Thursday, October 30, 2008
Wednesday, October 29, 2008
Jeremy Grantham is buying
U.S. pension funds are crying in their soup now, but they can at least find some solace in the fact that, for the first time in 20 years, we’re looking at all global equities being modestly cheap,” said Mr. Grantham. Some are substantially cheap, which has left GMO looking to add to its holdings, he said. “Catching a falling knife is never without pain, (but) the prime directive is to buy cheap assets.”
There’s no need to rush, however. CFOs should phase back into equities “with all deliberate slowness, as opposed to all deliberate speed,” Mr. Grantham warned. Even though the S&P 500 is trading below GMO’s fair value estimate for that index of 975, markets typically overshoot on the downside by 20% or more, he noted. If the market panics, that bottom could be reached in days or weeks. If it’s a more orderly affair, it could take until 2010, as investors digest a likely stream of wretched economic news, he said.
There’s no need to rush, however. CFOs should phase back into equities “with all deliberate slowness, as opposed to all deliberate speed,” Mr. Grantham warned. Even though the S&P 500 is trading below GMO’s fair value estimate for that index of 975, markets typically overshoot on the downside by 20% or more, he noted. If the market panics, that bottom could be reached in days or weeks. If it’s a more orderly affair, it could take until 2010, as investors digest a likely stream of wretched economic news, he said.
Tuesday, October 28, 2008
SPX vs Consumer confidence
Is there any connection between weak consumer confidence readings and bullish reversals in the stock market? To decide, have a look at the following quick-and-dirty overview (which includes all data going back to the Feb-67 start of the confidence series):
Monday, October 27, 2008
VIX closed at record
With the VIX under 75 and only ten minutes left in the trading day, it looked like volatility was on the wane, but aggressive selling into the close dropped the DJIA 200 points and helped to push the VIX up over the 80 during the extra 15 minutes of index options trading.
This is the first time the VIX has closed over 80 and the 8th time in the past 16 trading days that the VIX has registered a new record close.
Posted by Bill Luby at 1:34 PM 3
This is the first time the VIX has closed over 80 and the 8th time in the past 16 trading days that the VIX has registered a new record close.
Posted by Bill Luby at 1:34 PM 3
Friday, October 24, 2008
Thursday, October 23, 2008
Wednesday, October 22, 2008
一个小故事
今天和BETSY去吃饭，说到公司历史， 她说我们的创始人本是个富家子弟，绝顶聪敏但整天不干正事，他父亲开了个广告公司让他管， 他就天天去混混， 1929大萧条，股市崩盘他还是天天吊儿郎当。至到有一天， 公司楼下的Pain Webber老板来找他， 说我的SalesMan都快饿死了， 你想个产品给他们卖卖吧。 公子哥良心大发， 开始进入金融市场， 他发现几家当时算高科技的Utility sector势头很足，于是就把公司改成Asset Managment Firm, 建了几个ＵＴＩＬＩＴＹ的债卷基金，让Pain Webber做销售。 结果大获成功。
Tuesday, October 21, 2008
Jeremy Grantham: U.S. Stocks Now 'Very Reasonable Buys for Brave Value Managers'
Jeremy Grantham of GMO has released Part I of his Q3 letter (.pdf, dated October 17, 2008). Here's how Grantham sees the market at this juncture:
At under 1000 on the S&P 500, U.S. stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10th prices, but even more so.
History warns, though, that new lows are more likely than not. Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look okay for now, but the pound does not.
Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry! Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows.
As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower.
At under 1000 on the S&P 500, U.S. stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10th prices, but even more so.
History warns, though, that new lows are more likely than not. Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look okay for now, but the pound does not.
Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry! Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows.
As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower.
The Road to Ruins
JIM PUPLAVA: Well, here we are at the beginning of the year, and as we always do at the beginning of the year, people are looking for predictions, and especially with all of the volatility and unpredictability of the markets. But just like the polls in the United States, which seem to be missing out on things, it’s getting more difficult to predict.
Joining us on the program this year is Dr. Marc Faber, he’s the editor of The Gloom, Boom & Doom Report.
And Marc, I want to start out with something you said in your January newsletter, and you quote Lao Tzu, the 6th Century Chinese poet, where he said: Those who have knowledge don’t predict; those who predict don’t have knowledge. Isn’t this going to be one of those difficult years to predict where the markets are going? It just seems like there are too many crosscurrents this year.
MARC FABER: I don’t think that it is all that difficult to predict markets, but we have to understand that you can’t give a target for, say, the Dow Jones because you essentially have a manipulated market. Manipulated by the Federal Reserve, in the sense that if the Fed cuts interest rates to say zero percent or one percent, as they’ve done after 2001, then stock prices can be supported. But obviously a cut of interest rates at this stage of the cycle where we clearly have inflationary pressure would obviously increase the rate of inflation and probably weaken the dollar further – certainly against a hard asset such as gold and other precious metals. So let’s say someone said the Dow will go up to, oh, I don’t know, double. Say for argument’s sake, from 13,000 to 26,000. We would have to measure that increase –this doubling of the Dow Jones – in a hard currency such as either a foreign currency or in gold. And if the Dow doubles because of money printing by the Fed to 26,000, it wouldn’t mean necessarily that economic conditions improved, but it would mean maybe that inflation picked up dramatically and that the gold price goes up three times. [2:52]
JIM: You also quote Peter Bernstein the economist and strategist and he said that:
The current scene bears no resemblance to a typical economic peak or to conditions usually preceding a slowdown in business activity. Those kinds of conditions feature excesses in the business sector. But the business sector at the present time has a relatively clean bill of health. There are no signs of the usual boom in capital spending that leads to a cyclical top and leaves an overhang of capacity.
I’d like to get your thoughts on the current condition of business. Is this the one saving grace that we have in the US economy right now?
MARC: I think that it is difficult to say that we don’t have, let’s say, excesses in capital spending because we live in a globalized world. In other words, capital spending may not have been excessive in the United States – although I could argue that home building is some kind of capital investment; the whole commercial real estate market is some kind of capital investment. And what we have is we have excesses in capital spending in other countries such as in China and in other emerging economies. So basically, the US has outsourced largely it’s production, and that’s where the excesses in capital spending are occurring.
Moreover, in a business cycle you just don’t only look at capital spending. I think the biggest excess was in consumption in the United States, where consumption as a percent of the economy has increased from around 60% in 1980 to now over 70%. So in an economy where you essentially have maladjustments as a result of easy monetary policies the excesses do not necessarily have to be in capital spending. The excesses can be in asset markets, such as the housing market, in stocks, in commodities and they can be in consumption. [5:04]
JIM: Let’s talk about consumption, because the big question everybody has here –and there is such an emphasis in the US economy on consumption – and that’s the US consumer. And we’ve got a situation now where you know they can’t take out money out of their mortgages like they used to and use them as an ATM machine. We’ve seen a bit of a slowdown in the fourth quarter with consumer spending. Do you think this is the time that the US consumer finally goes on hold. I mean, they’ve been counting the US consumer out for years and decades, but it’s like the Energizer Bunny: They keep on spending.
MARC: Yes, I agree that there has been a lot of let’s say apprehension about the ability of the consumer in the US to continue to consume, but I think the important question here is the Federal Reserve and also the Treasury have encouraged, in the US, consumption. And does consumption lead to the creation of wealth? Or if you have a table full of food and you just eat the whole food away does it lead to a reduction of wealth? That is really the issue here. And I think that in the US the excessive consumption which was driven by asset markets, in other words by increasing asset prices – stocks until 2000, and after that by the real estate market – have essentially led to an economy that is starved [of] savings and starved of capital spending and characterized by excessive consumption which is on evidence from the growing trade and current account deficits. And now the goldilocks apostles they will always say, “well, the trade and current account deficits do not matter.” But they do matter in the sense that there has been a huge transfer of wealth to foreign countries, and now foreign countries have these sovereign funds which they invest globally; and there has been a huge creation of wealth, in particular in the resource-producing countries; and also there has been extended US dollar weakness. And so the current account deficit and the excessive consumption does matter to some extent for the well-being of the US. [7:33]
JIM: One thing that we’re starting to hear in the US, we’ve heard it from Hank Paulson and the President in December (we’ve seen it recently – the White House convened last Friday), they’re talking about some kind of stimulus package coming out from Washington. Whether it’s going to help people that are under duress right now because of mortgage resets – but some kind of fiscal spending program – who knows? Maybe we get some kind of helicopter drop. What about the US government combined with fiscal stimulus and monetary stimulus as it appears right now that the Fed is probably going to get more aggressive in its rate cutting.
MARC: Yes. I’m sure that they will implement a stimulus package, but I think the stimulus package will be an ill-fated attempt to revitalize the economy. If you look at the problem of the economy, it’s been excessive credit growth that came from easy monetary policies. And what they want to do now is essentially to implement another set of monetary policies and other measures to stimulate consumption, when consumption precisely has been the problem of the United States – the excessive consumption. And I think a stimulus package may be useful if it were directed at the stimulation of capital spending and at the encouragement of saving at the expense of consumption. And that can only lead to essentially a readjustment period in the economy. Readjustments – basically what the US needs is a recession. And only a recession can redress the excesses that have taken place. And if you superimpose another bubble on the existing bubble you create more maladjustments in the economy and more ill-fated measures that eventually lead to a total breakdown of the system. [9:42]
JIM: You know, unfortunately here in the US, whether you’re watching both parties – the Republicans or the Democrats – they’re talking about ways to increase consumption because they’re worried by a slowdown in consumer spending. And nobody in a presidential election year seems to want to take the pain to go through a recession and redress a lot of the imbalances or cleanse the system because of the imbalances we see right now – whether it’s mortgages, excess consumption and indebt[edness]. So in the end, could you see a scenario, Marc, something like this: In the first quarter we see economic weakness as we’ve been seeing, we see more write offs coming from the financial system (there’s talk about Citigroup maybe writing off $16 billion), also there’s going to be a slowdown in corporate earnings, and then we get a massive response from the Federal Reserve that temporarily probably stimulates the markets. So let’s say, in between, if you think of an Oreo cookie, a hard first quarter, a creamy filling in the second and third, and by the fourth quarter higher interest rates and inflation come back to bite us again.
MARC: Well, personally, I think that the US, if you measure economic statistics properly –and the government is lying blatantly – the US went into recession 3 months ago. And I’m saying the government is lying blatantly, because they take nominal GDP and then they fiddle around with inflation figures. I mean none of your listeners have an inflation rate of less than 5 to 6% per annum. You just can’t exclude food and energy prices and healthcare costs from the CPI, from the cost-of-living increases. So nominally the US economy may still be growing, but inflation adjusted –in other words, in real terms – we’re already in a recession. And most US households, except for the super rich, are today no better off than they were five or seven years ago. Their income gains have all been eaten up by cost increases by inflation.
Now, some people have benefited from asset inflation in the sense that their houses in which they live have appreciated in value but that has been precisely because of easy monetary policies and the debt growth that have now brought about problems.
And all I can say is that corporate profits in my opinion began to contract in the third quarter of last year and they will continue to contract, because corporations now –and this is important to understand – corporations are facing cost increases. So the margins are going to be squeezed. And whereas the valuation of the stock market is not unbelievably high in the sense that stocks are not selling at 50 to 80 times earnings like in Japan in 1989, if you exclude say the energy sector from the S&P which is selling at 12 times earnings or 10 times earnings, then the S&P valuation is over 20 times earnings. If you’re faced with declining earnings then basically the S&P is not a great bargain here. [13:14]
JIM: Let me just continue on that inflation theory, because what you are talking about in the fourth quarter the GDP deflator, if I recall, was falling from the second, third and fourth quarter last year; and I know in the third quarter the GDP deflator was the lowest since Eisenhower was president. So could you get statistically, and I’m just looking forward in an election year, maybe we get the lowest inflation rates since Calvin Coolidge was president. So in nominal terms as reported by the government we get this slow growth figure that they’re talking about – one to two percent – in those terms, we avoid a recession even though in real terms we are in one.
MARC: Well, basically, that would be a form of stagflation. And I mean it’s very difficult to measure GDP in the first place, and what you have to look at is essentially standards-of-living increases in an economy. And I don’t think that there are many standards-of-living increases in the United States at the present time, nor for that matter in Western Europe. We have huge standard-of-living improvements in emerging economies where a middle class is being created and where even workers or farmers are doing better than say a couple of years ago. But my point is simply that the government is lying. And they will continue to lie because they don’t want to admit that they created an unbelievable economic mess. Nor will the Fed admit that their ill-conceived monetary policies led to the crisis that we have today in the financial markets. [15:01]
JIM: What about the theory that’s being bandied about, even though the US economy slows down as we are now seeing that –they call the decoupling theory – that the rest of the world (whether it’s Europe, Asia, emerging markets) will continue to be strong? So therefore, if you are let’s say a large cap international company where you get a good majority of your sales overseas – and a good example would be, for example, DuPont this week beat estimates. They get 60% of their business overseas and because of that business doing very well their earnings were higher than expected. Do you subscribe to the decoupling theory, or do you think a slowdown in the US will have some effect on Europe and the rest of the world?
MARC: Well, basically, we have to first of all distinguish between an economic decoupling and a financial decoupling. In other words, can some countries grow when the US is say in a no-growth mode or in a recession mode? I think that this is possible because if you look at basically the US economy over the last two hundred years, occasionally you had a recession in one state, say, Texas in the early 1980s (when the oil price started to go down), and you had expansion in another state like New England (which benefited from lower oil prices); or in the early 1990s, you had a recession in California but other states they were expanding. So in an economy which is very complex, where you have different regions and you have different sectors – industrial sectors and service sectors – it is conceivable that one sector is in recession and other sectors or other regions are not; that is entirely possible. But I would argue that over the last seven years we had an unprecedented global economic boom where essentially every country has been growing with the exception of Zimbabwe, because you have a money printer in Zimbabwe who essentially should be joined by Mr. Bernanke. He would fit very well with Mr. Mugabe in that country.
Now, what happens if the US no longer grows is that the trade and current account deficits of the US shrink. In other words, we had during the excessive consumption period 1998-2006, a current account deficit in the US that increased from 2% of GDP to over 7% of GDP, and at the end was supplying the world with $800 billion annually. And this river flows into the world through the American current account deficits, and essentially provided the world with the so-called excess liquidity and created booms in everything from art prices to commodities, stocks, bonds, real estate, what not. And once the US no longer has this growing current account deficit, but a shrinking current account deficit, you have essentially a relative illiquidity coming up in the world. It is not that it’s tight money, but the rate of growth of liquidity shrinks and it does have obviously an impact on the economies and on the asset markets. And it is conceivable that say the US goes into a recession, Europe goes into a recession and that China does not go into a recession but into a growth slowdown, say from 8 to 10% GDP growth down to 3 to 6% of GDP growth. But this decline in the growth rate is still very uncomfortable for China, as well as for India. So I’m not a great believer in this decoupling theory.
Moreover, I don’t believe that financial markets will be decoupled. In fact, I would argue: If you look at look at the last four years, 2002 to today, then emerging markets have been the big bubble. The US markets have not been a gigantic bubble in the sense that US equities, especially large cap stocks, are not terribly expensive by world standards because the dollar has gone down so much. And so the big bubble is probably in emerging markets; and these markets, obviously if the S&P goes down, will be hit very hard. And I would argue, if someone puts a gun to my head, and says, “Marc, you must buy stocks,” as much as I dislike saying this but I would probably rather buy US stocks today, than say some of the emerging markets that are selling at 30 to 50 times earnings. [20:08]
JIM: You bring up an interesting point about liquidity in the world which has a genesis in much of the US trade deficit. As we look around the globe today, Marc – I have a screen on my Bloomberg that has year-over-year money supply growth rates around the globe and what is surprising as I look at this table is to see double digit money supply growth around the globe out of 18 of the top 20 central banks. I think Europe reported last week it’s money supply is growing at over 12%, yet Trichet is talking about being tough on inflation. You know, the inflation rates that we’re seeing here in the United States, are they not global in nature? Are you finding that, for example, in China where you have the inflation rate going at 6 or 7%, that this is a global phenomenon?
MARC: Yes, I mean that’s the point. I mean when recently people were very negative about the US dollar and so forth – and of course, long term you cannot be optimistic about the US dollar – but the US dollar has declined quite substantially, especially against the euro in the last couple of years; and the Europeans are also good money printers. It’s not just Mr. Bernanke that is the chief money printer. The others are not much better either. So basically, you have this excess liquidity being created in order to support asset markets and so forth.
But the point about this excess liquidity is that an eternal boom is out of the question. So what the Fed and the other central banks can do is kind of stimulate, through easy monetary policies, credit growth; but the private sector if it becomes, say, risk adverse can withdraw liquidity and a) not lend and people can also refuse to borrow, and so the credit does not accelerate but actually contracts. And that leads to what I call a relative illiquidity (it’s not an absolute illiquidity, it’s a relative illiquidity) and that then has some negative implications on some asset markets. But to come back to the first question you raise about making predictions, I think the difficulty today is that under normal conditions, say under a gold standard, we would be in a massive deflationary recession at the present time. Now, the central banks are all intent to prevent that and they print money like crazy and throw liquidity at the system by cutting interest rates and taking extraordinary measures. And so the question arises: How did you measure really economic growth and how do you measure your wealth? Say, as I mentioned, if the Dow goes from here to 26,000 – it doubles in value – if at the same time the gold price goes up 5 times, you lost out by being in financial assets. And I think this is what has happened since year 2000. In year 2000, as you know, you could buy with one Dow Jones, 44 ounces of gold. And now you can buy less 15 ounces of gold.
Now, I’m not saying that gold cannot have a meaningful correction, but I think that the central banks have created actually a state which I would almost call a hyperinflation where asset prices go up very substantially and they don’t make you really richer. I mean say in 1980, there were six billionaires in the world, and today you have thousands of billionaires in the world, everywhere. And money – the value of money – the purchasing power of money has depreciated very considerably. And I’m not speaking here of the US, because I was recently in New York and I saw that the price level in New York is actually quite reasonable compared to, say, the price level in Europe and in other countries. But usually when you have a situation like the US that has achieved relatively low prices levels through currency devaluations – and the US has pursued a policy to lower the value of the dollar – what usually follows (and not every time – usually what follows) is high and accelerating inflation rates. And the US government of course they will understate inflation, but the pocketbook of the consumer will notice this increase in inflation and what you will then get is essentially prices going up and the standards of living of people going down – in other words, stagflation. [25:08]
JIM: Isn’t this one of the signals that gold is giving to the financial markets? When you look through this period of time where we have seen nominal increases in assets and stock markets around the globe, yet if you look at the summer of 2001 when gold was at 255, and here we’re looking at gold heading towards $900 – do you think this is what is being recognized around the globe, that everybody knows that money is dying, it’s losing its value so gold is becoming the ultimate currency to hold?
MARC: Basically, my view is this: Normally, the safest investments in a society is cash, deposited in a bank or in Treasury bills. But the Western democracies and governments in general have created over time an environment where actually cash is a disastrous investment because you’re losing out to inflation like in the 70s as a result of consumer price increases or in the last couple of years as a result of asset price increases. Now, I’m not suggesting that there cannot be times – three months, six months, one year – when cash does better than, say, stocks or better than real estate. Say, in the last nine months it was better to be in cash than in stocks that depreciated or in real estate that depreciated. But basically, if you print money like the Fed or other central banks do, the value of money – of paper money – goes down and then it’s reflected in an increase in the value of assets such as gold that cannot be multiplied at the same rate. I mean someone could say, “oh, the gold price has gone up a lot since 2001.” I can turn around and say: “No, the gold price is the same. It’s the dollar the dollar that has collapsed against the price of gold.” And why did the dollar collapse against the price of gold. You call up Mr. Greenspan and Mr. Bernanke and you ask them about it. Of course, they will never give an answer. Each time Ron Paul asks them a sensible question they just evade the question and they move on to something else because, as I explained, they are a bunch of liars. And actually, if there was a court for honest money, both Mr. Greenspan and Mr. Bernanke should be hanged. [27:44]
JIM: You know, it was interesting – you mentioned Congressman Ron Paul. The last time Bernanke was on Capitol Hill, he asked him about curing inflation with more inflation, and asked him about what was happening to the dollar. And Mr. Bernanke responded – which I was horrified – and he said, “well, actually if you live in the United States and you pay for things with dollars it really doesn’t affect you.”
MARC: He’s out of his mind. Go to Zimbabwe and ask the citizens there: If you pay in Zimbabwe dollars it affects you that the currency has collapsed? Of course it affects you.
JIM: There’s a situation I want to move on to in the financial markets. A lot of the risks that we’ve seen erupt last year, whether it was in February with intermediate lenders or August with the collateralized debt obligations, something that has not gotten much attention and I think could even be a bigger issue and that is credit default swaps, which are now estimated to be somewhere in the neighborhood of 45 trillion. I think there have been a lot of people, Marc, in the hedge fund community and the banking community during this period when we were inflating between 2003 and 2006, they were writing these credit default swaps on corporate bonds because it was almost like free money. Now, if the US economy has gone into a recession –even though we’re not saying it formally – when you go into a recession companies have greater difficulties making their earnings, earnings slow down, cash flow slows down. And what happens if you start getting a bunch of corporate bond defaults? I think this is an issue with these credit default swaps that nobody is looking at. A few people have talked about it; Bill Gross saying it could be somewhere in the neighborhood of $250 billion losses. This is another issues that could surface this year that could throw chaos into the markets.
MARC: Well, I think you’re touching on something very important. I think that over the last 25 years we had numerous financial innovations. And I have to say is, the Federal Reserve had the power to control the financial innovations but actually they encouraged it and led to the excesses we had recently. And I think that the problem that occurred in subprime lending is a symptom of a much wider problem, and that the subprime lending crisis infects obviously other credit markets and so forth and that it will spread like a bush fire through the economy, especially if an economy was essentially driven by excessive credit growth. I mean in the last seven years GDP increased by $4.2 trillion and total credit between 2000 and 2007 increased by $21.2 trillion. In other words, debt has been growing much faster than the nominal GDP.
And I think that now we are in a process of deleveraging – of credit contraction, basically – but the Fed and the Treasury will do everything to restimulate the credit growth that led to the problems in the first place. That’s why I’m arguing that the policies of Mr. Greenspan, of Mr. Bernanke and Mr. Hank Paulson are totally misguided. Totally. And I believe, you know, the financial stocks, every bull market I’ve seen since 1970 when I started to work was accompanied by strength in financial stocks. When you have weakness in financial stocks something is wrong. And therefore, I don’t believe that this bull market that we had since October 2002 to the Summer of 2007 that this will come back. I rather believe that we are in a period of high volatility like in the 70s, when the Dow moved up and down every year by 20%, and in 1982 the Dow was still no higher than we were in 1964. So I think we can have a lot of fluctuations here. And at times the Fed, through rate cuts, can manipulate equity prices higher and so forth. And at times we will have disappointing earnings, disappointing results. And I would suppose that we will have massive bankruptcies as well where financial firms become illiquid and insolvent and are forced to the wall. And so the market environment for financial assets is not going to be particularly good. [32:46]
JIM: Let’s talk about a couple of investment themes among this volatility that we’re seeing. A couple of things that stand out or strike me, Marc, is energy which has been on a roll – and I happen to subscribe to the peak oil theory. I mean we have not made any major discoveries, we’re not replacing what it is that we consume, we have more people consuming energy today. That is one theme that I can see. And along those lines and something similar – you cover this in your current newsletter – is you’ve got a little over 1% population growth in the world, the acreage for growing crops isn’t expanding. In fact, in certain areas like China it’s being turned into parking lots – like Joni Mitchell’s song – or buildings. What about the theme of energy, food and precious metals if you wanted to be in this market as a long term investor?
MARC: Yes, I think that’s a very good point. In general, I believe that you should be in assets that cannot be multiplied easily, such as commodities (whether it’s copper or zinc or nickel or oil or precious metals), or food items (wheat, corn, soybeans, sugar and so forth). But the commodity markets had a very big move and the price of oil has gone up essentially almost 10 times since 1998 from $12 a barrel to now close to $100 a barrel. And in an environment of slowing growth in the world, I would be somewhat careful of investing now in industrial commodities whose demand depends essentially on strong economic growth. So I would not be surprised to see – as has already happened in some commodities like nickel – that prices correct meaningfully. And all I can say to investors is I’m bullish about gold in the long run, but don’t buy anything –whether it’s a house or stocks or precious metals – if you are not prepared to ride through say a 20% correction, because we have higher volatility. We will get more corrections along the way up. I mean I remember the great bull market of the Taiwanese stock market, 1984 to 1990. The market went from an index of less than 500 to 12,500, but we had in 1987 a 50% correction, in 88 a 40% correction, in 89 a 30% correction until we reached a final peak. So investors have to get accustomed to higher volatility. And someone who cannot live with this volatility because he is leveraged, is going to be forced to the wall.
So my advice is to be prudent. And yes, I like energy. I think energy stocks are actually quite inexpensive. But if the oil price for one reason or another drops to say $70, then obviously energy stocks will be down. And all I notice is when I started to like commodities in the year 1999 to 2002, it was not a widely accepted investment theme. And today, the investment theme is much more well known, and there are many more speculators in the market place. So I’m still positive in the long run but cautious say for the next six months. And I would also add, as of today – you see, if I remember, well, in 1980, after 10 years of consumer price inflation in the US, everybody thought that consumer price inflation would continue forever. And what then happened after 1980 is that consumer price inflation slowed down and we had a period of disinflation. Today, if there is one consensus it is that paper money will become worthless and that asset prices will continue to go up. And I would still think that it’s not very likely that Robert Prechter is going to be right with his deflationary bias –with everything, with gold prices collapsing to the Dow going down and so forth – but I would still think that there is still a small probability that we could have actually a period of deflation in the near future, which then will lead the central banks to print money like crazy. But in this period of deflation that I would not rule out we would have big declines in asset markets – big declines. [38:09]
JIM: Let’s say we start to get deflation. I mean certainly we’re seeing falling housing prices in the US and other places of the world. Do you think that we get preemptive strikes and perhaps they just throw all caution to the wind? Like right now, the latest consensus is when the Fed meets January 30th it’s going to be 50 basis points; and there’s even talk within the markets that they don’t wait until January 30th if things begin to deteriorate. I know there’s a lag effect to all kinds of things, whether it’s raising interest rates or lowering interest rates. If this deflationary period that could possibly erupt, do you believe it would be short-lived?
MARC: Yeah, very good question. I am quite sure the Fed will cut by 50 basis points; and if not by 50 at least by 25. But as you know, in Japan they cut rates dramatically to essentially zero and we still had deflation. I mean we cut interest rates from 6.5% on the Fed funds rate in January 2001, to 1% in 2003, and yet the NASDAQ still went down. So whether interest rate cuts and even a stimulus package – fiscal package – will help much remains to be seen. We could be in an unusual situation where it doesn’t help much. It’s possible because the public or the household suddenly starts to save; in other words, the savings rate goes up and people become risk adverse. As I said, I don’t know how the world will look like in a year’s time. I’d rather be in gold than in the Dow Jones, whereby maybe for the next three months the Dow Jones could outperform gold for a while. But in general, it’s very, very difficult to make any kind of predictions that make sense simply because you don’t know how irresponsible Mr. Bernanke and Mr. Hank Paulson will be. We just don’t have any idea. As you say, they can do a lot of things to try to support the asset markets. And Mr. Bernanke has written and spoken about this: that you cannot identify bubbles but when they burst you should step in with extraordinary measures. We just don’t know how extraordinary his measures will be. I mean the best for Mr. Bernanke, the best extraordinary measure would be to resign and say: “We failed. We are incompetent.” [40:54]
JIM: But you know, Marc, if you take a look at his study of the Great Depression and people might recall the comment he made at Milton Friedman’s birthday where he said to Mr. Friedman: “You know, you were right, we made the mistake. We caused the Great Depression. I assure you, it will never happen again.” Basically saying, according to Mr. Bernanke’s view and study of the Great Depression, the reason we had it was the Fed didn’t print enough money. Had they been able to do so the Depression would never have occurred. So it almost gives you an insight in terms of his thinking, which is along the lines with Mr. Greenspan in the sense that anytime there’s a problem in the economy or the financial markets massive liquidity seems to be the response and answer.
MARC: Yes, that is correct and I’ve written about this. And I think that the entire analysis of the Great Depression, especially by Mr. Bernanke, is totally wrong. The causes of the Depression were not tight monetary policies by the Fed, but easy monetary policies by the Fed. And Paul Warburg, who was at that time a Fed member, later on commented about this; that the Fed should have pursued tighter monetary policies in the years leading to 1929. And I’d just like to mention one point: In 1929, the PE on the Dow Jones was just about 13 times earnings. We didn’t have a massive stock market bubble in terms of valuation, but what we had is an earnings bubble and half the earnings collapsed. And I think today we don’t have, you know, like 50 times earnings on the stock market like we had in Japan. But I think we have an earnings bubble and that the earnings will disappoint very badly. But I’m just convinced that in a democracy, especially in a country like the United States, the politicians will print money. And whether or not it will always help to support asset markets is very questionable.
The one thing I can assure you is that money printing doesn’t create wealth. That is important to understand. And at some point, as my friend Barry Bannister pointed out, you reach with credit growth the zero hour. In other words, you print money, credit grows, but the economy doesn’t respond. And I think we are already in that situation. And what the outcome will be, hyperinflation or deflation, that is the difficulty to judge. But I think personally as an investor, I would be positioned to some extent in gold because in a deflationary environment I happen to believe that gold would outperform other asset classes because things will get so bad that people will run into gold as a safe haven. And at the same time, I would hold essentially some cash and I would probably deleverage. In other words, I wouldn’t hold a lot of debt in the present environment. If there is hyperinflation, to hold a lot of debt is the right thing to do; but just in case we have deflation, like now in housing and now probably also in commercial properties (that is the next shoe to drop), that in such an environment you’re better off by not holding too many debts. [44:40]
JIM: I want to cover a point in your January newsletter and just let our listeners know, if you don’t subscribe to Marc’s newsletter you’re really missing out on some good thinking.
MARC: Well, it is very kind of you.
JIM: You had a gentleman who has written pieces for your newsletter in the past, his name is Michael O’Higgins, he’s author of Beating The Dow – a very sharp money manager, and I’m going to quote from your newsletter here, and he goes:
So where does one find value in today’s investment world? In my view, given that the main focus of the current US Federal Reserve board remains one of fighting deflation, investors should avoid bonds entirely and concentrate on investments that can protect them from a rising inflation rate i.e. stocks and commodities. With these two categories we have our portfolios equally invested among four investment themes: dogs of the Dow; dogs of the world; precious metals and mining; and energy.
What do you think of that?
MARC: Well, basically, I agree with Michael and I think that if you buy today at 10 years the US Treasury, or 30 year US Treasury, you’re flirting with disaster because they will only perform well in an environment of total deflation, given the low yields they provide at the present time. But as I said, the concept of inflation and deflation is very complex because you can have an economic system where some assets are inflating and some assets are deflating. Like in the US, say in the last 12 months, you would have been better off in US Treasuries than say in the housing market, which has declined in value. So in general, I of course agree with Michael to be in stocks in the long run and to be in precious metals and in energy in the long run and so forth. I’m not sure whether that is the right medicine for, say, the next three to six months. I mean I’m very cash rich here. I’m cash rich US dollars. I think the US dollar does not have a significant downside risk against the euro. In other words, if you put a gun on my head and said, “Marc, you have to choose one currency today, for the next three months: the euro or the US dollar,” I think I would choose the US dollar. Although, I’m very negative about the US dollar in the very long run. But just for the next three months I think the dollar will hold because the current account deficit is now shrinking, the trade deficit is no longer expanding and so forth and so on; and the dollar is relatively inexpensive vis a vis the euro. Would the question be: put all your money into US dollars cash, or put all of your money in gold? As of today, that would be a very tough question because the gold market in my opinion is now somewhat overbought and could undergo easily a 10 to 20% correction. [47:59]
JIM: I’m sensing, Marc, as we’ve had this discussion and also from reading your newsletter, that you’re very cautious at this point. The fact that you’re holding larger amounts of cash and in the dollar is that because of the amount of uncertainty? And what would cause you to move out of cash?
MARC: Well, I think that as an investor – and I’m not a mutual fund manager or hedge fund manager that needs to show performance every week or every month – I’m a believer that occasionally the markets create an unusual opportunity. The unusual opportunity of the last 10 years was really commodities in the years 1999 to 2001, and emerging economies following the Asian crisis. They provided a lifetime buying opportunity. Now that the whole world is captivated with investments, and buying this and selling that and moving here and moving there and performance, I sometimes feel I want to actually be on the sidelines and just give it some time until I make the next major bet. I mean I’m involved quite heavily in gold. Would I put now all my money tomorrow into gold? I doubt it. And I want to be diversified. And all I can say: investment opportunities arise again and again. I mean, I suppose if Citigroup went down to $5, I’d be tempted to look at it. I’m not particularly interested here at the 27 to $30 level, because the financial excesses we had that were built over the last 25 years will take time to kind of correct. And if you have a boom sector, say, like the oil sector in the 70s, afterwards for 20 years oil was unattractive and the drillers were unattractive. And so financial stocks, after a bubble burst in that sector may not provide the leadership in the future and may be unattractive for many, many years to come. But I’m convinced, like I wrote about in my last report about Cambodia, I think there are some countries in the world whether it’s Cambodia or Ukraine or Belarus or parts of China or parts of India, or parts of Russia that can have strong economic growth even in a weakening global environment and provide investors with unusual opportunities. [50:50]
JIM: Marc, you do a lot of traveling around the globe and I think that gives you a different perspective than let’s say some analyst that stays in his office all the time. As you have been traveling over the let’s say last 12 months, is there anything that stands out in your mind and things that you’ve observed?
MARC: Well, I mean people talk about the housing bubble in the United States and the downturn in housing prices in the US. What stands out to me –and I never experienced that before and I’ve been traveling extensively since the 1960s – is wherever you go you encounter boom conditions. And some boom conditions are bigger than others. Say three years ago there was a boom in Dubai. Two years ago the boom was a bit bigger; a year ago it was a bit larger; and now, it’s difficult to imagine how the boom could become bigger to what it is right now. And the same happens in many other countries. Everywhere you have essentially a forest of cranes building; and we have an unbelievable construction boom everywhere in the world. And my view is simply: If you have a synchronized global economic boom as we have had, then the consequence is one day a global synchronized bust, because in the past usually booms were concentrated in one sector, say oil in the 70s or NASDAQ, I mean technology in the late 1990s, or Japan (1985-1990). So that was just one sector of the global economy that was booming and the others weren’t. But now I can assure you: Everywhere you have a colossal boom; and I think this will give way to colossal bust. If it’s this year or next year, who knows? But I don’t want to be caught in this colossal bust. And if someone says, “oh, we can make a lot of money over the next 12 months until it happens,” then good luck to him. I just don’t want to be overly exposed to this boom at the time when, say, cyclically I can see that there is this relative illiquidity coming up and where it is difficult to build much on the existing boom. And besides from that, if you really have boom conditions, that doesn’t guarantee that equities go up. Sometimes you have strong economic conditions and stocks go down like in the Middle East in 2006, early 2007. We had boom conditions but stocks still dropped 50 percent. [53:41]
JIM: Well, you know, Marc, I think it’s in the next week or so you meet with the Barron’s roundtable group. I’m sure I think your views are going to be much, much different than the roundtable. They usually are. Do you expect optimism to be expressed there. I mean one of the standard things that we see today, slow growth, rising markets, even though earnings are going down, interest rates are going down, so we could see multiple expansions. What do you expect your group of peers to be saying?
MARC: Well, basically, the interview took place last Monday and the group by and large is bearish on the economy. But they are in denial about the stock market. They all think that stocks will be okay, but they are bearish on the economy. And that’s what I think is happening throughout essentially the money management establishment. People are kind of cautious on the economy. The economists predict, say, a soft landing and the analysts are essentially actually quite positive because they predict the S&P earnings to grow by 12 percent this year. And so there is this environment of what I would call self-delusion. And my view is that the markets won’t perform well. But equally, as I said, if someone said you must own stocks, I think the emerging stock markets today are more vulnerable than the Dow Jones. And so if I had to own stocks, probably I would be in the Dow Jones – whereby I’d prefer not to own any stocks. [55:15]
JIM: Well, Marc, I want to thank you for joining us on the Financial Sense Newshour. You’ve been very generous with your time. I know it’s late there in Thailand where you join us. If our listeners would like to find out more about your work –and by the way, my compliments, it’s probably one of the best written newsletters out there. It’s always full of interesting aspects or thoughts on investing – tell them how they could do so.
MARC: Well, basically, they can send me an email at FaberDoom@yahoo.com, or they can go to the website www.gloomboomdoom.com.
JIM: Marc, I want to thank you so much for joining us on the program. I want to wish you a happy, prosperous and healthy new year.
MARC: Well, thank you very much for having me.
Guest Expert Page & Contact Information
Joining us on the program this year is Dr. Marc Faber, he’s the editor of The Gloom, Boom & Doom Report.
And Marc, I want to start out with something you said in your January newsletter, and you quote Lao Tzu, the 6th Century Chinese poet, where he said: Those who have knowledge don’t predict; those who predict don’t have knowledge. Isn’t this going to be one of those difficult years to predict where the markets are going? It just seems like there are too many crosscurrents this year.
MARC FABER: I don’t think that it is all that difficult to predict markets, but we have to understand that you can’t give a target for, say, the Dow Jones because you essentially have a manipulated market. Manipulated by the Federal Reserve, in the sense that if the Fed cuts interest rates to say zero percent or one percent, as they’ve done after 2001, then stock prices can be supported. But obviously a cut of interest rates at this stage of the cycle where we clearly have inflationary pressure would obviously increase the rate of inflation and probably weaken the dollar further – certainly against a hard asset such as gold and other precious metals. So let’s say someone said the Dow will go up to, oh, I don’t know, double. Say for argument’s sake, from 13,000 to 26,000. We would have to measure that increase –this doubling of the Dow Jones – in a hard currency such as either a foreign currency or in gold. And if the Dow doubles because of money printing by the Fed to 26,000, it wouldn’t mean necessarily that economic conditions improved, but it would mean maybe that inflation picked up dramatically and that the gold price goes up three times. [2:52]
JIM: You also quote Peter Bernstein the economist and strategist and he said that:
The current scene bears no resemblance to a typical economic peak or to conditions usually preceding a slowdown in business activity. Those kinds of conditions feature excesses in the business sector. But the business sector at the present time has a relatively clean bill of health. There are no signs of the usual boom in capital spending that leads to a cyclical top and leaves an overhang of capacity.
I’d like to get your thoughts on the current condition of business. Is this the one saving grace that we have in the US economy right now?
MARC: I think that it is difficult to say that we don’t have, let’s say, excesses in capital spending because we live in a globalized world. In other words, capital spending may not have been excessive in the United States – although I could argue that home building is some kind of capital investment; the whole commercial real estate market is some kind of capital investment. And what we have is we have excesses in capital spending in other countries such as in China and in other emerging economies. So basically, the US has outsourced largely it’s production, and that’s where the excesses in capital spending are occurring.
Moreover, in a business cycle you just don’t only look at capital spending. I think the biggest excess was in consumption in the United States, where consumption as a percent of the economy has increased from around 60% in 1980 to now over 70%. So in an economy where you essentially have maladjustments as a result of easy monetary policies the excesses do not necessarily have to be in capital spending. The excesses can be in asset markets, such as the housing market, in stocks, in commodities and they can be in consumption. [5:04]
JIM: Let’s talk about consumption, because the big question everybody has here –and there is such an emphasis in the US economy on consumption – and that’s the US consumer. And we’ve got a situation now where you know they can’t take out money out of their mortgages like they used to and use them as an ATM machine. We’ve seen a bit of a slowdown in the fourth quarter with consumer spending. Do you think this is the time that the US consumer finally goes on hold. I mean, they’ve been counting the US consumer out for years and decades, but it’s like the Energizer Bunny: They keep on spending.
MARC: Yes, I agree that there has been a lot of let’s say apprehension about the ability of the consumer in the US to continue to consume, but I think the important question here is the Federal Reserve and also the Treasury have encouraged, in the US, consumption. And does consumption lead to the creation of wealth? Or if you have a table full of food and you just eat the whole food away does it lead to a reduction of wealth? That is really the issue here. And I think that in the US the excessive consumption which was driven by asset markets, in other words by increasing asset prices – stocks until 2000, and after that by the real estate market – have essentially led to an economy that is starved [of] savings and starved of capital spending and characterized by excessive consumption which is on evidence from the growing trade and current account deficits. And now the goldilocks apostles they will always say, “well, the trade and current account deficits do not matter.” But they do matter in the sense that there has been a huge transfer of wealth to foreign countries, and now foreign countries have these sovereign funds which they invest globally; and there has been a huge creation of wealth, in particular in the resource-producing countries; and also there has been extended US dollar weakness. And so the current account deficit and the excessive consumption does matter to some extent for the well-being of the US. [7:33]
JIM: One thing that we’re starting to hear in the US, we’ve heard it from Hank Paulson and the President in December (we’ve seen it recently – the White House convened last Friday), they’re talking about some kind of stimulus package coming out from Washington. Whether it’s going to help people that are under duress right now because of mortgage resets – but some kind of fiscal spending program – who knows? Maybe we get some kind of helicopter drop. What about the US government combined with fiscal stimulus and monetary stimulus as it appears right now that the Fed is probably going to get more aggressive in its rate cutting.
MARC: Yes. I’m sure that they will implement a stimulus package, but I think the stimulus package will be an ill-fated attempt to revitalize the economy. If you look at the problem of the economy, it’s been excessive credit growth that came from easy monetary policies. And what they want to do now is essentially to implement another set of monetary policies and other measures to stimulate consumption, when consumption precisely has been the problem of the United States – the excessive consumption. And I think a stimulus package may be useful if it were directed at the stimulation of capital spending and at the encouragement of saving at the expense of consumption. And that can only lead to essentially a readjustment period in the economy. Readjustments – basically what the US needs is a recession. And only a recession can redress the excesses that have taken place. And if you superimpose another bubble on the existing bubble you create more maladjustments in the economy and more ill-fated measures that eventually lead to a total breakdown of the system. [9:42]
JIM: You know, unfortunately here in the US, whether you’re watching both parties – the Republicans or the Democrats – they’re talking about ways to increase consumption because they’re worried by a slowdown in consumer spending. And nobody in a presidential election year seems to want to take the pain to go through a recession and redress a lot of the imbalances or cleanse the system because of the imbalances we see right now – whether it’s mortgages, excess consumption and indebt[edness]. So in the end, could you see a scenario, Marc, something like this: In the first quarter we see economic weakness as we’ve been seeing, we see more write offs coming from the financial system (there’s talk about Citigroup maybe writing off $16 billion), also there’s going to be a slowdown in corporate earnings, and then we get a massive response from the Federal Reserve that temporarily probably stimulates the markets. So let’s say, in between, if you think of an Oreo cookie, a hard first quarter, a creamy filling in the second and third, and by the fourth quarter higher interest rates and inflation come back to bite us again.
MARC: Well, personally, I think that the US, if you measure economic statistics properly –and the government is lying blatantly – the US went into recession 3 months ago. And I’m saying the government is lying blatantly, because they take nominal GDP and then they fiddle around with inflation figures. I mean none of your listeners have an inflation rate of less than 5 to 6% per annum. You just can’t exclude food and energy prices and healthcare costs from the CPI, from the cost-of-living increases. So nominally the US economy may still be growing, but inflation adjusted –in other words, in real terms – we’re already in a recession. And most US households, except for the super rich, are today no better off than they were five or seven years ago. Their income gains have all been eaten up by cost increases by inflation.
Now, some people have benefited from asset inflation in the sense that their houses in which they live have appreciated in value but that has been precisely because of easy monetary policies and the debt growth that have now brought about problems.
And all I can say is that corporate profits in my opinion began to contract in the third quarter of last year and they will continue to contract, because corporations now –and this is important to understand – corporations are facing cost increases. So the margins are going to be squeezed. And whereas the valuation of the stock market is not unbelievably high in the sense that stocks are not selling at 50 to 80 times earnings like in Japan in 1989, if you exclude say the energy sector from the S&P which is selling at 12 times earnings or 10 times earnings, then the S&P valuation is over 20 times earnings. If you’re faced with declining earnings then basically the S&P is not a great bargain here. [13:14]
JIM: Let me just continue on that inflation theory, because what you are talking about in the fourth quarter the GDP deflator, if I recall, was falling from the second, third and fourth quarter last year; and I know in the third quarter the GDP deflator was the lowest since Eisenhower was president. So could you get statistically, and I’m just looking forward in an election year, maybe we get the lowest inflation rates since Calvin Coolidge was president. So in nominal terms as reported by the government we get this slow growth figure that they’re talking about – one to two percent – in those terms, we avoid a recession even though in real terms we are in one.
MARC: Well, basically, that would be a form of stagflation. And I mean it’s very difficult to measure GDP in the first place, and what you have to look at is essentially standards-of-living increases in an economy. And I don’t think that there are many standards-of-living increases in the United States at the present time, nor for that matter in Western Europe. We have huge standard-of-living improvements in emerging economies where a middle class is being created and where even workers or farmers are doing better than say a couple of years ago. But my point is simply that the government is lying. And they will continue to lie because they don’t want to admit that they created an unbelievable economic mess. Nor will the Fed admit that their ill-conceived monetary policies led to the crisis that we have today in the financial markets. [15:01]
JIM: What about the theory that’s being bandied about, even though the US economy slows down as we are now seeing that –they call the decoupling theory – that the rest of the world (whether it’s Europe, Asia, emerging markets) will continue to be strong? So therefore, if you are let’s say a large cap international company where you get a good majority of your sales overseas – and a good example would be, for example, DuPont this week beat estimates. They get 60% of their business overseas and because of that business doing very well their earnings were higher than expected. Do you subscribe to the decoupling theory, or do you think a slowdown in the US will have some effect on Europe and the rest of the world?
MARC: Well, basically, we have to first of all distinguish between an economic decoupling and a financial decoupling. In other words, can some countries grow when the US is say in a no-growth mode or in a recession mode? I think that this is possible because if you look at basically the US economy over the last two hundred years, occasionally you had a recession in one state, say, Texas in the early 1980s (when the oil price started to go down), and you had expansion in another state like New England (which benefited from lower oil prices); or in the early 1990s, you had a recession in California but other states they were expanding. So in an economy which is very complex, where you have different regions and you have different sectors – industrial sectors and service sectors – it is conceivable that one sector is in recession and other sectors or other regions are not; that is entirely possible. But I would argue that over the last seven years we had an unprecedented global economic boom where essentially every country has been growing with the exception of Zimbabwe, because you have a money printer in Zimbabwe who essentially should be joined by Mr. Bernanke. He would fit very well with Mr. Mugabe in that country.
Now, what happens if the US no longer grows is that the trade and current account deficits of the US shrink. In other words, we had during the excessive consumption period 1998-2006, a current account deficit in the US that increased from 2% of GDP to over 7% of GDP, and at the end was supplying the world with $800 billion annually. And this river flows into the world through the American current account deficits, and essentially provided the world with the so-called excess liquidity and created booms in everything from art prices to commodities, stocks, bonds, real estate, what not. And once the US no longer has this growing current account deficit, but a shrinking current account deficit, you have essentially a relative illiquidity coming up in the world. It is not that it’s tight money, but the rate of growth of liquidity shrinks and it does have obviously an impact on the economies and on the asset markets. And it is conceivable that say the US goes into a recession, Europe goes into a recession and that China does not go into a recession but into a growth slowdown, say from 8 to 10% GDP growth down to 3 to 6% of GDP growth. But this decline in the growth rate is still very uncomfortable for China, as well as for India. So I’m not a great believer in this decoupling theory.
Moreover, I don’t believe that financial markets will be decoupled. In fact, I would argue: If you look at look at the last four years, 2002 to today, then emerging markets have been the big bubble. The US markets have not been a gigantic bubble in the sense that US equities, especially large cap stocks, are not terribly expensive by world standards because the dollar has gone down so much. And so the big bubble is probably in emerging markets; and these markets, obviously if the S&P goes down, will be hit very hard. And I would argue, if someone puts a gun to my head, and says, “Marc, you must buy stocks,” as much as I dislike saying this but I would probably rather buy US stocks today, than say some of the emerging markets that are selling at 30 to 50 times earnings. [20:08]
JIM: You bring up an interesting point about liquidity in the world which has a genesis in much of the US trade deficit. As we look around the globe today, Marc – I have a screen on my Bloomberg that has year-over-year money supply growth rates around the globe and what is surprising as I look at this table is to see double digit money supply growth around the globe out of 18 of the top 20 central banks. I think Europe reported last week it’s money supply is growing at over 12%, yet Trichet is talking about being tough on inflation. You know, the inflation rates that we’re seeing here in the United States, are they not global in nature? Are you finding that, for example, in China where you have the inflation rate going at 6 or 7%, that this is a global phenomenon?
MARC: Yes, I mean that’s the point. I mean when recently people were very negative about the US dollar and so forth – and of course, long term you cannot be optimistic about the US dollar – but the US dollar has declined quite substantially, especially against the euro in the last couple of years; and the Europeans are also good money printers. It’s not just Mr. Bernanke that is the chief money printer. The others are not much better either. So basically, you have this excess liquidity being created in order to support asset markets and so forth.
But the point about this excess liquidity is that an eternal boom is out of the question. So what the Fed and the other central banks can do is kind of stimulate, through easy monetary policies, credit growth; but the private sector if it becomes, say, risk adverse can withdraw liquidity and a) not lend and people can also refuse to borrow, and so the credit does not accelerate but actually contracts. And that leads to what I call a relative illiquidity (it’s not an absolute illiquidity, it’s a relative illiquidity) and that then has some negative implications on some asset markets. But to come back to the first question you raise about making predictions, I think the difficulty today is that under normal conditions, say under a gold standard, we would be in a massive deflationary recession at the present time. Now, the central banks are all intent to prevent that and they print money like crazy and throw liquidity at the system by cutting interest rates and taking extraordinary measures. And so the question arises: How did you measure really economic growth and how do you measure your wealth? Say, as I mentioned, if the Dow goes from here to 26,000 – it doubles in value – if at the same time the gold price goes up 5 times, you lost out by being in financial assets. And I think this is what has happened since year 2000. In year 2000, as you know, you could buy with one Dow Jones, 44 ounces of gold. And now you can buy less 15 ounces of gold.
Now, I’m not saying that gold cannot have a meaningful correction, but I think that the central banks have created actually a state which I would almost call a hyperinflation where asset prices go up very substantially and they don’t make you really richer. I mean say in 1980, there were six billionaires in the world, and today you have thousands of billionaires in the world, everywhere. And money – the value of money – the purchasing power of money has depreciated very considerably. And I’m not speaking here of the US, because I was recently in New York and I saw that the price level in New York is actually quite reasonable compared to, say, the price level in Europe and in other countries. But usually when you have a situation like the US that has achieved relatively low prices levels through currency devaluations – and the US has pursued a policy to lower the value of the dollar – what usually follows (and not every time – usually what follows) is high and accelerating inflation rates. And the US government of course they will understate inflation, but the pocketbook of the consumer will notice this increase in inflation and what you will then get is essentially prices going up and the standards of living of people going down – in other words, stagflation. [25:08]
JIM: Isn’t this one of the signals that gold is giving to the financial markets? When you look through this period of time where we have seen nominal increases in assets and stock markets around the globe, yet if you look at the summer of 2001 when gold was at 255, and here we’re looking at gold heading towards $900 – do you think this is what is being recognized around the globe, that everybody knows that money is dying, it’s losing its value so gold is becoming the ultimate currency to hold?
MARC: Basically, my view is this: Normally, the safest investments in a society is cash, deposited in a bank or in Treasury bills. But the Western democracies and governments in general have created over time an environment where actually cash is a disastrous investment because you’re losing out to inflation like in the 70s as a result of consumer price increases or in the last couple of years as a result of asset price increases. Now, I’m not suggesting that there cannot be times – three months, six months, one year – when cash does better than, say, stocks or better than real estate. Say, in the last nine months it was better to be in cash than in stocks that depreciated or in real estate that depreciated. But basically, if you print money like the Fed or other central banks do, the value of money – of paper money – goes down and then it’s reflected in an increase in the value of assets such as gold that cannot be multiplied at the same rate. I mean someone could say, “oh, the gold price has gone up a lot since 2001.” I can turn around and say: “No, the gold price is the same. It’s the dollar the dollar that has collapsed against the price of gold.” And why did the dollar collapse against the price of gold. You call up Mr. Greenspan and Mr. Bernanke and you ask them about it. Of course, they will never give an answer. Each time Ron Paul asks them a sensible question they just evade the question and they move on to something else because, as I explained, they are a bunch of liars. And actually, if there was a court for honest money, both Mr. Greenspan and Mr. Bernanke should be hanged. [27:44]
JIM: You know, it was interesting – you mentioned Congressman Ron Paul. The last time Bernanke was on Capitol Hill, he asked him about curing inflation with more inflation, and asked him about what was happening to the dollar. And Mr. Bernanke responded – which I was horrified – and he said, “well, actually if you live in the United States and you pay for things with dollars it really doesn’t affect you.”
MARC: He’s out of his mind. Go to Zimbabwe and ask the citizens there: If you pay in Zimbabwe dollars it affects you that the currency has collapsed? Of course it affects you.
JIM: There’s a situation I want to move on to in the financial markets. A lot of the risks that we’ve seen erupt last year, whether it was in February with intermediate lenders or August with the collateralized debt obligations, something that has not gotten much attention and I think could even be a bigger issue and that is credit default swaps, which are now estimated to be somewhere in the neighborhood of 45 trillion. I think there have been a lot of people, Marc, in the hedge fund community and the banking community during this period when we were inflating between 2003 and 2006, they were writing these credit default swaps on corporate bonds because it was almost like free money. Now, if the US economy has gone into a recession –even though we’re not saying it formally – when you go into a recession companies have greater difficulties making their earnings, earnings slow down, cash flow slows down. And what happens if you start getting a bunch of corporate bond defaults? I think this is an issue with these credit default swaps that nobody is looking at. A few people have talked about it; Bill Gross saying it could be somewhere in the neighborhood of $250 billion losses. This is another issues that could surface this year that could throw chaos into the markets.
MARC: Well, I think you’re touching on something very important. I think that over the last 25 years we had numerous financial innovations. And I have to say is, the Federal Reserve had the power to control the financial innovations but actually they encouraged it and led to the excesses we had recently. And I think that the problem that occurred in subprime lending is a symptom of a much wider problem, and that the subprime lending crisis infects obviously other credit markets and so forth and that it will spread like a bush fire through the economy, especially if an economy was essentially driven by excessive credit growth. I mean in the last seven years GDP increased by $4.2 trillion and total credit between 2000 and 2007 increased by $21.2 trillion. In other words, debt has been growing much faster than the nominal GDP.
And I think that now we are in a process of deleveraging – of credit contraction, basically – but the Fed and the Treasury will do everything to restimulate the credit growth that led to the problems in the first place. That’s why I’m arguing that the policies of Mr. Greenspan, of Mr. Bernanke and Mr. Hank Paulson are totally misguided. Totally. And I believe, you know, the financial stocks, every bull market I’ve seen since 1970 when I started to work was accompanied by strength in financial stocks. When you have weakness in financial stocks something is wrong. And therefore, I don’t believe that this bull market that we had since October 2002 to the Summer of 2007 that this will come back. I rather believe that we are in a period of high volatility like in the 70s, when the Dow moved up and down every year by 20%, and in 1982 the Dow was still no higher than we were in 1964. So I think we can have a lot of fluctuations here. And at times the Fed, through rate cuts, can manipulate equity prices higher and so forth. And at times we will have disappointing earnings, disappointing results. And I would suppose that we will have massive bankruptcies as well where financial firms become illiquid and insolvent and are forced to the wall. And so the market environment for financial assets is not going to be particularly good. [32:46]
JIM: Let’s talk about a couple of investment themes among this volatility that we’re seeing. A couple of things that stand out or strike me, Marc, is energy which has been on a roll – and I happen to subscribe to the peak oil theory. I mean we have not made any major discoveries, we’re not replacing what it is that we consume, we have more people consuming energy today. That is one theme that I can see. And along those lines and something similar – you cover this in your current newsletter – is you’ve got a little over 1% population growth in the world, the acreage for growing crops isn’t expanding. In fact, in certain areas like China it’s being turned into parking lots – like Joni Mitchell’s song – or buildings. What about the theme of energy, food and precious metals if you wanted to be in this market as a long term investor?
MARC: Yes, I think that’s a very good point. In general, I believe that you should be in assets that cannot be multiplied easily, such as commodities (whether it’s copper or zinc or nickel or oil or precious metals), or food items (wheat, corn, soybeans, sugar and so forth). But the commodity markets had a very big move and the price of oil has gone up essentially almost 10 times since 1998 from $12 a barrel to now close to $100 a barrel. And in an environment of slowing growth in the world, I would be somewhat careful of investing now in industrial commodities whose demand depends essentially on strong economic growth. So I would not be surprised to see – as has already happened in some commodities like nickel – that prices correct meaningfully. And all I can say to investors is I’m bullish about gold in the long run, but don’t buy anything –whether it’s a house or stocks or precious metals – if you are not prepared to ride through say a 20% correction, because we have higher volatility. We will get more corrections along the way up. I mean I remember the great bull market of the Taiwanese stock market, 1984 to 1990. The market went from an index of less than 500 to 12,500, but we had in 1987 a 50% correction, in 88 a 40% correction, in 89 a 30% correction until we reached a final peak. So investors have to get accustomed to higher volatility. And someone who cannot live with this volatility because he is leveraged, is going to be forced to the wall.
So my advice is to be prudent. And yes, I like energy. I think energy stocks are actually quite inexpensive. But if the oil price for one reason or another drops to say $70, then obviously energy stocks will be down. And all I notice is when I started to like commodities in the year 1999 to 2002, it was not a widely accepted investment theme. And today, the investment theme is much more well known, and there are many more speculators in the market place. So I’m still positive in the long run but cautious say for the next six months. And I would also add, as of today – you see, if I remember, well, in 1980, after 10 years of consumer price inflation in the US, everybody thought that consumer price inflation would continue forever. And what then happened after 1980 is that consumer price inflation slowed down and we had a period of disinflation. Today, if there is one consensus it is that paper money will become worthless and that asset prices will continue to go up. And I would still think that it’s not very likely that Robert Prechter is going to be right with his deflationary bias –with everything, with gold prices collapsing to the Dow going down and so forth – but I would still think that there is still a small probability that we could have actually a period of deflation in the near future, which then will lead the central banks to print money like crazy. But in this period of deflation that I would not rule out we would have big declines in asset markets – big declines. [38:09]
JIM: Let’s say we start to get deflation. I mean certainly we’re seeing falling housing prices in the US and other places of the world. Do you think that we get preemptive strikes and perhaps they just throw all caution to the wind? Like right now, the latest consensus is when the Fed meets January 30th it’s going to be 50 basis points; and there’s even talk within the markets that they don’t wait until January 30th if things begin to deteriorate. I know there’s a lag effect to all kinds of things, whether it’s raising interest rates or lowering interest rates. If this deflationary period that could possibly erupt, do you believe it would be short-lived?
MARC: Yeah, very good question. I am quite sure the Fed will cut by 50 basis points; and if not by 50 at least by 25. But as you know, in Japan they cut rates dramatically to essentially zero and we still had deflation. I mean we cut interest rates from 6.5% on the Fed funds rate in January 2001, to 1% in 2003, and yet the NASDAQ still went down. So whether interest rate cuts and even a stimulus package – fiscal package – will help much remains to be seen. We could be in an unusual situation where it doesn’t help much. It’s possible because the public or the household suddenly starts to save; in other words, the savings rate goes up and people become risk adverse. As I said, I don’t know how the world will look like in a year’s time. I’d rather be in gold than in the Dow Jones, whereby maybe for the next three months the Dow Jones could outperform gold for a while. But in general, it’s very, very difficult to make any kind of predictions that make sense simply because you don’t know how irresponsible Mr. Bernanke and Mr. Hank Paulson will be. We just don’t have any idea. As you say, they can do a lot of things to try to support the asset markets. And Mr. Bernanke has written and spoken about this: that you cannot identify bubbles but when they burst you should step in with extraordinary measures. We just don’t know how extraordinary his measures will be. I mean the best for Mr. Bernanke, the best extraordinary measure would be to resign and say: “We failed. We are incompetent.” [40:54]
JIM: But you know, Marc, if you take a look at his study of the Great Depression and people might recall the comment he made at Milton Friedman’s birthday where he said to Mr. Friedman: “You know, you were right, we made the mistake. We caused the Great Depression. I assure you, it will never happen again.” Basically saying, according to Mr. Bernanke’s view and study of the Great Depression, the reason we had it was the Fed didn’t print enough money. Had they been able to do so the Depression would never have occurred. So it almost gives you an insight in terms of his thinking, which is along the lines with Mr. Greenspan in the sense that anytime there’s a problem in the economy or the financial markets massive liquidity seems to be the response and answer.
MARC: Yes, that is correct and I’ve written about this. And I think that the entire analysis of the Great Depression, especially by Mr. Bernanke, is totally wrong. The causes of the Depression were not tight monetary policies by the Fed, but easy monetary policies by the Fed. And Paul Warburg, who was at that time a Fed member, later on commented about this; that the Fed should have pursued tighter monetary policies in the years leading to 1929. And I’d just like to mention one point: In 1929, the PE on the Dow Jones was just about 13 times earnings. We didn’t have a massive stock market bubble in terms of valuation, but what we had is an earnings bubble and half the earnings collapsed. And I think today we don’t have, you know, like 50 times earnings on the stock market like we had in Japan. But I think we have an earnings bubble and that the earnings will disappoint very badly. But I’m just convinced that in a democracy, especially in a country like the United States, the politicians will print money. And whether or not it will always help to support asset markets is very questionable.
The one thing I can assure you is that money printing doesn’t create wealth. That is important to understand. And at some point, as my friend Barry Bannister pointed out, you reach with credit growth the zero hour. In other words, you print money, credit grows, but the economy doesn’t respond. And I think we are already in that situation. And what the outcome will be, hyperinflation or deflation, that is the difficulty to judge. But I think personally as an investor, I would be positioned to some extent in gold because in a deflationary environment I happen to believe that gold would outperform other asset classes because things will get so bad that people will run into gold as a safe haven. And at the same time, I would hold essentially some cash and I would probably deleverage. In other words, I wouldn’t hold a lot of debt in the present environment. If there is hyperinflation, to hold a lot of debt is the right thing to do; but just in case we have deflation, like now in housing and now probably also in commercial properties (that is the next shoe to drop), that in such an environment you’re better off by not holding too many debts. [44:40]
JIM: I want to cover a point in your January newsletter and just let our listeners know, if you don’t subscribe to Marc’s newsletter you’re really missing out on some good thinking.
MARC: Well, it is very kind of you.
JIM: You had a gentleman who has written pieces for your newsletter in the past, his name is Michael O’Higgins, he’s author of Beating The Dow – a very sharp money manager, and I’m going to quote from your newsletter here, and he goes:
So where does one find value in today’s investment world? In my view, given that the main focus of the current US Federal Reserve board remains one of fighting deflation, investors should avoid bonds entirely and concentrate on investments that can protect them from a rising inflation rate i.e. stocks and commodities. With these two categories we have our portfolios equally invested among four investment themes: dogs of the Dow; dogs of the world; precious metals and mining; and energy.
What do you think of that?
MARC: Well, basically, I agree with Michael and I think that if you buy today at 10 years the US Treasury, or 30 year US Treasury, you’re flirting with disaster because they will only perform well in an environment of total deflation, given the low yields they provide at the present time. But as I said, the concept of inflation and deflation is very complex because you can have an economic system where some assets are inflating and some assets are deflating. Like in the US, say in the last 12 months, you would have been better off in US Treasuries than say in the housing market, which has declined in value. So in general, I of course agree with Michael to be in stocks in the long run and to be in precious metals and in energy in the long run and so forth. I’m not sure whether that is the right medicine for, say, the next three to six months. I mean I’m very cash rich here. I’m cash rich US dollars. I think the US dollar does not have a significant downside risk against the euro. In other words, if you put a gun on my head and said, “Marc, you have to choose one currency today, for the next three months: the euro or the US dollar,” I think I would choose the US dollar. Although, I’m very negative about the US dollar in the very long run. But just for the next three months I think the dollar will hold because the current account deficit is now shrinking, the trade deficit is no longer expanding and so forth and so on; and the dollar is relatively inexpensive vis a vis the euro. Would the question be: put all your money into US dollars cash, or put all of your money in gold? As of today, that would be a very tough question because the gold market in my opinion is now somewhat overbought and could undergo easily a 10 to 20% correction. [47:59]
JIM: I’m sensing, Marc, as we’ve had this discussion and also from reading your newsletter, that you’re very cautious at this point. The fact that you’re holding larger amounts of cash and in the dollar is that because of the amount of uncertainty? And what would cause you to move out of cash?
MARC: Well, I think that as an investor – and I’m not a mutual fund manager or hedge fund manager that needs to show performance every week or every month – I’m a believer that occasionally the markets create an unusual opportunity. The unusual opportunity of the last 10 years was really commodities in the years 1999 to 2001, and emerging economies following the Asian crisis. They provided a lifetime buying opportunity. Now that the whole world is captivated with investments, and buying this and selling that and moving here and moving there and performance, I sometimes feel I want to actually be on the sidelines and just give it some time until I make the next major bet. I mean I’m involved quite heavily in gold. Would I put now all my money tomorrow into gold? I doubt it. And I want to be diversified. And all I can say: investment opportunities arise again and again. I mean, I suppose if Citigroup went down to $5, I’d be tempted to look at it. I’m not particularly interested here at the 27 to $30 level, because the financial excesses we had that were built over the last 25 years will take time to kind of correct. And if you have a boom sector, say, like the oil sector in the 70s, afterwards for 20 years oil was unattractive and the drillers were unattractive. And so financial stocks, after a bubble burst in that sector may not provide the leadership in the future and may be unattractive for many, many years to come. But I’m convinced, like I wrote about in my last report about Cambodia, I think there are some countries in the world whether it’s Cambodia or Ukraine or Belarus or parts of China or parts of India, or parts of Russia that can have strong economic growth even in a weakening global environment and provide investors with unusual opportunities. [50:50]
JIM: Marc, you do a lot of traveling around the globe and I think that gives you a different perspective than let’s say some analyst that stays in his office all the time. As you have been traveling over the let’s say last 12 months, is there anything that stands out in your mind and things that you’ve observed?
MARC: Well, I mean people talk about the housing bubble in the United States and the downturn in housing prices in the US. What stands out to me –and I never experienced that before and I’ve been traveling extensively since the 1960s – is wherever you go you encounter boom conditions. And some boom conditions are bigger than others. Say three years ago there was a boom in Dubai. Two years ago the boom was a bit bigger; a year ago it was a bit larger; and now, it’s difficult to imagine how the boom could become bigger to what it is right now. And the same happens in many other countries. Everywhere you have essentially a forest of cranes building; and we have an unbelievable construction boom everywhere in the world. And my view is simply: If you have a synchronized global economic boom as we have had, then the consequence is one day a global synchronized bust, because in the past usually booms were concentrated in one sector, say oil in the 70s or NASDAQ, I mean technology in the late 1990s, or Japan (1985-1990). So that was just one sector of the global economy that was booming and the others weren’t. But now I can assure you: Everywhere you have a colossal boom; and I think this will give way to colossal bust. If it’s this year or next year, who knows? But I don’t want to be caught in this colossal bust. And if someone says, “oh, we can make a lot of money over the next 12 months until it happens,” then good luck to him. I just don’t want to be overly exposed to this boom at the time when, say, cyclically I can see that there is this relative illiquidity coming up and where it is difficult to build much on the existing boom. And besides from that, if you really have boom conditions, that doesn’t guarantee that equities go up. Sometimes you have strong economic conditions and stocks go down like in the Middle East in 2006, early 2007. We had boom conditions but stocks still dropped 50 percent. [53:41]
JIM: Well, you know, Marc, I think it’s in the next week or so you meet with the Barron’s roundtable group. I’m sure I think your views are going to be much, much different than the roundtable. They usually are. Do you expect optimism to be expressed there. I mean one of the standard things that we see today, slow growth, rising markets, even though earnings are going down, interest rates are going down, so we could see multiple expansions. What do you expect your group of peers to be saying?
MARC: Well, basically, the interview took place last Monday and the group by and large is bearish on the economy. But they are in denial about the stock market. They all think that stocks will be okay, but they are bearish on the economy. And that’s what I think is happening throughout essentially the money management establishment. People are kind of cautious on the economy. The economists predict, say, a soft landing and the analysts are essentially actually quite positive because they predict the S&P earnings to grow by 12 percent this year. And so there is this environment of what I would call self-delusion. And my view is that the markets won’t perform well. But equally, as I said, if someone said you must own stocks, I think the emerging stock markets today are more vulnerable than the Dow Jones. And so if I had to own stocks, probably I would be in the Dow Jones – whereby I’d prefer not to own any stocks. [55:15]
JIM: Well, Marc, I want to thank you for joining us on the Financial Sense Newshour. You’ve been very generous with your time. I know it’s late there in Thailand where you join us. If our listeners would like to find out more about your work –and by the way, my compliments, it’s probably one of the best written newsletters out there. It’s always full of interesting aspects or thoughts on investing – tell them how they could do so.
MARC: Well, basically, they can send me an email at FaberDoom@yahoo.com, or they can go to the website www.gloomboomdoom.com.
JIM: Marc, I want to thank you so much for joining us on the program. I want to wish you a happy, prosperous and healthy new year.
MARC: Well, thank you very much for having me.
Guest Expert Page & Contact Information
Monday, October 20, 2008
Cold Water on Today's Bull
http://seekingalpha.com/article/100771-throwing-cold-water-on-today-s-rally-mark-faber?source=article_lb_articles
Saturday, October 18, 2008
Hedge Fund Not Fun Anymore
Investors pulled at least $43bn from US hedge funds in September as market turmoil led to unprecedented withdrawals, an analysis by a leading research house shows.
The data from TrimTabs Investment Research – which was to be sent to clients late on Wednesday – come as hedge funds are working to prevent far bigger redemptions by the end of the year, when many funds give investors a chance to take out money.
Withdrawals can lead to a vicious circle in the markets, as funds sell holdings to return money to clients, depressing prices and prompting further redemptions. ...
The chief executive of a leading alternative investment manager said he expected the hedge fund industry to shrink by 50 per cent in coming months – with half the decline coming from withdrawals and half coming from investment losses.
Conrad Gunn, chief operating officer of TrimTabs, said the $43bn in September withdrawals would mark “the beginning of what we expect to be a series of outflows for the remainder of the year. We expect October outflows to be larger”.
The industry, which manages close to $2,000bn, has experienced outflows during only a handful of months previously, including a small outflow in April of this year.
If you ask me what makes me most bearish, what makes me think that the S&P 500 could go to 600, it is not the recession. We have gone through recessions before, even credit-induced ones.
No, what makes me very worried and why I am not deploying capital just yet, even though the market is getting cheap, is the tsunami of hedge fund sales that may be on the horizon.
Recessions we have seen before. Highly leveraged fund liquidation by over-compensated money managers in an industry that gets paid not to take losses whose time horizon is next quarter and whose clients thought they would earn money in any market environment we have not seen before.
That is what worries me.
The data from TrimTabs Investment Research – which was to be sent to clients late on Wednesday – come as hedge funds are working to prevent far bigger redemptions by the end of the year, when many funds give investors a chance to take out money.
Withdrawals can lead to a vicious circle in the markets, as funds sell holdings to return money to clients, depressing prices and prompting further redemptions. ...
The chief executive of a leading alternative investment manager said he expected the hedge fund industry to shrink by 50 per cent in coming months – with half the decline coming from withdrawals and half coming from investment losses.
Conrad Gunn, chief operating officer of TrimTabs, said the $43bn in September withdrawals would mark “the beginning of what we expect to be a series of outflows for the remainder of the year. We expect October outflows to be larger”.
The industry, which manages close to $2,000bn, has experienced outflows during only a handful of months previously, including a small outflow in April of this year.
If you ask me what makes me most bearish, what makes me think that the S&P 500 could go to 600, it is not the recession. We have gone through recessions before, even credit-induced ones.
No, what makes me very worried and why I am not deploying capital just yet, even though the market is getting cheap, is the tsunami of hedge fund sales that may be on the horizon.
Recessions we have seen before. Highly leveraged fund liquidation by over-compensated money managers in an industry that gets paid not to take losses whose time horizon is next quarter and whose clients thought they would earn money in any market environment we have not seen before.
That is what worries me.
Thursday, October 16, 2008
Time will tell
Seth Glickenhaus, who in 1929 had just become a Wall Street Broker says that we are on the verge of a new bull market, within a week mind you, and there is no question the U.S. did the right thing.
::::::::
I suppose in this video, when Mr. Glickenhaus states that the U.S. "did the right thing" he is referring to this rapacious Wall Street bailout Bill?
::::::::
I suppose in this video, when Mr. Glickenhaus states that the U.S. "did the right thing" he is referring to this rapacious Wall Street bailout Bill?
Monday, October 13, 2008
A pure financial crisis?
chincook,
Though I never posted at mitbbs, I have been reading there a lot and like your posts the most. Glad to see you here. As for your view, I was thinking the same and still think it could be the best scenario if everything turns out the way as we hoped: a pure financial crisis. That's why I was quite bullish in the beginning of the year and shouted bottom around 1250, and worst 1150. Boy was I wrong, I would be chopped to thousand pieces if I posted that in MITBBS.
Not till the July crash, I came to realize how severe the situation is, we are talking about a 12 trillion Real Estate bubble, compare with 5 trillion Nasdaq 2000 melt down, it’s 2.5 time worse, in addition to that, We are living in a globalized era, globalization makes life better in many ways, but when it fail it could be quite ugly. As for how bad it can be, it is up to anyone’s guess.
On the bright side, the world will be much better after the wash off, there will be many prosper years ahead of us, so let’s get prepared for this to end, and end it will, that I can assure you.
chinook wrote:
头次开贴，上周四晚上和朋友们说的几句话：
“I have been thinking about this sell off with the 1929 one, and I still believe this will be a much short event, it might only have a quick dent for the economy, just like a flu. The quick response, coordinated actions across the globe and the real needs from emerging market will prevent a deep recession from happening. ”
基本的想法就是so far，实际上还是金融危机，如果政府开动印钞机器，很多程度上代理financial inst的功能，或让金融机构再次运转起来，那么经济主体当不会受太大影响。
向各位老大请教下，这个看法哪里不对？
Though I never posted at mitbbs, I have been reading there a lot and like your posts the most. Glad to see you here. As for your view, I was thinking the same and still think it could be the best scenario if everything turns out the way as we hoped: a pure financial crisis. That's why I was quite bullish in the beginning of the year and shouted bottom around 1250, and worst 1150. Boy was I wrong, I would be chopped to thousand pieces if I posted that in MITBBS.
Not till the July crash, I came to realize how severe the situation is, we are talking about a 12 trillion Real Estate bubble, compare with 5 trillion Nasdaq 2000 melt down, it’s 2.5 time worse, in addition to that, We are living in a globalized era, globalization makes life better in many ways, but when it fail it could be quite ugly. As for how bad it can be, it is up to anyone’s guess.
On the bright side, the world will be much better after the wash off, there will be many prosper years ahead of us, so let’s get prepared for this to end, and end it will, that I can assure you.
chinook wrote:
头次开贴，上周四晚上和朋友们说的几句话：
“I have been thinking about this sell off with the 1929 one, and I still believe this will be a much short event, it might only have a quick dent for the economy, just like a flu. The quick response, coordinated actions across the globe and the real needs from emerging market will prevent a deep recession from happening. ”
基本的想法就是so far，实际上还是金融危机，如果政府开动印钞机器，很多程度上代理financial inst的功能，或让金融机构再次运转起来，那么经济主体当不会受太大影响。
向各位老大请教下，这个看法哪里不对？
Sunday, October 12, 2008
Closer to the bottom
FOR THE TENS OF MILLIONS OF INVESTORS WHO HAVE been nervously watching the U.S. stock market's 40% decline in the past 12 months, and it's 18% drop in the past week alone, history holds some solace: There is a case to be made that the averages will hit bottom sometime in the next few months, even if the economy is in the middle of a recession.
Indeed, stocks showed some signs of finding a bottom late Friday, with the Dow Jones industrial average closing down just 128 points on the day, after having plummeted about 700 points earlier in the session. The Nasdaq Composite even managed a small gain on the day. Investors will be watching for a possible market bounce that could occur early this week, especially if any new measures to ease the global economic crisis emerge from the weekend's meeting in Washington of the finance ministers of the so-called G-7 industrial nations.
Scott Pollack for Barron's
The lesson of history is this: The average U.S. recession since the late 1940s has lasted 10 months, and stocks typically hit their low point about three months before the recession ends. So, if the U.S. entered a recession on July 1, as many economists now suggest, and the recession was to last until April 2009, a typical bottom for stocks would occur some time in the next few months.
Granted, much depends on the ability of the Federal Reserve and the U.S. Treasury to put rescue measures in place that will unlock today's frozen capital markets. And there are nagging concerns that the next disaster may lurk in the unregulated $60 trillion market for credit-default swaps. But the fear that sent the market down so sharply last week may have driven stocks close to their ultimate lows.
"I don't think this is the end of America as we know it," says Byron Wien, chief investment strategist at Pequot Capital Management. "I think it's conceivable that the markets will bottom before year end."
Wien cites a number of positive events in recent weeks. The Treasury now has the ability, through the $700 billion Troubled Asset Relief Program (TARP), to start buying distressed assets from banks. There is speculation the federal government will come up with yet another program to help the housing market. Oil prices have fallen below $80 a barrel from levels above $140, a slide that on its own should boost economic growth. And smart investors have started buying at what they hope are good prices. Barclays (ticker: BCS) purchased Lehman Brothers' investment-banking operations in the U.S. Warren Buffett took stakes in General Electric (GE) and Goldman Sachs (GS). Citigroup (C) and Wells Fargo (WFC) actually fought over the right to buy Wachovia (WB).
Recessions certainly have been both shorter and longer than the 10-month average. On a positive note, five recent recessions were shorter. The 1980 recession lasted a mere six months, and there were four recessions that lasted only eight months, according to data from Bespoke Investment Group.
But a mild recession wasn't what the market feared last week. Investors were worried the current economic slump will be "different" from those in the past. American consumers are carrying more debt this time around, and the banking system is in much more fragile shape.
THOUGH A TYPICAL RECESSION would end by next spring, economists are paying increasing attention to longer downturns, specifically the two recessions since 1940 that each lasted 16 months. The November 1973 to August 1975 downdraft was sparked by the Arab oil embargo, while the July 1981 to November 1982 recession was triggered by the Federal Reserve hiking interest rates dramatically to curtail runaway inflation. In each case stocks bottomed about three months before the recession ended.
The good news today is that stocks appear to have gotten out ahead of any recession, falling so sharply that they might already have priced in pretty horrible times ahead. The Dow is down almost as much in the past year as the 45% it fell in the 1973-1975 recession, and its 12-month decline far exceeds the 24% it lost in the period leading up to and during the 1981-1982 recession, according to Birinyi Associates.
Today's 40% drop also far surpasses the average bear-market slide of 30% since 1940. Markets that decline for more than a year average a loss of 42%, says Paul Desmond, President of Lowry Research Corp. The Dow has fallen by more than 40% 10 other times, with all but one such drop occurring between 1900 and 1930. It slid by more than 50% only once, between 1929 and 1932, when it shed 89%. That bear was bracketed by the Great Depression, which lasted for 44 months.
A recession is labeled a depression when economic activity shrinks by 10% or more. From August 1929 to March 1933 U.S. economic output contracted by more than 30%. That's what made it "Great."
Table: Stocks and Recessions: What History Tells UsBut back in the 'Thirties, the financial markets lacked many of today's safety nets, like deposit insurance, and the Federal Reserve didn't loosen the purse strings quickly, as the Fed lately has done. Also, the stock-market rally leading up to the Depression was much more frenzied. From 1921 to 1929, the market rose almost 500%. In the rally from 1987 to 2000, stocks jumped 574%, but did so over a much longer period. From 2002 to the market's peak in October 2007, the Dow rose 94%.
Given stocks' swoon in the past 12 months, prices look much more reasonable today. The companies in the Standard & Poor's 500 trade for an average of 11.6 times the profits that analysts expect them to earn next year. And the index trades at 17.1 times the companies' most recent earnings. That's only slightly below the market's 60-year average price/earnings multiple of 17.8, according to Birinyi Associates.
The current P/E is still high compared to the low P/Es of previous major recessions. During the '74, '80 and '82 recessions, the S&P's trailing P/E dropped to between 6.8 and 7.2. But in the '70, '90 and '01 economic downturns, the P/E ranged from 12.9 to 23.5.
The Bottom Line
Though dangers aplenty still lurk for the economy and the market, studies of stock-market performance through recessions suggest the Dow could see its low shortly.One person who fears further market declines is Wayne Nordberg, chairman of Hollow Brook Associates. "This is the end of the great credit supercycle," he says. "It takes a very long time to unwind."
Or, as Doug Cliggott, manager of the Dover Management Long-Short Sector Fund, put it with regard to the TARP, "we're fighting a forest fire with a garden hose."
But such gloomy sentiments aren't a reason to get out of the stock market. It could be quite the opposite, in fact. Consider that $1 invested in stocks from February 1966 through May 2007 would have grown to $16.58 in that period. That's a 7% annual return. By contrast, investors who were out of the market in the five best days each year during that span were left with only 11 cents.
That's a pretty good case for the buy and hold philosophy, or, if you're out of the market, for getting back in soon.
Indeed, stocks showed some signs of finding a bottom late Friday, with the Dow Jones industrial average closing down just 128 points on the day, after having plummeted about 700 points earlier in the session. The Nasdaq Composite even managed a small gain on the day. Investors will be watching for a possible market bounce that could occur early this week, especially if any new measures to ease the global economic crisis emerge from the weekend's meeting in Washington of the finance ministers of the so-called G-7 industrial nations.
Scott Pollack for Barron's
The lesson of history is this: The average U.S. recession since the late 1940s has lasted 10 months, and stocks typically hit their low point about three months before the recession ends. So, if the U.S. entered a recession on July 1, as many economists now suggest, and the recession was to last until April 2009, a typical bottom for stocks would occur some time in the next few months.
Granted, much depends on the ability of the Federal Reserve and the U.S. Treasury to put rescue measures in place that will unlock today's frozen capital markets. And there are nagging concerns that the next disaster may lurk in the unregulated $60 trillion market for credit-default swaps. But the fear that sent the market down so sharply last week may have driven stocks close to their ultimate lows.
"I don't think this is the end of America as we know it," says Byron Wien, chief investment strategist at Pequot Capital Management. "I think it's conceivable that the markets will bottom before year end."
Wien cites a number of positive events in recent weeks. The Treasury now has the ability, through the $700 billion Troubled Asset Relief Program (TARP), to start buying distressed assets from banks. There is speculation the federal government will come up with yet another program to help the housing market. Oil prices have fallen below $80 a barrel from levels above $140, a slide that on its own should boost economic growth. And smart investors have started buying at what they hope are good prices. Barclays (ticker: BCS) purchased Lehman Brothers' investment-banking operations in the U.S. Warren Buffett took stakes in General Electric (GE) and Goldman Sachs (GS). Citigroup (C) and Wells Fargo (WFC) actually fought over the right to buy Wachovia (WB).
Recessions certainly have been both shorter and longer than the 10-month average. On a positive note, five recent recessions were shorter. The 1980 recession lasted a mere six months, and there were four recessions that lasted only eight months, according to data from Bespoke Investment Group.
But a mild recession wasn't what the market feared last week. Investors were worried the current economic slump will be "different" from those in the past. American consumers are carrying more debt this time around, and the banking system is in much more fragile shape.
THOUGH A TYPICAL RECESSION would end by next spring, economists are paying increasing attention to longer downturns, specifically the two recessions since 1940 that each lasted 16 months. The November 1973 to August 1975 downdraft was sparked by the Arab oil embargo, while the July 1981 to November 1982 recession was triggered by the Federal Reserve hiking interest rates dramatically to curtail runaway inflation. In each case stocks bottomed about three months before the recession ended.
The good news today is that stocks appear to have gotten out ahead of any recession, falling so sharply that they might already have priced in pretty horrible times ahead. The Dow is down almost as much in the past year as the 45% it fell in the 1973-1975 recession, and its 12-month decline far exceeds the 24% it lost in the period leading up to and during the 1981-1982 recession, according to Birinyi Associates.
Today's 40% drop also far surpasses the average bear-market slide of 30% since 1940. Markets that decline for more than a year average a loss of 42%, says Paul Desmond, President of Lowry Research Corp. The Dow has fallen by more than 40% 10 other times, with all but one such drop occurring between 1900 and 1930. It slid by more than 50% only once, between 1929 and 1932, when it shed 89%. That bear was bracketed by the Great Depression, which lasted for 44 months.
A recession is labeled a depression when economic activity shrinks by 10% or more. From August 1929 to March 1933 U.S. economic output contracted by more than 30%. That's what made it "Great."
Table: Stocks and Recessions: What History Tells UsBut back in the 'Thirties, the financial markets lacked many of today's safety nets, like deposit insurance, and the Federal Reserve didn't loosen the purse strings quickly, as the Fed lately has done. Also, the stock-market rally leading up to the Depression was much more frenzied. From 1921 to 1929, the market rose almost 500%. In the rally from 1987 to 2000, stocks jumped 574%, but did so over a much longer period. From 2002 to the market's peak in October 2007, the Dow rose 94%.
Given stocks' swoon in the past 12 months, prices look much more reasonable today. The companies in the Standard & Poor's 500 trade for an average of 11.6 times the profits that analysts expect them to earn next year. And the index trades at 17.1 times the companies' most recent earnings. That's only slightly below the market's 60-year average price/earnings multiple of 17.8, according to Birinyi Associates.
The current P/E is still high compared to the low P/Es of previous major recessions. During the '74, '80 and '82 recessions, the S&P's trailing P/E dropped to between 6.8 and 7.2. But in the '70, '90 and '01 economic downturns, the P/E ranged from 12.9 to 23.5.
The Bottom Line
Though dangers aplenty still lurk for the economy and the market, studies of stock-market performance through recessions suggest the Dow could see its low shortly.One person who fears further market declines is Wayne Nordberg, chairman of Hollow Brook Associates. "This is the end of the great credit supercycle," he says. "It takes a very long time to unwind."
Or, as Doug Cliggott, manager of the Dover Management Long-Short Sector Fund, put it with regard to the TARP, "we're fighting a forest fire with a garden hose."
But such gloomy sentiments aren't a reason to get out of the stock market. It could be quite the opposite, in fact. Consider that $1 invested in stocks from February 1966 through May 2007 would have grown to $16.58 in that period. That's a 7% annual return. By contrast, investors who were out of the market in the five best days each year during that span were left with only 11 cents.
That's a pretty good case for the buy and hold philosophy, or, if you're out of the market, for getting back in soon.
Still Holding Back
FOR THREE YEARS, HE'S CAUTIONED INVESTORS TO AVOID RISK. Jeremy Grantham, chairman of institutional money manager GMO in Boston, was early, but eventually right.
Grantham told Barron's in February of 2006 that "housing is a classic bubble" and that "this feels like the end of a cycle." Known for his insights on global investing, Grantham, 70, co-founded GMO, which has a value framework combining quantitative and fundamental analysis. It oversees assets of about $120 billion.
For Grantham's latest views on the fallout from the financial crisis and what investment opportunities he sees, please read on.
Shawn Henry
"I can't say we are going to be in a great hurry, but our next move…will be back to emerging-market equities and small-cap international value." – Jeremy Grantham
Barron's: How much will the recent $700 billion bailout plan approved by Congress help stabilize the economy and the financial markets?
Grantham: It certainly doesn't hurt. It is an amazingly complicated situation. But I do believe we have passed the point where we have to worry about moral hazard. When Bear Stearns was in trouble, I used to worry about moral hazard.
What is your sense of how this crisis has been handled by those in charge?
It's been a haphazard response, and the next time something happens, you can't be sure what will happen. In one deal they protect the bonds, while in the next deal the bonds go. Then in the next deal they protect the foreign bonds but not the domestic bonds. My guess is that people will be nervous that they will be at the bad end of one of the tough deals, rather than one of the more gentle deals.
Everyone is shaking in their boots. The awareness of risk has come back with a terrifying surge, and it is not going to go away too quickly.
With the Fed and other central banks lowering rates last week, are you worried about inflation?
My view is, "Forget inflation, guys." This is serious, the real McCoy, and you don't have to worry about little things like inflation. Global growth will slow down, commodities will be weaker for a while, and inflation is a thing of the past. Now we are talking about getting the financial machinery to work and just keeping [gross domestic product] grinding along.
What was at the core of what got the financial system into this crisis?
It was the belief by a lot of people who counted that financial bubbles did not have to addressed. The thinking was that...you could step in and, by scattering a bit of money around, ease the downside consequences. Therefore, you could let the tech bubble run amok and wait for it to burst and step in. And you could let the housing bubble run amok and step in.
At the center of this crisis was a bubble in risk-taking. The risk premiums dropped off the cosmic scale, the lowest ever recorded. On our seven-year forecast data, we reckoned that between June of '06 and June of '07, people were actually paying for the privilege of taking risk. Our constant theme for the last three years was avoid risk, avoid risk, avoid risk.
How much further do we have to go to get through this downturn?
Great bubbles like the one in 2000 take a long time to wash through the system, and you shouldn't really expect a low much before 2010. The fair value on the [Standard & Poor's 500 index] is about 1025 [versus 910 late last week].
This was not only a monetary event, but it coincided with the first truly global bubble in all assets. You had inflated housing in almost every country in the world, except for Japan and Germany. You had overpriced stocks in every country in the world. And you had too much money and too-low interest rates. I was confident about very little, but I was confident that this would be different from anything we had seen before, and potentially more dangerous. It should have been treated with more care.
Is this crisis playing out the way you thought it would?
No. I threw in the towel three months ago, and wrote a quarterly letter saying I thought I was the bear around this joint.
But this is much worse than I thought. All the fundamentals are turning out worse than I thought they would. All the competencies of the senior people at the Fed, Treasury and [firms like Merrill Lynch and Lehman Brothers] have turned out to be much less than I had expected; that's very disappointing.
And, therefore, how could one's confidence that the senior people would get us through the storm be very high? Prior to three months ago, we were investing in emerging-market equities. Then we battened down the hatches, and I changed my view from avoid all risk except emerging markets to avoid all risk, period.
The terrible thing -- after all this pain -- is that the U.S. equity market is not even cheap. You would imagine that, given the amount of panic, that it would be. But it started from such a high level in 2000 that it still has not yet worked its way down to trend, although it is getting close. But the really bad news is that great bubbles in history always overcorrected. So although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%. That is very discouraging.
What about equities outside the U.S.?
Things are getting cheaper. We score the EAFE [the Europe, Australasia and Far East Index] as absolutely cheap, and it's offering a 7% real annual return over seven years. Emerging-market equities are a bit cheaper, and we see a 9.5% annual real return over the same period.
The problem, though, is that we have so much downside momentum, so many financial problems and so many interlocking relationships, that it is hard to imagine this crisis subsiding because stock prices are digging in their heels and approaching fair value.
What happens to hedge funds in the wake of this crisis?
A year ago, I said that half of all hedge funds would go out of business in five years, and I would certainly stand by that today. Unfortunately, like a lot of my dire projections, that may turn out to be conservative.
I also said that at least one major bank will fail. I got a lot of grief for that, and now it looks like I could have said at least a dozen major banks will fail.
As for the broad, typical opinion that we would muddle through this crisis, it just shows you what a dangerous optimistic bias the advisory business has built into it.
Do you think we will learn anything from all of this turmoil?
We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.
Let's talk about your asset allocations.
In a nutshell, we are as conservative as we can possibly get. One bet that has been very successful for us, touch wood, has been long high-quality, blue-chip stocks, particularly in the U.S., and short risky companies. We have been screaming against risk-taking for a long time, and in recent weeks, it has paid off enormously.
What about looking ahead in terms of asset allocation?
Going forward, you can think about slowly moving back into the cheapest pockets of global equities. So the next move that we make will be back to moderate neutral in emerging-market equities and small-cap international value. I can't say we are going to be in a great hurry, but that will be our next move. We had finished selling almost everything except emerging markets two years ago. We finished selling emerging-market equities three months ago.
But the next move will be buying, and we are encouraged that there are a few pockets that are cheap on an absolute basis. We are not encouraged that they will rally immediately. But we will be looking to buy the cheap pockets of global equities as our next move some time in the next several months.
Why emerging markets and small-cap international value?
Just value and because they have been hit the most. Emerging equities are down almost 50% since late last year, and some of small-cap international is down more than 40%. That big a drop has this wonderful effect of making these categories look cheap pretty fast. You can buy, but it doesn't mean it is their low, and I strongly suspect it is not.
The great trap is to buy too soon and, in the big move, to sell too soon. I've been saying since '98-'99 that my next major-league error will be buying too soon -- but we will not buy quite yet. But when we do, I suspect it will be too soon again.
What do you see ahead for commodities?
Commodities have a great long-term future, now that the long-term trend has shifted from falling commodity prices to rising commodity prices. Having said that, the next couple of years will be quite different. We are in a global slowdown, which I think will be worse than expected even today, and it will be longer than expected -- so this is not a healthy environment for commodities. Over a shorter horizon, I would be getting out of the way of commodities or I would be short commodities. I'm personally short oil; the firm is short copper.
What about some other trades?
I'm speaking for the asset-allocation unit at the firm. We have been substantially long the safe-haven currencies. We have been very long the yen and somewhat long the Swiss franc and short sterling, which is one of our favorite bets. We have been short the euro for three months, and slightly long the U.S. dollar. One of the paradoxes is, if the world is worse than people expect, the U.S. dollar will outperform.
Why are you shorting the euro?
It just ran too far. It went from 85 cents on the U.S. dollar to $1.60; it more or less doubled, which I don't think reflects reality. But the biggest lay-up of any idea over the last three or six months was shorting the pound.
The U.K. housing market was dreadfully overpriced. I felt nearly certain that the U.K. housing market would come back to a more normal multiple of family income, which is a very big decline of 40% if you did it in a hurry -- or you can sit back for many years and wait for income to catch up. But you should really count on that market coming down over a couple of years painfully.
Do you have any closing thoughts about how we got into this financial state?
I ask myself, "Why is it that several dozen people saw this crisis coming for years?" I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even [U.S. Treasury Secretary] Hank Paulson and [Fed Chairman Ben] Bernanke -- none of them seemed to see it coming.
I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained -- but we end up with an army of left-brained immediate doers.
So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored.
If you look at the people who have been screaming about impending doom, and you added all of those several dozen people together, I don't suppose that collectively they could run a single firm without dragging it into bankruptcy in two weeks. They are just a different kind of person.
So we kept putting organization people -- people who can influence and persuade and cajole -- into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don't have those skills.
Where do you see all of this going?
I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don't. And I have no idea, really, how this will work out. I certainly wish it hadn't happened. It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect.
Grantham told Barron's in February of 2006 that "housing is a classic bubble" and that "this feels like the end of a cycle." Known for his insights on global investing, Grantham, 70, co-founded GMO, which has a value framework combining quantitative and fundamental analysis. It oversees assets of about $120 billion.
For Grantham's latest views on the fallout from the financial crisis and what investment opportunities he sees, please read on.
Shawn Henry
"I can't say we are going to be in a great hurry, but our next move…will be back to emerging-market equities and small-cap international value." – Jeremy Grantham
Barron's: How much will the recent $700 billion bailout plan approved by Congress help stabilize the economy and the financial markets?
Grantham: It certainly doesn't hurt. It is an amazingly complicated situation. But I do believe we have passed the point where we have to worry about moral hazard. When Bear Stearns was in trouble, I used to worry about moral hazard.
What is your sense of how this crisis has been handled by those in charge?
It's been a haphazard response, and the next time something happens, you can't be sure what will happen. In one deal they protect the bonds, while in the next deal the bonds go. Then in the next deal they protect the foreign bonds but not the domestic bonds. My guess is that people will be nervous that they will be at the bad end of one of the tough deals, rather than one of the more gentle deals.
Everyone is shaking in their boots. The awareness of risk has come back with a terrifying surge, and it is not going to go away too quickly.
With the Fed and other central banks lowering rates last week, are you worried about inflation?
My view is, "Forget inflation, guys." This is serious, the real McCoy, and you don't have to worry about little things like inflation. Global growth will slow down, commodities will be weaker for a while, and inflation is a thing of the past. Now we are talking about getting the financial machinery to work and just keeping [gross domestic product] grinding along.
What was at the core of what got the financial system into this crisis?
It was the belief by a lot of people who counted that financial bubbles did not have to addressed. The thinking was that...you could step in and, by scattering a bit of money around, ease the downside consequences. Therefore, you could let the tech bubble run amok and wait for it to burst and step in. And you could let the housing bubble run amok and step in.
At the center of this crisis was a bubble in risk-taking. The risk premiums dropped off the cosmic scale, the lowest ever recorded. On our seven-year forecast data, we reckoned that between June of '06 and June of '07, people were actually paying for the privilege of taking risk. Our constant theme for the last three years was avoid risk, avoid risk, avoid risk.
How much further do we have to go to get through this downturn?
Great bubbles like the one in 2000 take a long time to wash through the system, and you shouldn't really expect a low much before 2010. The fair value on the [Standard & Poor's 500 index] is about 1025 [versus 910 late last week].
This was not only a monetary event, but it coincided with the first truly global bubble in all assets. You had inflated housing in almost every country in the world, except for Japan and Germany. You had overpriced stocks in every country in the world. And you had too much money and too-low interest rates. I was confident about very little, but I was confident that this would be different from anything we had seen before, and potentially more dangerous. It should have been treated with more care.
Is this crisis playing out the way you thought it would?
No. I threw in the towel three months ago, and wrote a quarterly letter saying I thought I was the bear around this joint.
But this is much worse than I thought. All the fundamentals are turning out worse than I thought they would. All the competencies of the senior people at the Fed, Treasury and [firms like Merrill Lynch and Lehman Brothers] have turned out to be much less than I had expected; that's very disappointing.
And, therefore, how could one's confidence that the senior people would get us through the storm be very high? Prior to three months ago, we were investing in emerging-market equities. Then we battened down the hatches, and I changed my view from avoid all risk except emerging markets to avoid all risk, period.
The terrible thing -- after all this pain -- is that the U.S. equity market is not even cheap. You would imagine that, given the amount of panic, that it would be. But it started from such a high level in 2000 that it still has not yet worked its way down to trend, although it is getting close. But the really bad news is that great bubbles in history always overcorrected. So although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%. That is very discouraging.
What about equities outside the U.S.?
Things are getting cheaper. We score the EAFE [the Europe, Australasia and Far East Index] as absolutely cheap, and it's offering a 7% real annual return over seven years. Emerging-market equities are a bit cheaper, and we see a 9.5% annual real return over the same period.
The problem, though, is that we have so much downside momentum, so many financial problems and so many interlocking relationships, that it is hard to imagine this crisis subsiding because stock prices are digging in their heels and approaching fair value.
What happens to hedge funds in the wake of this crisis?
A year ago, I said that half of all hedge funds would go out of business in five years, and I would certainly stand by that today. Unfortunately, like a lot of my dire projections, that may turn out to be conservative.
I also said that at least one major bank will fail. I got a lot of grief for that, and now it looks like I could have said at least a dozen major banks will fail.
As for the broad, typical opinion that we would muddle through this crisis, it just shows you what a dangerous optimistic bias the advisory business has built into it.
Do you think we will learn anything from all of this turmoil?
We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.
Let's talk about your asset allocations.
In a nutshell, we are as conservative as we can possibly get. One bet that has been very successful for us, touch wood, has been long high-quality, blue-chip stocks, particularly in the U.S., and short risky companies. We have been screaming against risk-taking for a long time, and in recent weeks, it has paid off enormously.
What about looking ahead in terms of asset allocation?
Going forward, you can think about slowly moving back into the cheapest pockets of global equities. So the next move that we make will be back to moderate neutral in emerging-market equities and small-cap international value. I can't say we are going to be in a great hurry, but that will be our next move. We had finished selling almost everything except emerging markets two years ago. We finished selling emerging-market equities three months ago.
But the next move will be buying, and we are encouraged that there are a few pockets that are cheap on an absolute basis. We are not encouraged that they will rally immediately. But we will be looking to buy the cheap pockets of global equities as our next move some time in the next several months.
Why emerging markets and small-cap international value?
Just value and because they have been hit the most. Emerging equities are down almost 50% since late last year, and some of small-cap international is down more than 40%. That big a drop has this wonderful effect of making these categories look cheap pretty fast. You can buy, but it doesn't mean it is their low, and I strongly suspect it is not.
The great trap is to buy too soon and, in the big move, to sell too soon. I've been saying since '98-'99 that my next major-league error will be buying too soon -- but we will not buy quite yet. But when we do, I suspect it will be too soon again.
What do you see ahead for commodities?
Commodities have a great long-term future, now that the long-term trend has shifted from falling commodity prices to rising commodity prices. Having said that, the next couple of years will be quite different. We are in a global slowdown, which I think will be worse than expected even today, and it will be longer than expected -- so this is not a healthy environment for commodities. Over a shorter horizon, I would be getting out of the way of commodities or I would be short commodities. I'm personally short oil; the firm is short copper.
What about some other trades?
I'm speaking for the asset-allocation unit at the firm. We have been substantially long the safe-haven currencies. We have been very long the yen and somewhat long the Swiss franc and short sterling, which is one of our favorite bets. We have been short the euro for three months, and slightly long the U.S. dollar. One of the paradoxes is, if the world is worse than people expect, the U.S. dollar will outperform.
Why are you shorting the euro?
It just ran too far. It went from 85 cents on the U.S. dollar to $1.60; it more or less doubled, which I don't think reflects reality. But the biggest lay-up of any idea over the last three or six months was shorting the pound.
The U.K. housing market was dreadfully overpriced. I felt nearly certain that the U.K. housing market would come back to a more normal multiple of family income, which is a very big decline of 40% if you did it in a hurry -- or you can sit back for many years and wait for income to catch up. But you should really count on that market coming down over a couple of years painfully.
Do you have any closing thoughts about how we got into this financial state?
I ask myself, "Why is it that several dozen people saw this crisis coming for years?" I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even [U.S. Treasury Secretary] Hank Paulson and [Fed Chairman Ben] Bernanke -- none of them seemed to see it coming.
I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained -- but we end up with an army of left-brained immediate doers.
So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored.
If you look at the people who have been screaming about impending doom, and you added all of those several dozen people together, I don't suppose that collectively they could run a single firm without dragging it into bankruptcy in two weeks. They are just a different kind of person.
So we kept putting organization people -- people who can influence and persuade and cajole -- into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don't have those skills.
Where do you see all of this going?
I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don't. And I have no idea, really, how this will work out. I certainly wish it hadn't happened. It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect.
A little perspective, please
How did this crisis happen? Could it get worse? When will the pain end ? If you were looking for answers to those questions - and you should be - you'd seek out someone with knowledge of the past and a record for being right about the future.
Allow us, then, to introduce you to three people rich in both. Diane Swonk, the chief economist of Chicago's Mesirow Financial, has been named one of the country's top forecasters and is an adviser to the Federal Reserve Board.
Jeremy Grantham, co-founder of the investment firm GMO, was one of the first investors to foresee that the financial system was headed for a breakdown.
And market historian John Steele Gordon, whose grandfathers held seats on the New York Stock Exchange, has chronicled America's long history of booms and busts in An Empire of Wealth.
Reporter Joe Light and senior writer Janice Revell spoke with them in mid-September.
In retrospect, there were plenty of signs pointing to the serious and growing problems in the financial system before everything seemed to fall apart at once. Why didn't anyone, on Wall Street or in Washington, take action sooner?
Jeremy Grantham: We got so good at denial. The Fed was in denial, the Treasury was in denial, the bosses of Merrill Lynch and Lehman were in denial. And yet this crisis was the most widely heralded "surprise" in the history of finance - there were plenty of people warning that it was going to happen long before it did.
You were one of them. What did you see that bothered you?
Grantham: All you had to do was open a history book and see what happens when you have a bubble. In this case, there was a bubble in housing and there was a magnificent bubble in risk taking. People were just shoveling their money into risk on the pathetic idea that risk is always rewarded.
That is completely misguided. You don't get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.
You can lay the evidence in front of everybody, but they will yawn and ignore it. It's that denial that's impressive. It's what happens in bubbles.
How did individual homeowners contribute to the current meltdown?
Diane Swonk: The housing bubble is certainly the root of the problem in the financial markets. If you were a home buyer, you didn't have to have any skin in the game, you didn't have to put any equity down to get a mortgage.
Another problem is the ease with which people can walk away from their homes in this country. A home buyer can say to a bank, "Here are the keys; the house is your problem now. But I'm going to keep my car, my 401(k) and everything else."
No other major industrialized country in the world allows that. And it encouraged homeowners here to take more risk, to put zero money down.
How much at risk were the financial institutions involved? That is, was this degree of intervention really necessary?
Grantham: Leverage is the ultimate demonstration of risk, and we never had system-wide leverage like this before. Ever. We had several firms that were leveraged 30 to 1. [For every $30 of assets on their books, they put up $1 of equity and borrowed the other $29.] At leverage of 30 to 1, you have to lose only about 3% on your $30 worth of assets and your dollar of equity gets wiped out. You're bankrupt.
Why would those financial firms take on such extreme risk?
Grantham: They believed their risk models, which said they had a diversified portfolio, so their investments couldn't all go down together. And the potential rewards were out of whack with the risk.
Say you're in the hedge fund division of some investment bank and you have a billion dollars to invest. You hit the ball out of the park, make 120% on that billion and probably walk away with a $45 million bonus. If you lose the billion dollars, you're fired. Hey, that's not bad! If I thought the odds of success were fifty-fifty, I'd be a fool not to try.
How bad is our current situation compared with previous financial crises?
John Steele Gordon: It feels bad but not like a panic. In a classic panic, as in 1987 or 1929, everyone was selling and prices went through the floor. The market lost 22% on Oct. 19, 1987, compared with 4% on the day Lehman filed for bankruptcy. We were getting close to a breakdown in the whole financial system, but now that decisive government actions are being taken, we're stepping back from the brink.
By comparison, after the 1929 stock market crash, the government didn't do much of anything - and what they did do just made the situation worse. For instance, the Fed kept interest rates high and the government implemented the largest tariff in American history, which was effectively a big tax increase in a declining economy. These things converted a perfectly ordinary recession and market crash into the greatest economic calamity in American history.
In 1987, on the other hand, it was the Federal Reserve that ended the panic. The Fed basically called up Wall Street and said, "Listen, you guys need liquidity. Bring your wheelbarrows and we'll fill them up." We've seen a similar use of the Fed in the current crisis.
How have other countries responded to the deteriorating situation here?
Swonk: This is one aspect of the crisis that most people aren't talking about. The financial liquidity that has been infused into the market to provide stability has come not only from the Federal Reserve but from international sources as well. The European Central Bank and the Bank of Japan have been very involved.
The reality is setting in that globalization has made us all intrinsically linked, and coordination of policy across borders is critical. That is not the place America was in during the Great Depression. Then the rest of the world was still hurting financially from World War I and there was nowhere to go outside the U.S. to raise money. Today there are a lot of places to go.
Is a massive government rescue program really necessary?
Swonk: The piecemeal approach to creating some sort of backstop to the financial system - Bear Stearns, AIG and so on - appeared to add more panic than confidence to the markets. We needed a more holistic approach to stop the bloodletting, especially once it started to affect short-term credit.
What about the cost to taxpayers?
Gordon: People thought the cost associated with the S&L crisis would be two or three times larger than the $150 billion it turned out to be. At the time the S&L's problem assets - real estate - would have overwhelmed the market if sold at once. The government later sold them for much more than people originally thought they could. That may also be the case today.
We've now seen huge banks acquire other huge banks. Are these massive financial institutions dangerous?
Gordon: It's good because it makes the banks more stable. A lot of the banking problems we had earlier in our history occurred because the banks were so small. In 1920 we had 30,000 banks in this country; each small town had its own bank. If the economy of that small town went into the toilet - a factory closed or there was a long drought - the bank went broke because there was such a small base supporting it.
The more widespread a bank is, the more stable it is. If something goes wrong in one area, there are other places where things are going well to offset that.
What can the past tell us about where the stock market is going next?
Grantham: Historically, when a market bubble has popped, it has almost always overcorrected. But after the tech bubble burst in 2000, the stock market didn't hit the lows it should have.
Before it could, the housing bubble and tax cuts that followed 9/11 kicked off the biggest sucker rally in history, from 2002 to 2006. So I think the market isn't cheap yet. There is more pain coming. I don't think we'll hit the low until 2010.
Swonk: But even though the market is turbulent and scary today, we're still looking at a pretty favorable environment over the longer term for stocks. Productivity growth is accelerating - we all know this, of course, because we're working harder for less money. Rising productivity leads to rising corporate profits. That, historically, has been highly correlated with a bull market.
What's your advice to investors now?
Grantham: Understand that the market may recover for a while and then go to a new low. One of the lessons I have learned over the years is that things can get a whole lot more extreme, both up and down, than you ever dreamed of. So we may drop another 30% before we hit bottom.
Keep telling yourself every night that you're a long-term investor and don't look at daily stock prices. And it's not too late to shift some of your money to high-quality blue chips. Emerging markets are probably no longer too expensive either. If you had 80% of your stockholdings in blue chips and 20% in emerging markets, you'd have a pretty reasonable portfolio to ride out the bad times.
Gordon: Psychology is central in these kinds of markets. Don't panic, that's the No. 1 rule, and think long term.
What's ahead for the economy now?
Swonk: We can't really avoid the economy getting worse before it gets better. We don't have the tax rebates helping us out anymore. Labor markets have deteriorated further, and people who are working are in many cases earning less. So I don't think we'll recover before 2010. It won't be until then that housing prices stabilize, and that's the key issue.
I'm confident that they will by 2010 because we are still creating a million new households a year and those people have to live somewhere. We've got some fundamentals working for us, but it will take a while to get there.
What needs to change to prevent another crisis from happening?
Gordon: We need a thorough housecleaning of the financial regulation system. Right now it isn't even really a system. It just sort of grew over the years and doesn't make a whole lot of sense.
You have the Federal Reserve, the Comptroller of the Currency, the FDIC, the SEC, state banking authorities and state insurance authorities - and all of them working at cross-purposes. It doesn't make any sense at all anymore.
Is there a silver lining to all of this ?
Grantham: People lost the knack of thinking that cheaper assets are better. We're going to return to that way of thinking, and that's incredibly good news.
Allow us, then, to introduce you to three people rich in both. Diane Swonk, the chief economist of Chicago's Mesirow Financial, has been named one of the country's top forecasters and is an adviser to the Federal Reserve Board.
Jeremy Grantham, co-founder of the investment firm GMO, was one of the first investors to foresee that the financial system was headed for a breakdown.
And market historian John Steele Gordon, whose grandfathers held seats on the New York Stock Exchange, has chronicled America's long history of booms and busts in An Empire of Wealth.
Reporter Joe Light and senior writer Janice Revell spoke with them in mid-September.
In retrospect, there were plenty of signs pointing to the serious and growing problems in the financial system before everything seemed to fall apart at once. Why didn't anyone, on Wall Street or in Washington, take action sooner?
Jeremy Grantham: We got so good at denial. The Fed was in denial, the Treasury was in denial, the bosses of Merrill Lynch and Lehman were in denial. And yet this crisis was the most widely heralded "surprise" in the history of finance - there were plenty of people warning that it was going to happen long before it did.
You were one of them. What did you see that bothered you?
Grantham: All you had to do was open a history book and see what happens when you have a bubble. In this case, there was a bubble in housing and there was a magnificent bubble in risk taking. People were just shoveling their money into risk on the pathetic idea that risk is always rewarded.
That is completely misguided. You don't get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.
You can lay the evidence in front of everybody, but they will yawn and ignore it. It's that denial that's impressive. It's what happens in bubbles.
How did individual homeowners contribute to the current meltdown?
Diane Swonk: The housing bubble is certainly the root of the problem in the financial markets. If you were a home buyer, you didn't have to have any skin in the game, you didn't have to put any equity down to get a mortgage.
Another problem is the ease with which people can walk away from their homes in this country. A home buyer can say to a bank, "Here are the keys; the house is your problem now. But I'm going to keep my car, my 401(k) and everything else."
No other major industrialized country in the world allows that. And it encouraged homeowners here to take more risk, to put zero money down.
How much at risk were the financial institutions involved? That is, was this degree of intervention really necessary?
Grantham: Leverage is the ultimate demonstration of risk, and we never had system-wide leverage like this before. Ever. We had several firms that were leveraged 30 to 1. [For every $30 of assets on their books, they put up $1 of equity and borrowed the other $29.] At leverage of 30 to 1, you have to lose only about 3% on your $30 worth of assets and your dollar of equity gets wiped out. You're bankrupt.
Why would those financial firms take on such extreme risk?
Grantham: They believed their risk models, which said they had a diversified portfolio, so their investments couldn't all go down together. And the potential rewards were out of whack with the risk.
Say you're in the hedge fund division of some investment bank and you have a billion dollars to invest. You hit the ball out of the park, make 120% on that billion and probably walk away with a $45 million bonus. If you lose the billion dollars, you're fired. Hey, that's not bad! If I thought the odds of success were fifty-fifty, I'd be a fool not to try.
How bad is our current situation compared with previous financial crises?
John Steele Gordon: It feels bad but not like a panic. In a classic panic, as in 1987 or 1929, everyone was selling and prices went through the floor. The market lost 22% on Oct. 19, 1987, compared with 4% on the day Lehman filed for bankruptcy. We were getting close to a breakdown in the whole financial system, but now that decisive government actions are being taken, we're stepping back from the brink.
By comparison, after the 1929 stock market crash, the government didn't do much of anything - and what they did do just made the situation worse. For instance, the Fed kept interest rates high and the government implemented the largest tariff in American history, which was effectively a big tax increase in a declining economy. These things converted a perfectly ordinary recession and market crash into the greatest economic calamity in American history.
In 1987, on the other hand, it was the Federal Reserve that ended the panic. The Fed basically called up Wall Street and said, "Listen, you guys need liquidity. Bring your wheelbarrows and we'll fill them up." We've seen a similar use of the Fed in the current crisis.
How have other countries responded to the deteriorating situation here?
Swonk: This is one aspect of the crisis that most people aren't talking about. The financial liquidity that has been infused into the market to provide stability has come not only from the Federal Reserve but from international sources as well. The European Central Bank and the Bank of Japan have been very involved.
The reality is setting in that globalization has made us all intrinsically linked, and coordination of policy across borders is critical. That is not the place America was in during the Great Depression. Then the rest of the world was still hurting financially from World War I and there was nowhere to go outside the U.S. to raise money. Today there are a lot of places to go.
Is a massive government rescue program really necessary?
Swonk: The piecemeal approach to creating some sort of backstop to the financial system - Bear Stearns, AIG and so on - appeared to add more panic than confidence to the markets. We needed a more holistic approach to stop the bloodletting, especially once it started to affect short-term credit.
What about the cost to taxpayers?
Gordon: People thought the cost associated with the S&L crisis would be two or three times larger than the $150 billion it turned out to be. At the time the S&L's problem assets - real estate - would have overwhelmed the market if sold at once. The government later sold them for much more than people originally thought they could. That may also be the case today.
We've now seen huge banks acquire other huge banks. Are these massive financial institutions dangerous?
Gordon: It's good because it makes the banks more stable. A lot of the banking problems we had earlier in our history occurred because the banks were so small. In 1920 we had 30,000 banks in this country; each small town had its own bank. If the economy of that small town went into the toilet - a factory closed or there was a long drought - the bank went broke because there was such a small base supporting it.
The more widespread a bank is, the more stable it is. If something goes wrong in one area, there are other places where things are going well to offset that.
What can the past tell us about where the stock market is going next?
Grantham: Historically, when a market bubble has popped, it has almost always overcorrected. But after the tech bubble burst in 2000, the stock market didn't hit the lows it should have.
Before it could, the housing bubble and tax cuts that followed 9/11 kicked off the biggest sucker rally in history, from 2002 to 2006. So I think the market isn't cheap yet. There is more pain coming. I don't think we'll hit the low until 2010.
Swonk: But even though the market is turbulent and scary today, we're still looking at a pretty favorable environment over the longer term for stocks. Productivity growth is accelerating - we all know this, of course, because we're working harder for less money. Rising productivity leads to rising corporate profits. That, historically, has been highly correlated with a bull market.
What's your advice to investors now?
Grantham: Understand that the market may recover for a while and then go to a new low. One of the lessons I have learned over the years is that things can get a whole lot more extreme, both up and down, than you ever dreamed of. So we may drop another 30% before we hit bottom.
Keep telling yourself every night that you're a long-term investor and don't look at daily stock prices. And it's not too late to shift some of your money to high-quality blue chips. Emerging markets are probably no longer too expensive either. If you had 80% of your stockholdings in blue chips and 20% in emerging markets, you'd have a pretty reasonable portfolio to ride out the bad times.
Gordon: Psychology is central in these kinds of markets. Don't panic, that's the No. 1 rule, and think long term.
What's ahead for the economy now?
Swonk: We can't really avoid the economy getting worse before it gets better. We don't have the tax rebates helping us out anymore. Labor markets have deteriorated further, and people who are working are in many cases earning less. So I don't think we'll recover before 2010. It won't be until then that housing prices stabilize, and that's the key issue.
I'm confident that they will by 2010 because we are still creating a million new households a year and those people have to live somewhere. We've got some fundamentals working for us, but it will take a while to get there.
What needs to change to prevent another crisis from happening?
Gordon: We need a thorough housecleaning of the financial regulation system. Right now it isn't even really a system. It just sort of grew over the years and doesn't make a whole lot of sense.
You have the Federal Reserve, the Comptroller of the Currency, the FDIC, the SEC, state banking authorities and state insurance authorities - and all of them working at cross-purposes. It doesn't make any sense at all anymore.
Is there a silver lining to all of this ?
Grantham: People lost the knack of thinking that cheaper assets are better. We're going to return to that way of thinking, and that's incredibly good news.
Thursday, October 9, 2008
Marc Faber Gives Investors Some Hope
Investor Marc Faber said a series of coordinated interest-rate cuts by central banks including the Federal Reserve to ease the economic effects of the global financial crisis won’t halt a worldwide slide in equities…
“The slashing of interest rates will not help very much,” Faber, who manages $300 million, said in an interview in Manila. “They may cushion somewhat the decline but make matters worse.”
The Swiss-born investor added:
Had central banks around the world kept interest rates that encourage saving we wouldn’t have these problems today.
However, Dr. Faber believes there still remains a glimmer of hope for investors in equities. From the CNBC website yesterday:
The stock market is as oversold as it has been since the crash of 1987 and the broader market could start to rebound until early next year, Marc Faber, editor and publisher of the Gloom Boom and Doom Report, said Tuesday.
The market is possibly in “the most oversold condition” since perhaps Oct. 19, 1987, Faber told CNBC’s “Squawk Box.”
“Usually there is some seasonal strength between October and March” so it is possible the S&P 500 index will create a low between now and the end of the month, he said.
He talked about some areas investors should be looking at:
Longer-term investors will have to position themselves in emerging country stock markets to play the global recovery, Faber advised.
Faber, who recommended buying gold at the start of its six-year rally, also pointed out:
For now, gold is still attractive, with central banks readying more rate cuts and printing money, he said.
“The slashing of interest rates will not help very much,” Faber, who manages $300 million, said in an interview in Manila. “They may cushion somewhat the decline but make matters worse.”
The Swiss-born investor added:
Had central banks around the world kept interest rates that encourage saving we wouldn’t have these problems today.
However, Dr. Faber believes there still remains a glimmer of hope for investors in equities. From the CNBC website yesterday:
The stock market is as oversold as it has been since the crash of 1987 and the broader market could start to rebound until early next year, Marc Faber, editor and publisher of the Gloom Boom and Doom Report, said Tuesday.
The market is possibly in “the most oversold condition” since perhaps Oct. 19, 1987, Faber told CNBC’s “Squawk Box.”
“Usually there is some seasonal strength between October and March” so it is possible the S&P 500 index will create a low between now and the end of the month, he said.
He talked about some areas investors should be looking at:
Longer-term investors will have to position themselves in emerging country stock markets to play the global recovery, Faber advised.
Faber, who recommended buying gold at the start of its six-year rally, also pointed out:
For now, gold is still attractive, with central banks readying more rate cuts and printing money, he said.
Wednesday, October 8, 2008
Rolling 7 Day DJIA Returns <-15%
9 of the 39 cases since 1928 were not during the Depression:
Date 7D
09/21/01 -0.163
09/20/01 -0.165
10/27/87 -0.178
10/26/87 -0.238
10/23/87 -0.191
10/22/87 -0.222
10/21/87 -0.179
10/20/87 -0.258
10/19/87 -0.309
05/22/40 -0.166
05/21/40 -0.212
05/20/40 -0.174
05/17/40 -0.161
03/31/38 -0.155
03/30/38 -0.161
10/19/33 -0.154
07/21/33 -0.152
10/13/32 -0.161
10/10/32 -0.183
09/19/32 -0.160
09/16/32 -0.161
06/01/32 -0.157
05/31/32 -0.158
04/11/32 -0.153
04/08/32 -0.185
12/16/31 -0.151
10/05/31 -0.198
10/02/31 -0.165
06/24/30 -0.152
11/14/29 -0.157
11/13/29 -0.274
11/12/29 -0.189
11/07/29 -0.209
11/06/29 -0.225
11/04/29 -0.157
10/31/29 -0.162
10/30/29 -0.195
10/29/29 -0.310
10/28/29 -0.238
Date 7D
09/21/01 -0.163
09/20/01 -0.165
10/27/87 -0.178
10/26/87 -0.238
10/23/87 -0.191
10/22/87 -0.222
10/21/87 -0.179
10/20/87 -0.258
10/19/87 -0.309
05/22/40 -0.166
05/21/40 -0.212
05/20/40 -0.174
05/17/40 -0.161
03/31/38 -0.155
03/30/38 -0.161
10/19/33 -0.154
07/21/33 -0.152
10/13/32 -0.161
10/10/32 -0.183
09/19/32 -0.160
09/16/32 -0.161
06/01/32 -0.157
05/31/32 -0.158
04/11/32 -0.153
04/08/32 -0.185
12/16/31 -0.151
10/05/31 -0.198
10/02/31 -0.165
06/24/30 -0.152
11/14/29 -0.157
11/13/29 -0.274
11/12/29 -0.189
11/07/29 -0.209
11/06/29 -0.225
11/04/29 -0.157
10/31/29 -0.162
10/30/29 -0.195
10/29/29 -0.310
10/28/29 -0.238
Monday, October 6, 2008
Time To Go Long, At Least For A Short Time?
The violent sell-off in stock markets Monday morning, along with the stream of bad economic news of last week, is bound to provoke substantial cuts in short-term interest rates by the Federal Reserve and other central banks. Stock markets should thus be near a good rebound, especially given near-term oversold conditions.
If you went into those double-short ETFs last week, take the 10% to 25% gains so far and shift into the double-long ETFs. There is a list at Stock-Encyclopedia.com. I myself bought the Horizons BetaPro S&P/TSX 60 Bull Plus ETF (HXU) and the ProShares Ultra S&P500 ETF (SSO) – or should the symbol be SOS now?). It could be early and the double-long ETFs could come down fast, but they can come back fast too.
If and when the rally comes, it may be short-lived as attention shifts back to the worsening economic indicators parading through the headlines. So one could don their trader’s hat … or consider buying and holding since it’s hard to imagine stocks staying below this level over the next year to three years. Moreover, the Fed and politicians will likely have a number of other counterpunches lined up after the first rate cut.
If you went into those double-short ETFs last week, take the 10% to 25% gains so far and shift into the double-long ETFs. There is a list at Stock-Encyclopedia.com. I myself bought the Horizons BetaPro S&P/TSX 60 Bull Plus ETF (HXU) and the ProShares Ultra S&P500 ETF (SSO) – or should the symbol be SOS now?). It could be early and the double-long ETFs could come down fast, but they can come back fast too.
If and when the rally comes, it may be short-lived as attention shifts back to the worsening economic indicators parading through the headlines. So one could don their trader’s hat … or consider buying and holding since it’s hard to imagine stocks staying below this level over the next year to three years. Moreover, the Fed and politicians will likely have a number of other counterpunches lined up after the first rate cut.
Wednesday, October 1, 2008
Reflection on the Crash
1. It was symmetric with the previous week where it opened limit up on the news. They had reached a compromise, and then it went limit down, indeed 100 down when they didn't reach an agreement. Amazing that the time horizon is so short. As soon as they voted the agreement down, it was clear that they'd come up with an agreement shortly. The stock market took care of that. "It's amazing how a 900 point drop in Dow can get their attention" with all the lobbyists involved, and the power increases, but yet the leverage of traders is so great that they automatically get exited from their positions on bad news even if it's going to be reversed the next day at the open.
2. This crash and the Oct 19, 1987 both were symmetric in that the Secretary of the Treasury caused it. In the first one, Jim Baker said, "The Europeans have to strengthen the currencies." In this case, there was revulsion against a political plan to feather the nest of both parties. The bonds in both cases had their biggest up moves in history, but in 1987 they stayed up for the next week, and in this case they reversed the next day. Commodities had one of their worst days in history showing that all markets are interrelated and when wealth goes down, all spending is reduced.
3. This crash brought all markets to many year lows, and was the final revulsion, the final throwing the frog into hot water that cleared the decks as the move the next day, one of biggest in history, showed. The discount rate is always ready to be lowered when the market goes down by more than 4% in a day as it did on Jan 21, and in Aug 2007.
4. The European markets were down a few percent more than the US at the open, as were Japan and Israel, foretelling what was going to happen.
2. This crash and the Oct 19, 1987 both were symmetric in that the Secretary of the Treasury caused it. In the first one, Jim Baker said, "The Europeans have to strengthen the currencies." In this case, there was revulsion against a political plan to feather the nest of both parties. The bonds in both cases had their biggest up moves in history, but in 1987 they stayed up for the next week, and in this case they reversed the next day. Commodities had one of their worst days in history showing that all markets are interrelated and when wealth goes down, all spending is reduced.
3. This crash brought all markets to many year lows, and was the final revulsion, the final throwing the frog into hot water that cleared the decks as the move the next day, one of biggest in history, showed. The discount rate is always ready to be lowered when the market goes down by more than 4% in a day as it did on Jan 21, and in Aug 2007.
4. The European markets were down a few percent more than the US at the open, as were Japan and Israel, foretelling what was going to happen.
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