but have a -12% finite downside (assuming the 'bond' side was considered as being risk-free (10 year Treasury ladder is low risk when each rung is held to maturity)(.
Adding in another 5% in a 3x gold ETF (15% gold) however to account for the 15% of time that gold is the best performing asset does reduce the 'mostly safe' side of things down i.e. 12% 3x SCV, 5% 4x gold, 83% 10 year treasury ladder.
Assuming, as is likely, that 12% 3x SCV, 5% 3x gold, 83% 10 year treasury allocation compares to 36% 1x SCV, 15% gold, 49% 10 year treasury, if you compare historic performance of that using something like Simba's spreadsheet (data since 1972) you'd see comparable reward, with significantly less risk to that of a more conventional 60-40 type asset allocation such as the Coffee House Portfolio that Simba's spreadsheet compares to by default.
Regards. Clive.
Doh! Typo errors :
...held to maturity)).
i.e. 12% 3x SCV, 5% 3x gold, 83% 10 year treasury ladder.
Drop 40% of a total initial allocation into a ten year inflation bond ladder with a view to withdraw 4% (inflation uplifted) each year for the next 10 years.
Drop the remainder 60% into a growth based asset allocation of 50% stocks, 15% gold, 35% 10 year treasury ladder, but revised to use 36% small cap value instead of 50% total stock market for the 1.4x type SCV scaling benefit (36% SCV, 15% gold, 49% 10 year T ladder) and you'll find few rolling 10 year annualised real (after inflation) gains since 1972 when that 60% growth amount did not regrow back to 100% of the original start date amount on a inflation adjusted basis (and those that did fail did so by a relatively small margin).
Employing 2x SCV and 3x gold to reduce that 36% SCV, 15% gold, 49% 10 year T to 18% 2x SCV, 5% 3x gold, 77% 10 year T allocations against the 60% growth part might have achieved similar results. Making initial allocations of 40% inflation bonds (for 4% yearly income for the next ten years), 10.8% 2x SCV, 3% 3x gold, 46.2% 10 year T. That potentially provides a stable and assured 4% inflation uplifted income for the next 10 years and a reasonable likelihood of ending the 10 years with a similar inflation adjusted amount to 100% of that of the original start date amount. Despite having started with just 14% in riskier (stock and gold ETF's) assets.
While I agree philosophically with random (the tough love remedy?), and i'm not remotely in random's league to debate this intelligently, it just seems to me that an analogy comparing a country/economy the size of iceland with the u.s. economy is not going to be terribly helpful or pertinent. At the time I thought the fed needed to do something, also the administration; in hindsight it either wasn't the right prescription for the ailment or maybe just too little too late.
Anon 9:42AM, your skepticism regarding the value of comparing small, limited economies with the USA puts you a league above many debaters on this subject IMO. For example, legions of commenters were asserting, with great confidence mind you, that we were going to become Zimbabwe or Greece any day now if we continued our reckless ways (I don't even want to start on how much money I've made the past few years taking the other side of that trade).
Historical data for comparable large and complex economic entities (with currencies used as primary global reserves) certainly exists but we don't really need that because we've got a contemporaneous exemplar: the "tough love" approach has been implemented in Europe since 2008 and the results are pretty much in: Their central bank is now going to have to do what our central bank has been doing but the impact will probably be less; too little, too late for them I'm afraid.
Possibly too little too late for us as well because there was never a fiscal response to match the monetary response: Large-scale infrastructure projects financed at negative interests rates to soak up all that liquidity would be a developer's dream but we continue to fritter the chance away in senseless political wrangles and calls for more pain AKA 'belt-tightening' (somehow I always think of 18th century physicians bleeding their hapless patients when I hear this stuff).
I agree with RW on the inappropriateness of belt-tightening in our economic quandary.To some extent, we have tightened our belts with the layoffs of hundreds of thousands of public employees and the reduction of public services at the state and municipal levels. Partially as a result of this, unemployment continues unusually high and demand remains below growth levels. I think cutbacks at the federal level would be a disaster.
RW and 4:24. Respectfully, please re-read JimF's 7:17 comment concerning the 1920-21 depression. I agree with Roger on the need for tough love. You can only print so much money and save so many companies that need to go through bankruptcy (GM and Chrysler head this list), and you do become Zimbabwee; we are already far down the road to becoming Japan.
RW nails it!!!!
comparing the U.S.A. to tinker toy countries like Iceland, Zimbabwe, and Greece is just plain laughable!
Roger,
RRGR is lagging almost all of Vanguard's index funds (international and domestic). Is that a fair comparison? What is the appropriate benchmark to measure RRGR against? The prospectus compares hypothetical performance to SP500, but RRGR seems to have a lot of international exposure making that comparison questionable.
Anon 10:08PM, thanks, I normally pay more attention to posts and comments that argue thoughtfully and/or cite evidence and certainly did consider JimF's contribution. Historical evidence is inherently anecdotal and can't make a case on its own but it can illuminate and clarify even when there are multiple periods in history that contradict its lesson; the Long Depression of 1873 in this case for example.
But the Depression of 1921 just doesn't work well as a parallel to the current period because the USA was on the gold standard (hard currency) then so the contraction was powerfully deflationary and it was a post-war (WW I) deflation followed by the kind of strong economic rebound typical of post-war periods in the industrial era; i.e., the budget was not simply balanced because of 'tough love,' it was balanced because tax revenues surged from rapidly expanding economic recovery.
It is easy to forget there is a denominator as well as a numerator in budget calculations but deficits can increase or decrease either from increased spending (numerator) or from decreased revenues (denominator) and normally from the actions of both; i.e., current deficits in the USA are as much a function of falling revenues (tax cuts and recession) as they are of increased spending (Medicare and social supports).
But from my perspective as a researcher there is a much bigger problem with the tough love thesis: It has no quantifiable mechanism. Once you get through the assertions about the benefits of purging the system (hence my visions of ancient physicians assaulting hapless patients) or that a 100% fungible dollar spent by the government is somehow not as 'real' as a dollar spent by anyone else there is no model you can pull up to calculate the impact of a policy that adheres to those principles nor is there reliable confirmation it works as advertised; e.g., if the government spends x% more than the private sector then GDP will fall by y% and this effect has been confirmed in the data, etc, etc.
Shorter me: Any policy framework that affects the lives and well-being of millions of citizens better have a model and numbers that work or it's just moralizing and bovine excrement. JMO
I should clarify one thing. During early days of the crisis I argued for doing the tough thing and of course the Fed and Treasury did not do the tough thing and now four years later there is no end in sight. There is no way to know whether that would have worked well or not because that is not what happened but it did work in Iceland. I never mentioned Greece or Zimbabwe.
Sitting here today, I don't know what they should do only that what they have done has not worked in the manner they expected yet they are doing more of it.
8:13,
I have been blogging for years, for hundreds of posts about our objective to try to add value over the the course of the entire stock market cycle. Anyone who hires us either through a separate account or through any fun we might manage needs to be on board with that or it will be a bad fit.
I have been very clear for years (repeated for emphasis) about what expectation we set and we set no expectation for two months.
Since we're clarifying I should add that everything I wrote was against the notion that cutting government spending and tightening monetary policy during a recession was the right thing to do. We have well-developed models that provide viable alternatives and supporting evidence that those alternatives can ease a lot of pain with limited risk even if they do not lift us immediately out of the economic doldrums.
Nothing I wrote was in defense of the TBTF banks and insurance companies nor was there any argument that they should not ultimately be broken up nor, for that matter, their chief executives prosecuted. One of the greater disappointments is that, post-crisis, so little has been accomplished on that front.
But the reason smaller countries like Iceland (and Sweden) could resolve this kind of crisis was because there were only two major banks at issue and their scope was largely domestic with relatively minor foreign impact; government seizure and bankruptcy and, in the case of Iceland, refusal to pay foreign debtors were feasible. Existing models explain how that worked quite well.
But I do not believe there were any models adequate to the task of handling the immediate seizure of the TBTF financial businesses involved in the '08 credit debacle even if the political will had existed to do so: it was a blinding fog; the scope and influence of the instruments they created were global both in scope and size and absolutely depended on the perceived reliability of multiple international counterparties and their insurers. Take a look at what happened to the TED spread during that period; absolutely hair raising, no one trusted anybody.
In a situation that explosive with foreign entanglements on that scale there has to be a credit backer of last resort, one that everyone immediately trusts: That was the US.
But, as intimated above, I agree that continuing this kind of backing four years down the road is both discouraging and counterproductive. The fact that the banks and shadow banks still exist, are still large and are still producing largely unregulated securities virtually guarantees we will revisit this crisis again ...but that, as before, has very little to do with the deficit and a great deal to do with lacking sufficient political will to reduce systemic risk and reduce plutocratic power.
JMO as always.
I think it's time to book some profits
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