Buy And Hold Is Not As Smart As You Think

Wow, my last post was is November of 2012.  Talk about writers block...

Obviously,  I have been wrong about the Federal Reserves willingness to pump money into the banking system.  I never imagined they could be so careless.  But they have been.

When you hold the price of money artificially low for as long as possible, you create asset bubbles, you encourage the inefficient allocation of capital in to ventures that create fiat money, but have no (or very limited) real underlying economic value.

One of the things I have heard from retiree's that I have told to limit their exposure to stocks ever since right before the housing crash is that they hate missing out on the recent gains.

If you got out at the top of the market in the summer of 2008, or better yet shorted it, you saved or made an enormous amount of cash.  Now you are disappointed, because you have missed out on the rally, which has indeed been very impressive.

But please, which of your friends will get out at the top again?  Do you honestly believe this rally is based on anything rather than bubble economics, coupled with a herd like momentum mentality that has been evident in every run-up since 1990?

http://stockcharts.com/freecharts/historical/djia1900.html

Once again I will point you to a LONGER TIME FRAME than most are willing to look at. 

Baby boomers have lived in unprecedented boom times.  Not unlike the observer of a scientific experiment that is unable to comprehend his own impact on the outcome of an experiment, the boomers have both bought and sold the "buy and hold" theory....hook, line and sinker.

Imagine you were 65 years old in 1929.  You had just lived through the biggest stock market boom in history.  Times were good, very good....and you were going to retire comfortably.  Until the stock market crashed.  If you were not leveraged, and had no debt, perhaps you came out alright, unless your job depended on the economy, which subsequently collapsed. 

By the time you were 91 (26 years later), you would have theoretically made your money back. (If the companies you had been invested in didn't cease to exist.)

Most people are able to really start investing when they are in their mid-30's to early 40's. So sure, buy and hold is GREAT, if you were born between 1946 and 1956.   Clearly, not everyone was.  You boomers have been riding a wave, a wave that you have had a huge part in creating.  The wave started to crest and break in the early 2000's, and bubble blowing by the Fed has succeeded in creating the illusion that your wave will never completely break.  Like all waves, it will.

The question is not if, but when this will happen.

I believe China is the key.  The bubbles have been blown with government debt, which has been largely provided by foreign governments, primarily China.

When China can no longer afford to buy our debt, or decides they want a higher return for doing so (causing a spike in interest rates - where the Fed loses its control over the discount rate), we are in deep trouble.  This will be the beginning of the next crash, and it will be massive in scale and long in duration.  You will be very glad to have cash, hard real estate assets, and gold.  This will position you to be able to take advantage of depressed stock and bond prices, and take advantage of higher yielding, low risk bank products when interest rates spike.

The question then becomes, what will cause China to either stop buying US Treasuries, or even start dumping them, rendering the FED helpless. We got a glimpse into the answer in June:


http://colorinvestmentresearch.com/interbank-lending-spike-a-symptom-of-chinas-deeper-financial-policy-disorder/

http://www.nytimes.com/2013/06/21/business/global/china-manufacturing-contracts-to-lowest-level-in-9-months.html?pagewanted=all&_r=0

http://azizonomics.com/2013/05/03/chinese-treasury-contradictions/

http://www.telegraph.co.uk/finance/china-business/10120716/China-braces-for-capital-flight-and-debt-stress-as-Fed-tightens.html



Kep

Jindal Has It Right

I think the Republicans just found their new leader.  If they want to win four years from now, they had better listen to Jindal.

http://www.cnn.com/2012/11/15/opinion/jindal-gop-election/index.html?hpt=hp_t3

Notice:  He doesn't attack Obama, make irrational, emotional statements about how our country will never be the same, or blame the poor for wanting, "stuff".

http://politicalticker.blogs.cnn.com/2012/11/14/reports-romney-says-obama-won-by-offering-gifts-to-minorities-and-young-voters/

He clearly, concisely, and honestly points the Republicans in the right direction.

Go Bobby!

Worth A Thousand Words

Few pictures explain so much.  If you wonder why our economy is still struggling nearly 5
years after the housing collapse, all you need to do is look at this chart to understand the magnitude of what our economy has been, and is still going through.

The above is a 10-year chart of Citigroup.  At the peak, it traded as high as $560 a share.

Always One Of My Favorites

One of my favorite memories of childhood is when Long Lake froze solid enough to skate on and my dad took me skating on it.  It must have been late November or early December.  There was no snow.  The ice was perfectly smooth.  You could skate the entire lake safely.  The trees were covered in ice that morning and I felt like I was in some sort of wonderland.  I will never forget that day.

It cemented my love of ice skating.  I will never forget it.

Sometimes as an adult I miss those carefree days. Then I remember how lucky I was to have that day at all.

I spent a day with my Dad celebrating his Birthday this weekend.

Dad, I love you and will never forget the love of ice skating & nature you brought to my life:)

Joni Mitchell described those emotions well.

http://www.youtube.com/watch?v=GpFudDAYqxY

Sarah McLaclan did it even better:


http://www.youtube.com/watch?v=GpFudDAYqxY

Obama Won - Republicans...Listen...or Become Obsolete.

I don't have much to say about this election.  It is, however, a HUGE opportunity for the Republicans to regroup and figure out where they have gone astray.

This might help:
http://econmom.blogspot.com/2011/09/what-obama-doesnt-getand-what-he-does.html

"Philosophizing" With Old Friends

Today I received an email from an old high school friend who I used to love to "philosophize" with.

My friend seems to identify with Romney's economic positions, and sent me a well written reponse to a question from one of his friends:   

Why would people, especially conservatives, expect the president to help them get or keep a job? Do they not understand capitalism? i understand, but don't agree with, the liberal view of job creation through federal programs, but I thought that personal responsibility and achievement was a fundamental tenant of conservatism...

My friend had a great response, which I won't publish, because I don't have his consent, but it was an exchange which helped me clarify my thoughts, so I thought I would share my response to him:

In general, I agree with your logic.  I also agree with the moral argument that it is immoral to take another man's wealth by force.  Government should not be used to redistribute wealth without the consent of the governed. It is not only immoral, but inefficient.  Any job the government "creates" is by definition a transfer payment.  Someone else's taxes are footing the bill. (This does not mean those job's are not often valuable and necessary.)  The thing is, the government does redistribute wealth and employ people. It has for years, regardless of which party was in power.

My issue is this:  we do not have, and have not had a Capitalist economy for a very long time.  We have a sort of hybrid economy.  It has become a mix of, Socialism (state confiscating capital from individuals and corporations and redistributing it), Fascism (government supported industry), & Capitalism (yes, much free enterprise has survived). 

http://econmom.blogspot.com/2011/10/anger-at-wall-street.html

When I hear the Republicans speak of how they are for a "free" economy, I can only think of the devastation (via bubbles - tech, housing etc.) that Greenspan's manipulation of interest rates (the price of money, if you will - a form of government price controls) has caused.  Democrats are not alone in favoring certain industries over others. (farming & oil)  Hank Paulson basically wrote TARP, which was essentially a government guarantee of the investment banking industry.  These "Capitalists" were given a blank check by the Treasury to use trading equities in the stock market.  This is where their subsequent "profits" have come from. (The ones they used to "repay" TARP.)  When the moral underpinnings of Capitalism are sacrificed in order to gain government favor, the Republicans undercut their case for lower taxes.  They cannot have their cake and eat it too.

Think about it:  How can we have a free economy if the price of money itself is set by the government?  This will remain the same if Obama or Romney wins the election. 

I also disagree with the Democrats that "Capitalism" caused the crisis we are still enduring.  How could it have when that is not what we had?

Our Government (both parties are responsible) has created an unsustainable system, similar to that in Europe, where an aging population and government payments are making our fiscal situation perilous.  

This is where the pragmatist in me kicks in.  See, if we cut entitlements as drastically as needs to be done without raising taxes on the very rich at all, the entire system may collapse.  The poor, by definition, cannot pay for the gap, they have no money.  As many as 47% of Americans pay no income tax.  It simply isn't politically feasible to cut entitlements to these people, and raise their taxes at the same time...which is what would need to be done to close the gap if tax rates for the rich don't go up.  It sucks, but it is sort of like this:  if the very wealthy want to keep the system we have (the one in which they have created their wealth), they are going to have to pay more in taxes, at least temporarily.  I cannot imagine what the masses will do to the system if their entitlements are cut without increased taxes on the very wealthy. (I am not saying this is "right", but it is what it is.)  The messed up hybrid system we have created over the last 90 years has brought us here.

We witnessed the Socialist victories in France, Spain, and Greece a few months back.   I fear if we don't come to some compromise (a balanced approach between entitlement cuts and tax increases for the very wealthy) that the very system that has helped create that wealth will cease to exist.  Real Socialists will gain power and you will think Obama looks like Reagan compared to them.  Any Capitalism that remains in the system will indeed be eliminated in such an environment, and I don't want to see this happen.

I just think Romney and Obama are not that different.  I wouldn't have said that four years ago, but Obama's governance has been much more middle of the road than his rhetoric. (Perhaps because of the Republican congress - some times divided government is the best moderator of all.)

All that said, I am concerned with the Republican party's stance on religious issues.  I want the government out of the bedroom as much as I want it out of my wallet.  At this point I am not sure which party to be more afraid of.

So what's an independent to do?  

Simple: No

If life was simple, then we all would be.  There is something in our world, our culture, that wants us to be simple, understandable, safe.

The truth is;  we are not any of those things.

At least I know I am not.   I was a Freshman in High School in Advanced English, when I wrote an essay entitled, "I Am Complex".  I got an "A".  It wasn't due to my writing skills, it was because what I said was true, not only of me, but of all human beings.

We are very complex.  All the people I love in this world, and there are many, are very complex. I see them as beautiful, intricate beings that I have been blessed to know.  They are not all good, or all bad.  They are not always nice, they are not always cruel.  They are not always loving, and they are not always mean. They are not always beautiful, and they are not always ugly.  They are not always wise, and they are not always ignorant.

They are always perfect.  Perfect as they are.

I feel so blessed, that even in the darkest hours, there is something inside which allows me to see the best in not only myself (believe me, I can be dark), but in all those I love.

Life is not simple, it is complex.

For some reason I knew this at 15.  It was as true then as it is now.

Let us embrace the weird complexity that is US.