"For a greedy man even his tomb is too small." - Tajikistani Proverb
Ask any 9 year old and they will tell you the secret to winning. Stack your team with all the best players and then take on a weak team and crush them. It is obvious. Getting ahead in business is similar. Find an opportunity and fill it quickly. Once there draw up the gates, build protective walls and attack any competitors. Once you have forged a secure environment protected by legions of attorneys and scores of patents squeeze the life out of your employees so that the few at the top can reap all the rewards for their investment risk.
In a normal society those are basically the rules to the game and so long as you obey the rules of the law you have the opportunity to make a fortune. On paper this is fine, but in the real world most entrepreneurs reap a decent amount of reward and form the middle class. A few manage to break that mould and become the super wealthy while the majority of the population struggle to make ends meet. This inequality is normally healthy but as the spread between the haves and the have nots widens problems start to occur.
As with any business operating in a healthy economy the weaknesses in the company are hidden and the personalities of the owners are manageable until the proverbial fan starts to sling mud around the room. In society when things start to go wrong the divide opens up like a festering wound and society becomes restless. In severe cases riots break out and governments can be toppled. New regimes come in and with one swoop extract from those that have and give to those that supported their uprising. These lucky few then start the cycle again. Greed is a terrible thing to waste!
At present the divide between the rich and the rest is as wide as it has been since the great depression. There has been a slow creep since 1980 and has been covered over by the middle class taking on more and more debt to keep up with the Jones'. As the fat lady has finally stopped singing and this class of society is being squeezed the divide has increased. Over $650 billion has shifted from the middle class to the rich. The problem is this - societies that have a large divide suffer from weak recoveries and large economic slowdowns as the buffer of a large middle class is removed.
Furthermore the problem is exacerbated in political circles as deadlock ensues leading to lame duck sessions with no progress just when leadership is needed. As there is no resolution or guidance from the top people lose faith in their leaders and start to point fingers. A loss of confidence ensues and a generation of non-believers is born that forever shuns the markets. After the great depression it took the Dow Jones Industrial Average until 1954 to achieve its highs of 1929. A quarter of a century to recover.
When I look at the problems that face the world and see the lack of trust and the divide growing every day, it is clear to me that regardless of how much propaganda Wall Street dishes out via the media it is not enough to repair the damage that the past decade has inflicted on the average person. So even though the market rallies here and there I am still convinced that we are just setting up for a very poor outcome but hopefully one that levels the playing field for the next generation to enjoy.
Wednesday, November 30, 2011
Friday, November 18, 2011
A Change Can Go A Long Way
"Know thyself." - Gnothi Seuton
In ancient Greece people would flock to the temple of Apollo at Delphi in the hopes that the Oracle would show them their destiny. The thought was that if their destiny did not look appealing that they could change it to a more favorable outcome. Obviously wealth and happiness were high on their agenda just as they are today. What a lot of them missed was that inscribed above the entrance were the words "Know thyself". These words really ring true today and I believe it is more important than ever to reflect on this.
Consider what is going on in the global economy right now; Europe is a complete disaster, the United States is mired in an economy that is slowly grinding forward, credit is hard if not impossible to come by, people are loosing their houses and their livelihood, the world has lost faith in their leaders and everywhere there are grim signs pointing to more of the same (if not worse) for years to come. It is very easy to become completely wrapped up and consumed with fear and believe me everywhere I look people are fearful. Worse still stress is written on every one's faces. This can lead to serious health problems. The body begins to creak and groan which adds to the problems we face. In the sports world it is well known that the body hurts when you are losing but the aches vanish as if by magic when you win. So too when your finances are in a wreck. It certainly is not easy to be positive.
But that is just what is needed. Think about it, there is nothing that you can really do about the mess that the world is in (unless you are a president or high ranking official in your country). Getting consumed by things that are completely out of your control is completely ludicrous. Not that you should not consider them and strategise, but it is clear to me that most people are overly panicked by the potential outcomes. Focus on what you can control and, in all reality, that is just yourself.
A great story that I am sure a lot of you have heard springs to mind. Two shoe salesmen arrive in a small town in Africa where no-one wears shoes. The first salesman sends a message back to head office saying this is a complete bust as no-one wears shoes while the second sends a message back saying it is the best opportunity he has ever seen as no-one has a pair of shoes! Same town, different attitude.
Changing your outlook from negative to positive can start to turn the tide for you personally. Once you are a happier person to be around it is amazing how things will follow. Your family becomes happier, colleagues become friendlier and people open up more. Helping others is also a great endeavour that can lead to opportunities that you thought were out of your reach. It is far easier to ask for that referral once you have helped the referring person with their problem. People want to do business with positive people so look at how you are projecting yourself.
The quote above goes deeper than this though. To know yourself is to know what really makes you tick, what it is that you love to do, what it takes to make you feel at peace within your soul. That is the best part of a poor economy - the ashes of despair clear the way for the seeds of innovation. The boundaries that used to exist melt away causing some consternation for those entrenched in the old societal realms, but for those who know themselves the fear evaporates and they retool themselves and take advantage of the void created. I have seen this first hand living in South Africa during the time when foreign businesses were divesting of their holdings. It was a time of fear and gloom in the country, but for a few nimble entrepreneurs it was the greatest opportunity ever presented to them as they filled the void and made huge profits. Those that sat with their head in their hands lost their way while those that saw the great opportunity reaped the rewards.
Fixing all the mess in the world will not be easy but you can start with yourself. Make a change this weekend and reap the rewards. If we can all do this then guess what, the small change that you make will go a long way.
In ancient Greece people would flock to the temple of Apollo at Delphi in the hopes that the Oracle would show them their destiny. The thought was that if their destiny did not look appealing that they could change it to a more favorable outcome. Obviously wealth and happiness were high on their agenda just as they are today. What a lot of them missed was that inscribed above the entrance were the words "Know thyself". These words really ring true today and I believe it is more important than ever to reflect on this.
Consider what is going on in the global economy right now; Europe is a complete disaster, the United States is mired in an economy that is slowly grinding forward, credit is hard if not impossible to come by, people are loosing their houses and their livelihood, the world has lost faith in their leaders and everywhere there are grim signs pointing to more of the same (if not worse) for years to come. It is very easy to become completely wrapped up and consumed with fear and believe me everywhere I look people are fearful. Worse still stress is written on every one's faces. This can lead to serious health problems. The body begins to creak and groan which adds to the problems we face. In the sports world it is well known that the body hurts when you are losing but the aches vanish as if by magic when you win. So too when your finances are in a wreck. It certainly is not easy to be positive.
But that is just what is needed. Think about it, there is nothing that you can really do about the mess that the world is in (unless you are a president or high ranking official in your country). Getting consumed by things that are completely out of your control is completely ludicrous. Not that you should not consider them and strategise, but it is clear to me that most people are overly panicked by the potential outcomes. Focus on what you can control and, in all reality, that is just yourself.
A great story that I am sure a lot of you have heard springs to mind. Two shoe salesmen arrive in a small town in Africa where no-one wears shoes. The first salesman sends a message back to head office saying this is a complete bust as no-one wears shoes while the second sends a message back saying it is the best opportunity he has ever seen as no-one has a pair of shoes! Same town, different attitude.
Changing your outlook from negative to positive can start to turn the tide for you personally. Once you are a happier person to be around it is amazing how things will follow. Your family becomes happier, colleagues become friendlier and people open up more. Helping others is also a great endeavour that can lead to opportunities that you thought were out of your reach. It is far easier to ask for that referral once you have helped the referring person with their problem. People want to do business with positive people so look at how you are projecting yourself.
The quote above goes deeper than this though. To know yourself is to know what really makes you tick, what it is that you love to do, what it takes to make you feel at peace within your soul. That is the best part of a poor economy - the ashes of despair clear the way for the seeds of innovation. The boundaries that used to exist melt away causing some consternation for those entrenched in the old societal realms, but for those who know themselves the fear evaporates and they retool themselves and take advantage of the void created. I have seen this first hand living in South Africa during the time when foreign businesses were divesting of their holdings. It was a time of fear and gloom in the country, but for a few nimble entrepreneurs it was the greatest opportunity ever presented to them as they filled the void and made huge profits. Those that sat with their head in their hands lost their way while those that saw the great opportunity reaped the rewards.
Fixing all the mess in the world will not be easy but you can start with yourself. Make a change this weekend and reap the rewards. If we can all do this then guess what, the small change that you make will go a long way.
Friday, November 11, 2011
The World Needs A Leader
"I can calculate the motion of heavenly bodies, but not the madness of people." - Sir Isaac Newton
The above quote comes from the South Sea Bubble of 1720 after Sir Isaac had lost a fortune. For those of you how have not studied the history of market bubbles, the South Sea Bubble was created in the 1700's when a company, the South Sea Company, convinced the United Kingdom government to give them the exclusive rights to all trade across the South Seas. In return they would shoulder all the government debt of roughly GBP 10 million. Not only would the merchants be given the rights to trade but the government would tax certain items to make the interest payments of 6 percent per year. It turned out that the company never performed on its side to the bargain as it never gained rights from the Spanish government to the ports in Chile and Peru. This did not deter the company from taking on more government debt and raising millions in stock sales by selling the public on the belief that the riches were just around the corner. Needless to say that after a magnificent run-up the stock collapsed after England declared war on Spain and left in its wake numerous victims. High ranking government officials who were involved with the company were tried and stripped of their worth.
Recently another large company MF Global the futures and commodities titan let investors down with a $600 million fraud. Outside of this Chinese stocks have been notoriously weak on the compliance side and have lead the auditors down the path to disaster time and time again. In Europe the news is terrible in that the Italian government could soon default on its debt which is the third largest debt load on the planet. This would be disaster for the global financial institutions.
Needless to say, the market rallied in the face of this adversity on the fact that the consumer confidence in the United States was higher than expected. You have got to like the madness of crowds. Certainly all bubbles have to have crowds to exist and run ever higher. In certain extreme situations frenzied crowds can change a government or support a dictator, just look at how Hitler swept to power.
Throughout the world there is a mild wind of resentment that is starting to stir. Small crowds have gathered around the globe to express their discontent of the current leadership and policies. People are fed up at the lack of leadership and they want answers. I am sorry to say that the crowds are not having enough of an effect as the leadership in the United States and around the world has brushed this off with little concern. The problem is that until the people find a leader that they can believe in there will be little in the way of forward progress. Negative sentiment needs to be reversed by someone the people can trust and there are very few of them left.
Today is Veterans Day in the United States and I must admit that having served in the South African Defense Force I can truly say that I take my hat off to the poor souls fighting in Afghanistan, particularly when the cause is being debated in congress and there is no hope of winning. Furthermore to know that huge cuts to the defense budget are coming that will lead to the loss of a job on their return must be terrible for morale. Despite that they preserver because of a high moral conduct even when they know that the end is in sight. Our "leaders" of the world would do well to look a battle worn soldier in the eye, gain an insight from that sense of duty and then turn and command their countries out of this malaise no matter what the political loss of capital.
The above quote comes from the South Sea Bubble of 1720 after Sir Isaac had lost a fortune. For those of you how have not studied the history of market bubbles, the South Sea Bubble was created in the 1700's when a company, the South Sea Company, convinced the United Kingdom government to give them the exclusive rights to all trade across the South Seas. In return they would shoulder all the government debt of roughly GBP 10 million. Not only would the merchants be given the rights to trade but the government would tax certain items to make the interest payments of 6 percent per year. It turned out that the company never performed on its side to the bargain as it never gained rights from the Spanish government to the ports in Chile and Peru. This did not deter the company from taking on more government debt and raising millions in stock sales by selling the public on the belief that the riches were just around the corner. Needless to say that after a magnificent run-up the stock collapsed after England declared war on Spain and left in its wake numerous victims. High ranking government officials who were involved with the company were tried and stripped of their worth.
Recently another large company MF Global the futures and commodities titan let investors down with a $600 million fraud. Outside of this Chinese stocks have been notoriously weak on the compliance side and have lead the auditors down the path to disaster time and time again. In Europe the news is terrible in that the Italian government could soon default on its debt which is the third largest debt load on the planet. This would be disaster for the global financial institutions.
Needless to say, the market rallied in the face of this adversity on the fact that the consumer confidence in the United States was higher than expected. You have got to like the madness of crowds. Certainly all bubbles have to have crowds to exist and run ever higher. In certain extreme situations frenzied crowds can change a government or support a dictator, just look at how Hitler swept to power.
Throughout the world there is a mild wind of resentment that is starting to stir. Small crowds have gathered around the globe to express their discontent of the current leadership and policies. People are fed up at the lack of leadership and they want answers. I am sorry to say that the crowds are not having enough of an effect as the leadership in the United States and around the world has brushed this off with little concern. The problem is that until the people find a leader that they can believe in there will be little in the way of forward progress. Negative sentiment needs to be reversed by someone the people can trust and there are very few of them left.
Today is Veterans Day in the United States and I must admit that having served in the South African Defense Force I can truly say that I take my hat off to the poor souls fighting in Afghanistan, particularly when the cause is being debated in congress and there is no hope of winning. Furthermore to know that huge cuts to the defense budget are coming that will lead to the loss of a job on their return must be terrible for morale. Despite that they preserver because of a high moral conduct even when they know that the end is in sight. Our "leaders" of the world would do well to look a battle worn soldier in the eye, gain an insight from that sense of duty and then turn and command their countries out of this malaise no matter what the political loss of capital.
Friday, November 4, 2011
Why Are We So Enamored With The Stock Market?
"It's only when the tide goes out that you learn who's been swimming naked." - Warren Buffet
In the United States in circa 1640 Wall Street and the surrounding area was a place where local merchants and traders would gather to buy and sell shares and bonds. Over time they divided themselves into two classes—auctioneers and dealers. In the late 18th century, there was a buttonwood tree at the foot of Wall Street under which traders and speculators would gather to trade securities. In 1792, traders formalized their association with the Buttonwood Agreement which was the origin of the New York Stock Exchange. The idea of the agreement was to make the market more "structured" and "without the manipulative auctions". Persons signing the agreement agreed to charge each other a standard commission rate; persons not signing could still participate but would be charged a higher commission for dealing. Since then the stock market has blossomed and now markets across the United States trade more than 2.5 billion shares a day.
The premise behind the stock market is a place for companies to gain access to capital. There are only two ways in which a company can gain capital; adding debt or selling equity. There are a myriad of methods tied into these two basic principles but essentially those are the only two possible ways. The stock market is a place where entrepreneurs can sell a portion of their equity in order to take some of their personal risk off the table or increase their capital base to expand their business. Furthermore equity can be used as financing to acquire companies. For this reason companies have a desire to find a liquid market that can provide them funds quickly, cheaply and easily.
Investors buy this stock for the purpose of profiting from the investment. Buy the stock at a low price and sell it at a higher price and the spread is profit. For these reasons they want a liquid market that provides them a sense of security by imposing stringent rules on the issuers. These rules try to protect the investors against fraud and other forms of trickery. Entrepreneurs that bend or break the rules are liable for their actions and can have their shares suspended or even serve a prison sentence.
In the past the idea was to buy a stock that you believe in and hold it for an extended period of time. Over time with the growth of the company the price of the stock would appreciate resulting in a profit for the buyer. In addition many stocks paid a good dividend so the holder of the stock was rewarded for his or her patience with dividend payments. If you could select the best companies you could make a fortune.
The word FORTUNE is the often the route cause of most investors' problems. Think of a gold rush or the mania associated with any other opportunity to garner a fortune and you get the idea. With the advent of the Internet amateurs and professionals alike could speculate in the market and make a fortune out of betting on a stock. This speculation or gambling was enhanced with the advent of derivatives that allowed small investors to increase the size of their bets while risking only a fraction of the collateral. Never before has this speculation been more rife than the current market. As the market languishes near the neutral line for the past decade, trading volumes have tripled. With the advent of cheap powerful computers trading has turned into a frenzy where milliseconds mean the difference between large profits and losses.
Into this frenzy come thousands of amateurs most of whom trade stocks that they know little to nothing about. They are driven like sheep to the slaughter by the incessant promotion of the markets on television in the newspapers and through the armies of stock sales people. They are blinded to the fact that the stock market has been a terrible place to invest for the past decade. The pitch is that you should always be in stocks as that is the place where fortune's are made. However no-one mentions that fortunes are also lost there every day. Our ego gets the better of us and forces us back to the well time and time again just so we can have some bragging rights at the water cooler or so that we do not feel left behind.
Take a favorite stock of almost every amateur investor Apple for example. Most people believe that they know all about Apple. They buy its products and believe that the company is bullet proof, but most of them have no idea about who the company's competitors are and how their technologies could strip Apple of its luster. In fact most investors do not even know the name of the current company CEO, but they believe that they know the company because they buy the products. It is a speculative investment based on flawed analysis. However what they do have on their side at present is that the euphoria surrounding the company has driven people in their thousands to buy the stock and drive it higher. What people forget is that Apple once was a high flyer but its product insulation almost caused its total demise until Mr. Jobs stepped back into the breach and turned the business around. As he is now dead there is no reason why the current product offering could not be undermined by other competitors. Just look at what Apple did to Research in Motion the maker of the Blackberry.
Take your head out of the sand and look at what the driving forces are behind stock gains - the global economy. See where that is headed and this will give you a better understanding why I believe that the stock market may not be the best place in which to invest at present. Companies rely on global growth in order to grow. If there is no growth then while the toughest companies will survive it will be at the expense of the rest. This is our current environment. If you hold a basket of stocks and some companies make a lot of money and their share prices increase but the majority either sink or struggle then overall you are losing. Rather take your pride and bury it and wait for there to be a signal that the global economic engine has fired back up. Once that has happened then get back into the market.
Certainly the market is forward looking, but believe me, having been in the market for decades I know that while it looks forward, there is enough speculation in it to provide you plenty of opportunity to reinvest once things start to turn. Even missing the first year of the next secular bull market will not have an impact if you capture the rest of a ten year move AND you have not suffered the losses that everyone else did during the downturn. Protect yourself now and wait for a clear signal before you return to the stock market.
In the United States in circa 1640 Wall Street and the surrounding area was a place where local merchants and traders would gather to buy and sell shares and bonds. Over time they divided themselves into two classes—auctioneers and dealers. In the late 18th century, there was a buttonwood tree at the foot of Wall Street under which traders and speculators would gather to trade securities. In 1792, traders formalized their association with the Buttonwood Agreement which was the origin of the New York Stock Exchange. The idea of the agreement was to make the market more "structured" and "without the manipulative auctions". Persons signing the agreement agreed to charge each other a standard commission rate; persons not signing could still participate but would be charged a higher commission for dealing. Since then the stock market has blossomed and now markets across the United States trade more than 2.5 billion shares a day.
The premise behind the stock market is a place for companies to gain access to capital. There are only two ways in which a company can gain capital; adding debt or selling equity. There are a myriad of methods tied into these two basic principles but essentially those are the only two possible ways. The stock market is a place where entrepreneurs can sell a portion of their equity in order to take some of their personal risk off the table or increase their capital base to expand their business. Furthermore equity can be used as financing to acquire companies. For this reason companies have a desire to find a liquid market that can provide them funds quickly, cheaply and easily.
Investors buy this stock for the purpose of profiting from the investment. Buy the stock at a low price and sell it at a higher price and the spread is profit. For these reasons they want a liquid market that provides them a sense of security by imposing stringent rules on the issuers. These rules try to protect the investors against fraud and other forms of trickery. Entrepreneurs that bend or break the rules are liable for their actions and can have their shares suspended or even serve a prison sentence.
In the past the idea was to buy a stock that you believe in and hold it for an extended period of time. Over time with the growth of the company the price of the stock would appreciate resulting in a profit for the buyer. In addition many stocks paid a good dividend so the holder of the stock was rewarded for his or her patience with dividend payments. If you could select the best companies you could make a fortune.
The word FORTUNE is the often the route cause of most investors' problems. Think of a gold rush or the mania associated with any other opportunity to garner a fortune and you get the idea. With the advent of the Internet amateurs and professionals alike could speculate in the market and make a fortune out of betting on a stock. This speculation or gambling was enhanced with the advent of derivatives that allowed small investors to increase the size of their bets while risking only a fraction of the collateral. Never before has this speculation been more rife than the current market. As the market languishes near the neutral line for the past decade, trading volumes have tripled. With the advent of cheap powerful computers trading has turned into a frenzy where milliseconds mean the difference between large profits and losses.
Into this frenzy come thousands of amateurs most of whom trade stocks that they know little to nothing about. They are driven like sheep to the slaughter by the incessant promotion of the markets on television in the newspapers and through the armies of stock sales people. They are blinded to the fact that the stock market has been a terrible place to invest for the past decade. The pitch is that you should always be in stocks as that is the place where fortune's are made. However no-one mentions that fortunes are also lost there every day. Our ego gets the better of us and forces us back to the well time and time again just so we can have some bragging rights at the water cooler or so that we do not feel left behind.
Take a favorite stock of almost every amateur investor Apple for example. Most people believe that they know all about Apple. They buy its products and believe that the company is bullet proof, but most of them have no idea about who the company's competitors are and how their technologies could strip Apple of its luster. In fact most investors do not even know the name of the current company CEO, but they believe that they know the company because they buy the products. It is a speculative investment based on flawed analysis. However what they do have on their side at present is that the euphoria surrounding the company has driven people in their thousands to buy the stock and drive it higher. What people forget is that Apple once was a high flyer but its product insulation almost caused its total demise until Mr. Jobs stepped back into the breach and turned the business around. As he is now dead there is no reason why the current product offering could not be undermined by other competitors. Just look at what Apple did to Research in Motion the maker of the Blackberry.
Take your head out of the sand and look at what the driving forces are behind stock gains - the global economy. See where that is headed and this will give you a better understanding why I believe that the stock market may not be the best place in which to invest at present. Companies rely on global growth in order to grow. If there is no growth then while the toughest companies will survive it will be at the expense of the rest. This is our current environment. If you hold a basket of stocks and some companies make a lot of money and their share prices increase but the majority either sink or struggle then overall you are losing. Rather take your pride and bury it and wait for there to be a signal that the global economic engine has fired back up. Once that has happened then get back into the market.
Certainly the market is forward looking, but believe me, having been in the market for decades I know that while it looks forward, there is enough speculation in it to provide you plenty of opportunity to reinvest once things start to turn. Even missing the first year of the next secular bull market will not have an impact if you capture the rest of a ten year move AND you have not suffered the losses that everyone else did during the downturn. Protect yourself now and wait for a clear signal before you return to the stock market.
Thursday, October 27, 2011
A Step In The Right Direction
"Hell there are no rules here - we're trying to accomplish something." - Thomas A. Edison
Today the euro zone came out with some good news. The plan is to shore up the financial conditions by increasing the euro zone bailout fund to $1.4 trillion, recapitalize the banks and increase Greece's haircut to 50 percent. While the details are far from being complete this is a great step towards curing the ills of Europe and the markets in Europe have responded with rallies of more than 4 percent.
In the United States third quarter gross domestic product (GDP) increased 2.5 percent. This is the largest increase since the third quarter of last year. All of this news has the stock market up more than 3 percent for the day. Further good news is that all sectors contributed to the GDP growth; personal consumption rose, residential construction was up and exports increased. All in all good news all around.
So is the end of the poor economy in sight? Certainly if things keep improving this fast then you would have to say we are at the beginning of the about turn. The issue is that there is still a long way to go before we can actually say with confidence that the trend is favorable. Housing is still a major drag on the global recovery, unemployment is still far too high and the euro zone still has a long way to go to vote these measures in to effect, but it is a step in the right direction.
A further caution is that if this bailout package appears to be too small (and there is more than a small chance that it is) then this relief rally will turn nasty in a hurry. If it turns out that sufficient funds have been allocated then the rally should continue but we will only know that in the months ahead. As such, if you are a gambler you can take a pick at a direction, but many a portfolio has been undone with an incorrect guess.
I suggest that you stick to your knitting and wait for there to be more concrete signs that things have stabilized before going all in as after all this patience, to jump the gun too early would undermine all of our work to date.
Today the euro zone came out with some good news. The plan is to shore up the financial conditions by increasing the euro zone bailout fund to $1.4 trillion, recapitalize the banks and increase Greece's haircut to 50 percent. While the details are far from being complete this is a great step towards curing the ills of Europe and the markets in Europe have responded with rallies of more than 4 percent.
In the United States third quarter gross domestic product (GDP) increased 2.5 percent. This is the largest increase since the third quarter of last year. All of this news has the stock market up more than 3 percent for the day. Further good news is that all sectors contributed to the GDP growth; personal consumption rose, residential construction was up and exports increased. All in all good news all around.
So is the end of the poor economy in sight? Certainly if things keep improving this fast then you would have to say we are at the beginning of the about turn. The issue is that there is still a long way to go before we can actually say with confidence that the trend is favorable. Housing is still a major drag on the global recovery, unemployment is still far too high and the euro zone still has a long way to go to vote these measures in to effect, but it is a step in the right direction.
A further caution is that if this bailout package appears to be too small (and there is more than a small chance that it is) then this relief rally will turn nasty in a hurry. If it turns out that sufficient funds have been allocated then the rally should continue but we will only know that in the months ahead. As such, if you are a gambler you can take a pick at a direction, but many a portfolio has been undone with an incorrect guess.
I suggest that you stick to your knitting and wait for there to be more concrete signs that things have stabilized before going all in as after all this patience, to jump the gun too early would undermine all of our work to date.
Wednesday, October 19, 2011
Global Deflation - Is This Possible?
"Armaments, universal debt and planned obsolescence - those are the three pillars of western prosperity." - Aldous Huxley
I tend to agree with Aldous. In times of war government spending creates jobs and prosperity for those that are not in the trenches. For some that are in the trenches it is better than being at home unable to find a job and wondering why life has dealt you such a poor hand. A man needs to work for his soul more than anything. He needs a place to go, where he can feel wanted, needed and a part of something, whether it is fighting on the front line or working on Wall Street. A sense of purpose goes a long way to cultivating a positive attitude about the future. Those of you who follow this blog will know that I believe that a lot can be accomplished with positive consumer confidence.
Planned obsolesce is what technology thrives on. Think back just five years and try to remember what your cell phone could do. I am unsure if mine could even download emails let alone surf the web, play music, take pictures, give me directions, pay a bill, deposit a check, reserve an airline ticket and then be that ticket at check in, just to name a few. Technology creates obsolescence and this drives the consumer to upgrade and consume.
So with wars all over the globe and technology creating new products left and right plus a rapidly growing governmental debt burden we should be primed for inflation right? Not so fast. There are a number of people that think that deflation could be on its way and if they are correct then we are really looking at a long protracted problem.
In order to create inflation you need to have excessive demand over supply. Pumping money into an economy and lowering interest rates normally does the trick but the problem is that this works when other economies around the globe are growing and have a demand for your goods and services. The issue right now is that pumping money into the global pool is not working for two reasons; first there is no demand for the money no matter how cheap you make it, and second the bubbles that burst in the housing and the derivative markets were so large that the influx of cash is soaked up in a nano-second before reaching their intended targets.
With every government around the globe trying to resuscitate their economies at the same time the world is awash with cash. Furthermore the large companies of the globe are sitting on more than a trillion dollars. Pumping more money into the system is therefore having no effect. Those that can borrow do not need the money and those that desperately need the money are unable to get a loan. Consumers are trying to cut debt as fast as possible and are certainly not interested in adding more debt, so the Federal Reserve is pushing on a string.
Furthermore the recession is driving the prices of virtually everything down. Technology is one factor that is driving deflation but there are others. Amongst them is the continual depreciation in the price of housing and other assets. In addition, the lack of demand is forcing businesses to cut the price of thousands of items. Look no further than Walmart or all of the discount airfares and hotel prices that abound. The four stand-outs that are not getting cheaper are gas, food, health care and education. Of these I would expect that gas prices will start to drop as demand for oil drops. Food prices should continue to spiral higher as the world demand for food continues to outstrip supply and medical expenses will spiral higher as long as the government meddles. Education is similar to medical in that the government subsidies are creating a false market for these products and hence drive the prices higher, but these are the only three places where I can see sustained price growth.
Should we therefore be concerned that inflation is around the corner. For that to happen you require demand to exceed supply, therefore you need the consumer to buy more goods than are available. Think of what happens at Walmart and other stores on Black Thursday when prices are dropped to ridiculously low prices for one day just to drive traffic. It is madness and shows in real life what it is like to have demand exceed supply. In the real world however we have massive unused capacity at the factories around the world and there are million of unemployed workers looking for employment. Until these two data points start to dip it is hard to see how inflation can resurrect itself. You need consumers to buy goods but they are out of work and those that are working have seen their pay getting cut or are trying to whittle down their debt burden. Companies are not necessarily laying people off, but they are not hiring. In this environment I would expect to see increased productivity numbers as less workers produce more goods. So until there is a binge of hiring (which I do not see in the immediate future) we will be stuck in this quagmire.
In this environment consumers tend to save as buying assets is a losing proposition. Just look at Japan who has one of the highest savings rates in the world and who has been stuck in a deflationary environment for two decades. I would expect to see the US savings rate climb to a double digit number in the coming years and this will create a drag on economic growth for years to come. Furthermore, interest rates should remain low for years because until there is demand for the money being lent there is no reason for rates to increase. The incentive to borrow is that rates are low so take on debt, but when no-one wants to borrow rates can stay low for decades. Once again look at Japan which shows how this situation will be exacerbated by an increase in the savings rate.
Sluggish growth will not help the stock market and therefore I am firmly in the bear camp. That said there will always be rallies within a bear market so for you traders who can sniff out the next rally I wish you luck. For the rest of you I would continue to recommend that you sit in cash and start to get used to returns of three percent or less on your money.
I tend to agree with Aldous. In times of war government spending creates jobs and prosperity for those that are not in the trenches. For some that are in the trenches it is better than being at home unable to find a job and wondering why life has dealt you such a poor hand. A man needs to work for his soul more than anything. He needs a place to go, where he can feel wanted, needed and a part of something, whether it is fighting on the front line or working on Wall Street. A sense of purpose goes a long way to cultivating a positive attitude about the future. Those of you who follow this blog will know that I believe that a lot can be accomplished with positive consumer confidence.
Planned obsolesce is what technology thrives on. Think back just five years and try to remember what your cell phone could do. I am unsure if mine could even download emails let alone surf the web, play music, take pictures, give me directions, pay a bill, deposit a check, reserve an airline ticket and then be that ticket at check in, just to name a few. Technology creates obsolescence and this drives the consumer to upgrade and consume.
So with wars all over the globe and technology creating new products left and right plus a rapidly growing governmental debt burden we should be primed for inflation right? Not so fast. There are a number of people that think that deflation could be on its way and if they are correct then we are really looking at a long protracted problem.
In order to create inflation you need to have excessive demand over supply. Pumping money into an economy and lowering interest rates normally does the trick but the problem is that this works when other economies around the globe are growing and have a demand for your goods and services. The issue right now is that pumping money into the global pool is not working for two reasons; first there is no demand for the money no matter how cheap you make it, and second the bubbles that burst in the housing and the derivative markets were so large that the influx of cash is soaked up in a nano-second before reaching their intended targets.
With every government around the globe trying to resuscitate their economies at the same time the world is awash with cash. Furthermore the large companies of the globe are sitting on more than a trillion dollars. Pumping more money into the system is therefore having no effect. Those that can borrow do not need the money and those that desperately need the money are unable to get a loan. Consumers are trying to cut debt as fast as possible and are certainly not interested in adding more debt, so the Federal Reserve is pushing on a string.
Furthermore the recession is driving the prices of virtually everything down. Technology is one factor that is driving deflation but there are others. Amongst them is the continual depreciation in the price of housing and other assets. In addition, the lack of demand is forcing businesses to cut the price of thousands of items. Look no further than Walmart or all of the discount airfares and hotel prices that abound. The four stand-outs that are not getting cheaper are gas, food, health care and education. Of these I would expect that gas prices will start to drop as demand for oil drops. Food prices should continue to spiral higher as the world demand for food continues to outstrip supply and medical expenses will spiral higher as long as the government meddles. Education is similar to medical in that the government subsidies are creating a false market for these products and hence drive the prices higher, but these are the only three places where I can see sustained price growth.
Should we therefore be concerned that inflation is around the corner. For that to happen you require demand to exceed supply, therefore you need the consumer to buy more goods than are available. Think of what happens at Walmart and other stores on Black Thursday when prices are dropped to ridiculously low prices for one day just to drive traffic. It is madness and shows in real life what it is like to have demand exceed supply. In the real world however we have massive unused capacity at the factories around the world and there are million of unemployed workers looking for employment. Until these two data points start to dip it is hard to see how inflation can resurrect itself. You need consumers to buy goods but they are out of work and those that are working have seen their pay getting cut or are trying to whittle down their debt burden. Companies are not necessarily laying people off, but they are not hiring. In this environment I would expect to see increased productivity numbers as less workers produce more goods. So until there is a binge of hiring (which I do not see in the immediate future) we will be stuck in this quagmire.
In this environment consumers tend to save as buying assets is a losing proposition. Just look at Japan who has one of the highest savings rates in the world and who has been stuck in a deflationary environment for two decades. I would expect to see the US savings rate climb to a double digit number in the coming years and this will create a drag on economic growth for years to come. Furthermore, interest rates should remain low for years because until there is demand for the money being lent there is no reason for rates to increase. The incentive to borrow is that rates are low so take on debt, but when no-one wants to borrow rates can stay low for decades. Once again look at Japan which shows how this situation will be exacerbated by an increase in the savings rate.
Sluggish growth will not help the stock market and therefore I am firmly in the bear camp. That said there will always be rallies within a bear market so for you traders who can sniff out the next rally I wish you luck. For the rest of you I would continue to recommend that you sit in cash and start to get used to returns of three percent or less on your money.
Friday, October 14, 2011
The Great Stock Recovery - Or Not?
"You can fool all the people all the time if the advertising is right and the budget is big enough." - Joseph E. Levine
Let me start this blog by saying that I am not a perma-bear (a person that is constantly negative on the stock market), I am just giving you the best advice I can based on my overall economic outlook. Let me also say that this blog or quote is not about Apple stock or its products both of which I believe are overly priced stocks and gadgets that have been hyped by an exceptionally brilliant salesman.
No, I am referring to the market which has just rallied more than 10 percent in less than two weeks. Many are talking about this as the beginning of the next bull market but I would caution you to remain on the sidelines. In dissecting the stock market movements that have occurred during the previous decades it is clear that the market has averaged returns north of 7 percent a year. This number is often touted by unseasoned professionals and financial planners as the reason to invest in a portfolio of stocks. The return is higher than those of the bond market or most other investments the argument goes, so it is imperative to hold stocks (and a large portion of them) in your portfolio. Not only should you buy them but no matter what the outlook you should remain in stocks as you can never time the market and the average return will even out over the long-term.
My beef with this argument is that the long-term is often longer than any of us have left in our lifetimes. This average return has been averaged over roughly 100 years! I am sure I do not have that long left on this planet and if I do then my son will have his hands full in supporting me! No, most of us have a horizon of 10 to 20 years at most, so I would argue that you need to look at returns over those periods of time. Taking these parameters the landscape changes in an instant. Stocks have not moved at all since 2000 and in fact are well below that peak and have provided a negative compound annual rate of return of (0.5) percent. Going back another 10 years (1990 to 2000) and suddenly you are rewarded for being in stocks with compound annual returns of over 13 percent for that decade. Taking the two decades together and your total return falls to just over 6 percent or below the general trend.
So buy stocks now and be rewarded over the next 10 years? To answer that question we have to look at what drives stock returns. Returns to stocks are highly correlated to the increased earnings that companies enjoy as the economy expands. Looking back at the 1980s through to 2000 the US economy benefited from years of overspending by the US consumer whose savings rate dropped from 12 percent to 1 percent. Furthermore household debt increased from 65 percent of disposable after tax income to 135 percent. Added to this was low interest rates, easy money loans and many other exuberance's that were unsustainable. It was just a matter of time until the party was over and it is now over. These excesses are going to take a long time to unwind driving down economic growth and therefore company profits. I expect that the current economic environment will last at least another five years if not a decade therefore I conclude that the stock market will produce returns close to zero or even negative returns during that time frame. Assuming no return for the next decade takes the average return in the market for the 30 year period down to 3.85 percent. Certainly not something to crow over.
I would argue that rather than risk your money in a volatile stock market that is producing no returns but which has the propensity to nose dive at a given notice that you should exit stocks for an extended period and start to realize that a return of three to four percent on your money is the new "normal". At least for the next decade it is. If you then factor in the real probability that there may be global deflation coming your real rate of return on an investment yielding 3 percent could be as high as 6 percent. No-one would sniff at that now would they? (In my next blog I will look into the reasons that deflation is still an impending problem and how it will affect your investment outlook for years to come.)
In these poor economic times and until the global economy gives signs of stability I believe that you should exit stock positions and look to invest the proceeds in income bearing investments. If you must own stocks then look to large cap dividend plays as these companies will be able to sustain an extended downturn far more safely than smaller companies. Don't get me wrong, I believe that there will be plenty of companies that make a lot of money in this environment and innovators will succeed as always, but outside of these exceptions stocks are not a good place to be invested at present. Furthermore I would argue that finding a safe return of 3 percent will be looked upon as an excellent investment in the coming years.
Let me start this blog by saying that I am not a perma-bear (a person that is constantly negative on the stock market), I am just giving you the best advice I can based on my overall economic outlook. Let me also say that this blog or quote is not about Apple stock or its products both of which I believe are overly priced stocks and gadgets that have been hyped by an exceptionally brilliant salesman.
No, I am referring to the market which has just rallied more than 10 percent in less than two weeks. Many are talking about this as the beginning of the next bull market but I would caution you to remain on the sidelines. In dissecting the stock market movements that have occurred during the previous decades it is clear that the market has averaged returns north of 7 percent a year. This number is often touted by unseasoned professionals and financial planners as the reason to invest in a portfolio of stocks. The return is higher than those of the bond market or most other investments the argument goes, so it is imperative to hold stocks (and a large portion of them) in your portfolio. Not only should you buy them but no matter what the outlook you should remain in stocks as you can never time the market and the average return will even out over the long-term.
My beef with this argument is that the long-term is often longer than any of us have left in our lifetimes. This average return has been averaged over roughly 100 years! I am sure I do not have that long left on this planet and if I do then my son will have his hands full in supporting me! No, most of us have a horizon of 10 to 20 years at most, so I would argue that you need to look at returns over those periods of time. Taking these parameters the landscape changes in an instant. Stocks have not moved at all since 2000 and in fact are well below that peak and have provided a negative compound annual rate of return of (0.5) percent. Going back another 10 years (1990 to 2000) and suddenly you are rewarded for being in stocks with compound annual returns of over 13 percent for that decade. Taking the two decades together and your total return falls to just over 6 percent or below the general trend.
So buy stocks now and be rewarded over the next 10 years? To answer that question we have to look at what drives stock returns. Returns to stocks are highly correlated to the increased earnings that companies enjoy as the economy expands. Looking back at the 1980s through to 2000 the US economy benefited from years of overspending by the US consumer whose savings rate dropped from 12 percent to 1 percent. Furthermore household debt increased from 65 percent of disposable after tax income to 135 percent. Added to this was low interest rates, easy money loans and many other exuberance's that were unsustainable. It was just a matter of time until the party was over and it is now over. These excesses are going to take a long time to unwind driving down economic growth and therefore company profits. I expect that the current economic environment will last at least another five years if not a decade therefore I conclude that the stock market will produce returns close to zero or even negative returns during that time frame. Assuming no return for the next decade takes the average return in the market for the 30 year period down to 3.85 percent. Certainly not something to crow over.
I would argue that rather than risk your money in a volatile stock market that is producing no returns but which has the propensity to nose dive at a given notice that you should exit stocks for an extended period and start to realize that a return of three to four percent on your money is the new "normal". At least for the next decade it is. If you then factor in the real probability that there may be global deflation coming your real rate of return on an investment yielding 3 percent could be as high as 6 percent. No-one would sniff at that now would they? (In my next blog I will look into the reasons that deflation is still an impending problem and how it will affect your investment outlook for years to come.)
In these poor economic times and until the global economy gives signs of stability I believe that you should exit stock positions and look to invest the proceeds in income bearing investments. If you must own stocks then look to large cap dividend plays as these companies will be able to sustain an extended downturn far more safely than smaller companies. Don't get me wrong, I believe that there will be plenty of companies that make a lot of money in this environment and innovators will succeed as always, but outside of these exceptions stocks are not a good place to be invested at present. Furthermore I would argue that finding a safe return of 3 percent will be looked upon as an excellent investment in the coming years.
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