I found this article by Nouriel Roubini on the Foreign Policy website (hat tip Alphaville). It outlines why various regions in the world will feel the US' pain, especially if the recession lasts four quarters or more.
The quick take is that everywhere will be hurt but that a couple of places will, in addition to be being hurt, will also derive a touch of benefit.
A reader left a comment yesterday saying he might chuck it all and go into GLD. If you read a lot from Roubini you might be inclined to do the same.
If you have been reading this site for a while, you know where I have stood for months--normal bear market without pieces of sky hitting the ground but of course I could be wrong. If you are inclined to chuck all your equity exposure you need to explore and understand the other side of that trade, know the risk you take in doing that and have something reasonable in mind for how you make up for normal equity market growth.
Sticking with the normal cycle idea (which the risk faced by the chuck it all idea), if this turns out to be normal it is very likely that the first year off the bottom will be huge, like 2003. How many people do you suppose finally gave in in 2002 and did not catch 2003? There is no way to know but we can know that a lot of people did sell in 2002 as it was the worst of the three year decline. This decade has had a lot of down followed by many years now of up but anyone completely missing 2003 (or a large chunk of it) has likely missed too much of what little up (in percentage terms) there has been.
This is how people come to lag the markets in all those studies we see quoted. When the bottom comes and the market turns it is likely to be a big bounce. This has held up historically in all manner of declines (long bear markets or nasty V shaped events). The way this decade is shaping up missing 2003 could be the difference between being even on the decade or down a lot. Likewise anyone missing 1975 (up 31%) made the 1970s much worse than it needed to be and anyone missing 1934 (up 40%) made the 1930s worse than it needed to be.
Anyone reading this site for a while knows I am all for defense and underweight but the risk of zero weight and missing the best year of a decade can be very bad. The market averages 10% (or whatever the exact figure) by going up 40%, down 40% and everything in between. I can't stress enough that missing one of the big years in a decade can leave you so far behind as to alter your financial future.
Lagging an up 40% year however is a horse of a different color.
This is not a bet I would make and anyone entertaining that sort of a bet needs to understand the consequence of missing a reentry.
Wikinvest Wire
25 comments:
Roger,
Your not so subtle message of "its worse to miss the first leg back up than to miss the [last 5%? 10%? 15%] of the down" doesn't quite square with "we're only 4 1/2 months into the slow rolling over of the bear".
I realize and appreciate that you're in the unenviable position of commenting on the unknowable, and that occasionally sprinkling in columns like today's gives you [Obama like?] cover if there is a sudden reassessment of value, and money comes rushing back into equities.
But I think there is still plenty of room between "falling sky" and 1934 comparisons for today's markets. Trading rallies, yes, but a fundamental reversal of sentiment and expectations? I've learned the hard way to always expect the market to do the unexpected, but I'm struggling to imagine exactly what hindsight will see that truly will justify a hard bottom from these levels.
Dollar has broken through historical support (on the downside), housing prices are in freefall, inflation (in part driven by energy prices marked in dollars) is wrapping some tenacious fingers around the throat of Helicopter Ben, banks are "discovering" on a daily basis further writedowns (further pressuring loan officers to "get it right" going forward - meaning less lending, less business development - regardless of the latest airlift from HB), hedge funds are closing/consolidating, and consumer confidence (the quiet nuclear engine of the US economy) has been been stumbling tripped up by the reality of rising unemployment (construction industry and real estate related, as the obvious leader).
The market may have drastically overshot correct levels (cf. implied corporate default rates running at some 5x previous historical MAXIMUM default rate), but until there are more signs of economic stability (which is a tall order in an election year, with the candidates falling over themselves to offer economically untenable "solutions" such as "stay the course in Iraq for 100years" or "withdraw from NAFTA"/"freeze interest rates"), I'd suggest a defensive posture (defending against the potential for a surprising fundamental "V shaped" bottom) is still a future worry.
If it weren't for the levels of volatility (itself inconsistent with a post-capitulation bottom), wouldn't it be enough to simply buy some deep OTM LEAPS on SPY, or long dated OTM calls on [name your favorite EM country ETF that will come out of the recovery gates first]?
Rick in NY
Good thing the banks aren't already f'd. Oh wait.
Really Scary Fed Charts: March
funny Ben.
Rick,
Your choice of words is interesting "does not square," implying predictable structure.
You ask me; bear market. I have had this opinion for a while and as we sit today there is no convincing me otherwise.
That doesn't make me right.
I made a comment in the video that declines never last four months, they are either shorter or they are longer. Well what if this one does only last four months.
My opinion is what it is but i could be wrong. I don't feel the need for cover I feel the need to protect clients in case my opinions about the market are wrong which is process I wrote about.
To remind you I thought 2006 would be down a little yet kept up with the market just fine.
Roger, you're doing great with your line of thinking. As an active investor for over fifty years, I think I can safely say you are providing wisdom while at the same time not claiming to have inside knowledge of the future. That is important as no one has this kind of Crystal Ball. As a younger man in the 73-74 mess, I thought I had it all figured out and nearly busted out. BTW, that time period was significantly worse than what we are experiencing today IMHO.
"that time period was significantly worse than what we are experiencing today"
here's hoping we can still say that six months from now!
Not wishing to get into a long debate;however, the early 70s included among other things, a disgraced presidency with resignation. A lost war after 58,000 dead, going off the gold standard, an oil shortage followed by unprecedented oil prices, ahousing downturn, high un-employement etc. Even an end to rock and roll seemingly.
as renowned philosopher huey lewis noted in 1983 or 1984 the heart of rock n roll is still beating.
many do think this is as bad the 1970s, i do not, my only meaning was i hope it does not get that bad which again... i do not think it will.
As bad as the 70's? Don't believe so and I'm sticking with my expectation for sloppy mush -- about as deep as a normal bear but with no clean bottom or bright edges -- but the probability tails, inflation on the one hand and deflation on the other, seem to be getting fatter to me, putting us between the devil and the deep blue sea as it were (sorry for the mixed metaphors). Still, as long as these twin problems remain more or less in conflict, I believe we could muddle through as John Mauldin surmises; e.g., http://tinyurl.com/yvwom8
WRT Roger's strategy I've mentioned before that the issues he faces as a money manager are not identical to those who must please only one client, themselves (okay, the family too) and, io ipso, the measures he deploys may not be identical either although obviously there will be areas of overlap particularly in terms of broad goals; e.g., protecting capital, recognizing opportunity and taking appropriate risks. IMO the real value added is the thinking aloud, like meeting someone on a difficult trail who recognizes different landmarks than you so putting them both together increases confidence the walk will turn out well.
our first hiking analogy, excellent.
Any thoughts on whether the stock market indexes do better with a Democrat or a Republican (especially a first term one) in power? Are there definitive studies?
"As bad as the seventies" you say?We sold our 1st ever house in '65 and could not afford to buy it back 4 yrs later and, Roger mreminds us, the same sort of thing could happen if we don't have some money in the right market places. Well, if you diversify too much you'll likely not get much benifit when it turns. So, any ideas where a guy must (should) be somewhat overweight?
Willy
everyone knows that stocks do better under republicans and poorly under democrats.
except the 1970s under nixon/ford and in the 1990s under clinton and the naughties under W. this is the sort of thing that can be spun to say whatever you want but since the market has an up year 72% of the time I think the idea is too broad to be valid.
Willy, in addtion to shells and whiskey might i suggest sacks of flour and some dynamite.
seriously, being overweight cash looks good and I have allowed clients' GLD position to grow within the portfolio too. i have a little currency exposure mostly with 2 year sovereign debt, I sold me FXE about 3 days too early
a few stocks have done quite well relatively with one or two names maybe even up a hair?
Check out the disclaimer to http://www.FAKEPAYCHECKSTUBS.com .... TOO FUNNY!
On the subject of which ruling party is best for the market, no matter who is in it's always best if no party has complete majority rule over the presidency, the congress and the senate. Especially if it's the Democrats.
Roger,
I wouldn't spend as much time reading and posting to your column if I didn't think you have one of the better perspectives on the market's activity. Together with John Authers (FT's "Short View") and occasional columns from Doug Kass, you're one of my regular "must see's".
My apologies for cynically implying today's blog was just a set up for the future "I told you so" claim. With actual clients, you are being your prudent responsible self in reminding them that these things do end.
But as someone who was until recently at the "coalface" of evaluating the CDOs and derivative products produced by the now decimated ranks of the structuring departments of the bulge bracket banks, I'm far less convinced that the disappearance of this billions/trillion? dollar product area will fall neatly into a "normal" bear market.
So, I'm hoping that the credit/liquidity mess will start to sort out and we'll have some movement on the credit markets - and with that reliable upward movement on the equity fronts.
But hope is a quick route to ruin.
Keep writing!
R in NY
Is there perhaps a bit too much concern here with how the portfolio is positioned and not enough with simpler things, like simply cutting back on spending, saving more ? I know random's bag is portfolio construction but maybe 100% focus on the portfolio to pull us through is making things harder than they need to be ? Just a thought (not venting, I promise).
Thanks for the linked article. Seems like investing in the United States was the only light at the end of the tunnel. At some time in the future, could you explain what Ken Fisher is talking about when he discusses Mercantilism as a national policy. I have a science background, and only basic college training in economics, so the capitalim/ mercantilism reference was over my head. What's your take on Australia hiking rates? Is there a way to invest on that policy?
Thanks,
Sam
Rick the point is valid about destruction of capital but it is also true that in every event there are valid points as to why the current mess is different. This may turn out to be worse but in the middle of all of these they all seem to be different than before.
Anon 343, I don't think i follow. my guess is that the ratio of investing to personal finance posts is probably 25 to 1.
it is more of an investing site than personal finance. i feel like i might be missing your point. i might say saving more and spending less, IE living below your means is a good idea all the time not just when it appears as though there is a bear market and or recession.
Yeah, I got ya. Investing is a lot more interesting than dumb 'ol boring saving money. Just thought I'd try a little different post for a reaction - this likely isn't the place for a thought like that. It's just that, occassionally it seems to me instead of so much fine-tuning of one's stock portfolio, there may be simpler ways to go. But, yeah, playing the stock market SUCCESSFULLY is a lot of fun.
Here is a link about Mercantilism from Wikipedia.
I don't know enough about the topic to discuss it on that level or critique someone else's thoughts on the matter.
The RBA gave the impression in its statement that hikes will stop or slow down from here which hit AUD as a result.
I have had exposure for many clients with two year paper from Oz and or FXA, depending on the client.
Most clients have this exposure and own one of the banks but these are long term holds so i am not sure what to say about right here right now as an entry point.
I agree, Roger, there's never a good time to be 100% in cash. Not just because your pot is probably being eroded by inflation but also because I feel with investing the landscape changes on an almost daily basis and thus so do the opportunities. As the saying goes;
Use it or Lose it.
At the moment I'm wanting to have at least 30% cash if possible (available to trade), as the entry points to some of those opportunities are very narrow with the wild fluctuations in the markets. Just as an example I bought shares in a bank last week and made a decent return in under 3 hours, a trade beating my old record by over a month. As to being there for the inevitable upturn, my initial reaction was 'well I won't mind missing the first 15-20%' which got me thinking has there ever been a bear-market rally of >15%, or would this signal the end of the bear market? For investors of a nervous disposition this could be a very useful indicator, giving them an acceptable 'loss' if wanting to stay out of a bear market.
As an aside I was just reading an article in this weekend's FT. It says 1.5 billion of the World's population are 12-24 years old. Apparently Uganda's population has doubled in the last 20 years. Unless there are some large wars or new diseases in developing countries there simply won't be enough food to go around at some point.
way to close out on a positive note!
look at 2000-2002 for some pretty big bear market rallies.
Stock markets do better under Democrats.
http://money.cnn.com/2004/01/21/markets/election_demsvreps/
Also the market has woefully underperformed Treasuries under Bush, and about break even.
The posters on this blog are pretty aggressive, this is the first time I've been criticized so quickly for some pretty innocuous ramblings (although I appreciate my opinions are different from others' here). I'm fairly quick to learn though.
Take care.
Diversify and limit your downside participation....
These 2 philosophies that Roger teachs/preachs can help many people..
And don't ignore history....from 1966 to 1982 the Dow went up one point. If you had bought and held, you wouldn't have lost any money..but you did lose time.
Be cognizant of where you are in the market cycle, and your own life cycle. Things will get easier after 2015...
Just my humble opinion
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