I have no doubt that I'll be talking a lot about Anabelle here, but in general I'm going to leave the weekly updates and the multitude of pictures and videos for Christy to post on her blog. Since we have 90% the same readership, I see no reason to post it at both places.
So just a couple thoughts I've had over the last week. First of all, the Olympics. Even before the announcement on Friday I was fairly indifferent to whether it came to Chicago or not. Although I have no immediate plans to change jobs or move, it would be a bit naive to just assume that they'll both be unchanged 7 years from now. Thus I found myself unable to get excited about getting to experience the Olympics firsthand nor could I muster any dread about how it would inconvenience my commute for a couple months. As for the decision itself, in my opinion it was always going to be Rio and, given that South America has never hosted the games, that's exactly where it should be going.
Given that, I frankly don't care that Chicago was eliminated first. The 2010 winter games will be held in Vancouver. Quick, can someone tell me the runner-up location? Didn't think so. There's no prize for 2nd or 3rd, so who cares? Plus, I was working from home on Friday and saw all the news coverage leading up to the announcement and on several occasions it was reported that the 1st round of voting often has a lot of surprises. Supposedly there are a lot of voters who say "ok, I'll vote for your city after mine's eliminated" so you can actually end up doing far better in subsequent votes than initial ones (similar to a run-off election reversing the popular vote from the initial election). Thus we were told that the 1st round was actually the most dangerous and that nothing would be a surprise. Well, apparently either the press didn't really believe that or they just meant that the acceptable surprise would be Rio getting eliminated, because suddenly once the vote was announced it was "an absolute shocker" and "something no one expected." I was sitting there going "I just sat here 5 minutes ago when you told me that anything could happen and nothing would surprise you." Gotta love spin.
In any case, I am also predictably displeased at the spinning of this into an Obama failure, but I'm not even going to waste much of my breath on that. Since he went to Copenhagen to pitch for it, it was his failure, and if he hadn't gone the knock would have been that he didn't try hard enough for it. For some people, the sun never shines during a Democratic presidency and every little thing is just further evidence that he's working hard every day to destroy our country.
To continue the happy topics, I am once again sounding an alarm bell on the economy. Actually, just on the stock market. I do believe that the recession is over and we will see overall positive GDP growth this year and next. The trouble is that the stock market seems to have priced in a very aggressive V-shaped turnaround whereas it's far more likely that we're going to see a more messy U-shaped one.
If you have a minute and care at all about financial stats, take a look at this chart. It show the price to earnings (P/E) ratio for the S&P 500. For the laymen, that's the ratio of a company's stock price to their latest earnings per share. Historically, a P/E of between 8 and 10 is a sign of a fairly stable economy. A level below that usually indicates that people are irrationally gloomy on the market, and once we get above 15 people are starting to get a little slap-happy (and the almost 45 we hit at the height of the dotcom boom was euphoria of a kind usually only acheived via high quality street drugs and proved to be just as fleeting). If we are truly just starting to pull out of one of the worst financial crises ever, why in the world are we sitting at almost 19 right now? That's the kind of number you should only see during a period of robust growth. It's an indicator that we are once again trying to buy our way out of the problem. People buy a stock today not because they believe it's actually worth what they're paying but because they believe that someone else will decide it's worth more tomorrow (the so-called "greater fools" theory). That's not creating value or rewarding profitable companies, it's just gambling. Not that there's anything wrong with that; the trouble is that eventually you run out of greater fools. Anyway, I'm just saying don't be surprised when we see another big slump in stock prices over the next year to 18 months. Of course, if we really do start seeing signs of strong GDP growth between now and then, then maybe these optimistic expectations will be justified. But I have a feeling that if that in fact does happen, we're going to see this P/E ratio get pushed even higher into silly territory again. Finally, I'd like to state once again that I am not a believer in trying to time the market so I wouldn't advise anyone to touch their 401ks and start unloading their stocks. The market deserves to be at this level; it just doesn't deserve to be there right now.
5 comments:
I've been hearing and reading from a couple of different sources - The moneytalk show on WGN, and Bloomberg had Robert Prechter (admittedly not the best source) who was predicting the bottom of the market would fall out, with the Dow falling below 6000 and the S&P 500 going "substantially" below 676.
So, my first question is: Is the best place to weather the financial storm really the stock market, or should we be putting our money elsewhere right now? The gold market is up, but recessions typically negatively impact both the stock market and gold prices (with gold doing marginally better). Commodities perhaps? T-Bills? Shorting index funds (Inverse funds, not traditional "hedge" funds) with the understanding that we're likely to be in a bull within a bear market right now, and a deeper bottom is on it's way?
Second, how do you feel about the Fed's exposure from buying up mortgage backed securities? The money used to purchase over $722 Billion in mortgages was, in essence, printed... devaluing the dollar and increasing exposure to catastrophic loss since defaults are still going up, and we haven't even started the downward slope on commercial mortgage defaults.
BTW, along the line of that Fed question, what are your thoughts on Ron Paul's "Audit the Fed" movement?
On investing in Gold: I was at the gym today and CNBC was on one of the TVs and the topic of discussion (according to the graphic) was "Gold: The Next Big Bubble to Burst?" I ignored it and watched Lost on my ipod instead.
Mike, those are all pretty complex questions so I'll just give you my quick 2 cents on each.
First, I am by no means recommending the stock market right now. And I would certainly tell anyone who is thinking of investing that (absent specific knowledge of a particular any) the stock market is not where you want to be right now. BUT, for those already in the market, I'm just a real big believer that trying to time the market is an inherently losing proposition. For one thing, when do you decide to get back in? If you cash out and the Dow jumps another 500 points do you get back in and decide you were wrong or do you continue to wait it out? Or what if you get out and it does in fact tank, when do you get in then? You can really drive yourself crazy that way. I say that if you still have 20+ years until retirement you're fine to ride it out. If you're over 50, though, your 401(k) should be MAX 50% in stocks (and probably more like 40). Also, as a side note I don't trust anyone who tries to put an actual number to the floor (or ceiling for that matter) to the market, because really no one knows. I mean, we can't even accurately predict this weekend's weather.
Ah the Fed printing money. Yeah, they don't like to call it that. They prefer to call it quantitative easing (rebranding!). I do think that the Fed had to offer some form of guarantee for the bad mortgages or the economy would have really fallen off a cliff, but I'm not sure that was the best way to go about it. But a devalued currency is not a totally horrible thing. For one, it could make our exports a lot more competitive, which is something our manufacturing sector (what's left of it) could really use right now. There's a reason why China won't let its currency rise to market price.
I really want to read Ron Paul's book. I do agree with him that the "right" of the Fed to do what it's been doing the last 70 years or so is not supported anywhere in the Constitution and was (like judicial review) pretty much just made up. I think he's more along the lines of thinking that the Fed should be abolished and I'm not ready to go there. I do wish that the voters (via Congress or directly) had more oversight in their activities.
"But a devalued currency is not a totally horrible thing."
I understand the balance between currency value and exports, but doesn't that devaluation inherently just happen when the national debt ceiling rises? I mean, isn't there a ratio that we've exceeded where other nations, and even our people, say "there's now a lower chance that this debt will be repaid, so I'm not willing to loan you any more"? Like losing so much at the track that the shylock won't even give you enough to buy a bottle of thunderbird?
So printing money, or "quantitative easing" makes it that much worse, doesn't it? If we can't even get the American People to buy dollars, ... yah know?!?!
And this quantitative easing is BS anyway... Basically, isn't it saying "Right now we have a debt that is XX% of the GDP. Oh, wait a minute,"
(printing press running in the background)
"Not so fast... Now it's only X% of GDP."
And as that goes on, the president of the world bank says (and this is not a fictional quote) "The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency".
Yeah, a devalued currency is not a horrible thing, but what about a currency with no value. How do we keep from heading down that road? Fire Geithner and Bernanke? Stop passing laws raising the debt ceiling? Go back to a silver or gold standard?
Raise taxes?
There is a big difference between a devalued currency and a currency in free fall. I was just trying to point out that the conventional wisdom is that you always want to have the strongest currency possible and that's not always the case. Famously, there is the phenomenon of "Dutch disease" (also called the natural resource curse) whereby demand for a country's natural resources pushes their currencies up so high that the rest of their economy (particularly manufacturing) can't compete internationally. There's also Japan, which was hit even harder by the recession precisely because they were export-dependent and the yen has stayed strong.
On the flip side, of course, are the Zimbabwes of the world where every day their currency is worth 10 times more at breakfast than it is by lunch. Also probably the only country where those little chocolate coins are actually worth more than their real coins.
So the trouble is that as a country gets into worse and worse economic shape (through printing money or otherwise) then creditors (i.e. U.S. T-bill holders) start to get nervous and demand a higher rate of return on their investment. So that pushes interest rates higher and (assuming the government still needs to raise more money) causes the need to print even more money and you can see that we can get into a positive feedback loop pretty quick.
In the immediate term, that's not too big of a concern. When the recession hit the global economy, China and everyone else couldn't wait to throw more money into T-Bills. Even at about .10% interest, we were still the safest port in the storm. We also get a free pass for a couple years since pretty much every country has gone into debt with stimulus plans, guarantees etc so no one is going to point the finger while they've been doing the same thing.
But once the recession is officially over and growth has returned it will be paramount that we can demonstrate to the rest of the world that we can get our fiscal house in order. That's very worrying, because I'm not sure we have the political will to do it. I have no faith that the Democrats can do it and last time I trusted the Republicans to do it they dropped the ball big time (see Medicare Part D).
To be continued Sunday I'm sure . . .
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