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.

Minnesota Marriage Amendment

http://ballotpedia.org/wiki/index.php/Minnesota_Same-Sex_Marriage_Amendment_(2012)

"I cannot conceive of a personal God who would directly influence the actions of individuals, or would directly sit in judgment on creatures of his own creation. I cannot do this in spite of the fact that mechanistic causality has, to a certain extent, been placed in doubt by modern science. [He was speaking of Quantum Mechanics and the breaking down of determinism.] My religiosity consists in a humble admiration of the infinitely superior spirit that reveals itself in the little that we, with our weak and transitory understanding, can comprehend of reality. Morality is of the highest importance -- but for us, not for God." - Albert Einstein 'The Human Side', 1954

I must speak out against the Minnesota Same-Sex Marriage Amendment.  I feel a moral obligation to do so.

It seems as though the Republican party has been co-opted by the religious right, and for this reason I can no longer offer them any support. I never officially considered myself a Republican, but often voted Republican for economic reasons. Their economic ideology supports limiting the role of the government in our economy.  In action, they have often failed to apply this ideology.

It is clear our economy is in a horrible state.  Neither party is entirely to blame for this; both are responsible.  Neither party has been able to fix it.  This shifts my focus to different kinds of freedom, since neither party has been successful in ensuring our economic freedoms.

Constitutions are essentially rules governments operate by.

con·sti·tu·tion  (knst-tshn, -ty-) a. The system of fundamental laws and principles that prescribes the nature, functions, and limits of a government or another institution. b. The document in which such a system is recorded. c. Constitution The fundamental law of the United States, framed in 1787, ratified in 1789, and variously amended since then.

By amending Minnesota's constitution Republicans in the Minnesota legislature are attempting to change the role of the government itself.  Our national Constitution was designed to LIMIT the power of government and PROTECT the rights and privileges of its citizens.

The Minnesota Marriage Amendment is designed to do just the opposite:  it LIMITS the privileges of certain citizens (while granting them to others) and ENDOWS the State with power to discriminate based on sexual preference.

One could ask the question of whether any state should "support" or "recognize" marriage between either opposite or same-sex partners.  I am sure there are many single taxpayers that would argue that married couples should not receive favorable tax treatment simply because of their lifestyle choices.  

Whatever your view on this, the fact is that both state and federal governments do recognize marriage between a man and woman, and grant them financial and legal privileges based on their marital status. Therefore, denying those privileges to other married couples (based on gender) is discrimination.  

At the core of the issue, we are speaking of the state affording certain privileges to some, and denying them to others, based on whether they have the same genitalia as the person they choose to marry. 

The question then becomes, on what is that discrimination based?  We all discriminate.  Laws discriminate all the time.  For example, there are different penalties for different types of crimes. In this case, the discrimination  is based on a judgement of perhaps how much pain and suffering an action caused another, or perhaps the intent of the crime. 

Marrying a person of the same gender is no crime.  The state is discriminating if it denies the rights and privileges of marriage to same-sex couples while granting them to opposite-sex couples.  The problem is this type of discrimination is based not on reason, but on prejudice, fear, and hatred.

A constitution is not a law, it establishes the basis for law.  It is meant to protect and guarantee rights and privileges of individuals, not take them away.  The constitution is supposed to protect people against an overzealous state;  especially a state that has been hijacked by religious fanatics.

It is obvious that the Minnesota Marriage Amendment is based on religious beliefs.  Our Federal constitution establishes the freedom to practice your religious beliefs, not the right to use the government to force your beliefs upon another.

Question:  How does it harm anyone, anywhere, if  same-sex married couples are afforded the same privileges by the state as opposite-sex couples? 

Answer:  IT DOESN'T.

VOTE NO!  Minnesotans have a chance to be the first to defeat this type of hateful amendment.

The New Depression

I just read "The New Depression" by Richard Duncan.  If you want to understand our current economy, it is a must read.

http://video.cnbc.com/gallery/?video=3000110331

Rally To Fall Apart

For the very few readers I have left (I apologize for my lack of posts), I wanted to update you on where I think the market is headed.

You won't be surprised to know I think the stock, bond, and commodity markets are SEVERELY over priced.  We are headed for a fall that will decimate almost all asset prices.

Personally, I am outright short markets and individual stocks and in cash.*

As I have said before, we have just experienced a 30-40 yr bull cycle, driven by debt (credit expansion), central banks manipulation of money supply, demographics, and speculation.

The increase in prices of stocks, bonds and commodities we have seen since the 2009 bottom has not been driven by economic growth or value creation of any kind.  It has been "created" by central governments around the world printing money.  This money was given to the banking sector, and they have been speculating with it in the financial markets.  I do not know how long this manipulation of markets can continue, but I can see that it unsustainable.

The suspension of "mark-to-market" accounting rules in March of 2009 was the catalyst for the current rally.  Without this suspension, it would be apparent exactly how unhealthy our banks are.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agfrKseJ94jc

In layman's terms: FAS (Financial Accounting Standard) 157, required banks to value their assets (mainly outstanding loans) quarterly by marking them to market.  There is much debate about whether this practice exacerbated the 2008 financial crises.  In my opinion, marking assets to market is an ESSENTIAL tool for determining the health of financial institutions, and provides information that is absolutely critical for investors to have if they are to buy stock in a financial institution.

The suspension of FAS 157 by the Financial Accounting Standards Board allowed, and continues to allow, financial institutions to lie about the value of the loans they hold on their books.  This makes everybody feel better in the short run, because they can deny the fact that most of our large financial institutions are indeed insolvent.

Imagine if you could go to the bank and get a close to 0% loan, to use in anyway you pleased, with no collateral (or if collateral was required, you could just make up its value)!  Now;  imagine you could do this indefinitely, and when it became clear that you couldn't make the payments on this loan, the bank would just give you another one to use to pay the first, and there would be no impact on your credit rating.  Would this affect your behavior at all?

Of course it would, and this is the current arrangement many large financial institutions have with their bank (The Federal Reserve).

Still think this rally is sustainable?  Think again.

If you want to more information, or want to understand more about what caused the economic boom of the last 40 years or so, I recommend reading "The New Depression:  The Breakdown of the Paper Money Economy" by Richard Duncan.

*As always, trade at your own risk.  I am not advising you in any way.  You should seek the advice of a financial professional for investment advice.

Women Hating Religious Fanatics

As anti-American as anything could be:

http://www.cnn.com/2012/07/15/world/africa/egypt-clinton/index.html?hpt=hp_t1

This article is BEYOND upsetting.

If the headline isn't upsetting enough, the neutral, politically correct tone the rest of the article takes is nothing short of infuriating.

What country do we live in?

Let's speak out against evil when we see it.

I told you the radicals were going to try to take over in Egypt.  How do we like the look of their new Democracy?

Hitler was Democratically elected.

Never forget...we do not live in a Democracy, thank God.  We live in a Republic, based on balanced rule, not mob rule.  Our Republic is based on the Constitution and the Bill of Rights.  These documents gave the North the moral authority to free the slaves even when the majority was against it.

Our Republic has moral authority because it asserts the rights of individual human beings to life, liberty, and the pursuit of happiness, above mob rule, above any religion, and above collective rights.

Without this moral authority, which the new "Democracies" in the Middle East lack, they are nothing more than religious nation states ruled by the whims of the masses.

Do not mistake these movements in the Middle East for progress.  The opposite may be true.

Remember Benazir Bhutto?  Lara Logan?  Google them yourself.

How sad.

John Stewart Takes On Edward Conard

This interview is a must watch.  John Stewart should have been an economist.  Well, maybe not, then I wouldn't get to enjoy The Daily Show.

The Daily Show with Jon Stewart

What a great debate. I think JS is touching on a very important point. I have been thinking the same thing for a long time:

http://econmom.blogspot.com/search?q=our+economy+has+been+doped
http://econmom.blogspot.com/search?q=cancer
http://econmom.blogspot.com/search?q=this+is+not+capitalism

For just a few minutes, pretend you are neither a Republican or Democrat. Do this because if you cling to the ideology of either group, you will fail to see the truth. (If you are neither, it will be easier.)

Many Republicans, like Mr. Conard, base their defense of Capitalism not on moral arguments, but on overly academic ones.  This was the problem Greenspan had.  He failed to see the forest from the trees.  He paid so much attention to the details, that he forgot how to think clearly.

Are risk and reward related?  Absolutely.  This is obvious, and I can't imagine having the patience to write an entire book about it.  Does this relation mean that encouraging risk takers through the tax code always works?  No, not necessarily.  People are motivated by many things, money is not always one of them, and if it is, it is not always the most important.  Should we have a tax code that encourages risk taking?  Well, that depends, doesn't it? (To quote one of my favorite professors.)  It depends on what types of risk taking we are promoting and whether they are desirable for the economy as a whole or not.

What about creating a tax code that was neutral?  Would that even be possible?  Government may create an environment conducive to business and innovation by minimizing regulation and taxes, but should not in any case be subsidizing one business over another.  This not only creates moral hazard problems, but it makes the game unfair.  Subsidies are much more harmful to Capitalism than taxes.

Why?  Because they strip the Capitalists of a moral justification for their philosophy.  Subsidies make Capitalists hypocrites, and slaves at the same time. They are destroyers of Capitalism.  They skew the risk reward system to such an extent that it cannot be relied on as a market arbiter.

What industry is more subsidized and "coddled" as JS says, than any other (perhaps with the exception of oil and farming)?  The financial industry.  How?  The Federal Reserve (arm of the Government) "lends" free money to speculators at the big money center banks.  They then "invest" it in the stock market.

By fixing the price of money, which Conard calls "saving" the economy, the Government is giving these large financial institutions the biggest free ride in economic history.

If they make good decisions, they are rewarded handsomely. If they fail, they are bailed out by the taxpayers.  This is the "investor class" Edward Conard is speaking of, and many of them are indeed are feeding of the Government teat.  But they don't want you to know that.  They don't want to give up their subsidy, their advantages...and why would they?  If you were playing poker and you knew your betting money would never dry up, would you place riskier bets?

Obviously, not all in the financial industry fit this profile. There are many investors who participate in the market with the intent of not only making money for themselves and their clients (which is great), but also to support innovation.  It is the honest guys at the middle sized firms who don't have access to leverage at 0% and actually have to make money for their clients who are at a competitive disadvantage. They don't get Federal Reserve funding, but their clients still expect results.  Many true Capitalists are operating as independently of the government as possible, and putting up with many cumbersome regulations on top of it.  These are not the people or firms I am referring to.

I love that JS points out that in the while the real estate bubble was forming "We lost our minds chasing wealth."  He also asks a question I have been thinking about for a while:  Is our overvaluation of growth coming at the price of lost stability?  YES!  YES, it IS!

In a free economy, no central bank would be able to hold the price of money artificially low and in doing so warp the normal risk reward mechanisms imposed by markets.  In a truly free economy there would be no Goldman Sachs, no GM, no AIG, no Freddie and Fannie, and no taxpayer bailouts of hedge funds.

I say these things not to disparage Capitalism, but in the hopes we can save it.  We will NEVER be successful in cutting entitlements, which is necessary to the health and well being of this country, if we do not end Government subsidies and bailouts in the "private" sector.

If the "investor" class continues to behave as it has, and ignore these issues, I am afraid I will not be able to blame the masses for their rebellion.

'Nosce te ipsum'.

Know thy Self.

Half truths require no rigor.  I admire the man who tells the whole truth and nothing but the truth, and knows Him Self.

Does he exist? Yes, in all of us.

We all fall short of perfection, of truth.  Yet, he exists in all of us.

Tell the truth to your Self above all others and know the difference between yourself and your Self.

This is my only Religion.

We all have both.  We all are two.  The recognition of this reality implies you must employ free will and decide which to feed...the self...or the Self.

Which of your thoughts will you believe?

Repercussions

The repercussions of a mind...the effects.  Pretend it matters not...go on...deny your Self and go on.

Europe-Done

Wow, it has been a while.  Tax season is over, and I think I might actually have a few things to say.

This post will be my segue:
http://econmom.blogspot.com/2011/11/global-bail-out.html

Back in November of 2011, I told you Europe was going to fall apart.  I had no idea when.  But I knew it would.

Yesterday, the Socialists won in Greece and France.
http://money.cnn.com/2012/05/08/news/economy/french-greek-elections/?cnn=yes&hpt=hp_t2

The right shoulder of the head and shoulders top that started forming in 1999 is almost complete.


Current:


The final formation of the right shoulder could go on for some time (2-3yrs).  Alternatively, it could
collapse at any moment, given the right catalyst.

This is why I remain short.  DJIA 2000....11,700 or so....12 yrs later...12,932...a whopping 10% in 12 yrs, or 1.2% a year.  Adjusted for inflation you lost $.

All you bulls out there that want to talk about all the money you made on the rebound off the lows, well, you only "made" that if you sold at the top.

What about the risk you have taken on?

Return is a meaningless concept without risk consideration.

Nighty night.  Sweet dreams...sell, sell, sell.

Wonderful

As taxing as this season can be...don't forget:

Note To Republicans

If you think birth control is immoral...don't use it.

If you think gay sex is a sin...don't have gay sex.

If you think gay marriage is a threat to you...you need to work on your marriage.

If you really believe in Liberty...leave every one else the hell alone.

Enough said.

RIP Whitney

This song brought me through my darkest days as a teenager.

I don't care how messed up she got..I love Whitney..and will miss her...

Possible...

Is it possible that there is really nothing more to say?

Truth...

Resides in the most obvious places...