"The market's going to come down, probably in an orderly manner, with animal spirits fairly high, and the economy and profit margins doing pretty well. It often happens that way. But if we just go roaring through on a spluttering economy, with all the money flowing into speculation, the way it does now, the way he's (Bernanke) begging us to do incidently, then, come eighteen months from now, we're set for another bust and the piggy bank is empty. If we have another bust, what do we throw at that one compared to the last one or the one before? - Jeremy Grantham - May 2010
"It's very tempting, and this is what the Fed wants by the way, it wants us to go out there and buy stocks which are overpriced because bonds, they have manipulated into being even less attractive. So, we're being forced to choose between two overpriced assets....And what the Fed is trying to do is to make cash so ugly that it will force you to take it out and basically speculate. - Jeremy Grantham - November 2010
"But I think if you're willing to speculate, you might find this is an interesting one more year, to speculate, but be aware, the ice is thin, it's overpriced, it's a dangerous game, don't believe that it's somehow justified. It is not justified by anything except the crazy behaviour of the Fed." - Jeremy Grantham - November 2010
"So, in the end, Uncle Alan and his interest rate heroics only postponed the inevitable. Perhaps it will be the same again. The surge of bailout money certainly prevented the market from going as low this time as would have been justified by the severity of the crisis. Based on history, an appropriate decline would have been in the 400's or 500's on the S&P." - Jeremy Grantham - January 2011
You've done well by holding on to your investments as the central banks have done all they can to reflate the asset bubbles without correcting the underlying problems.
Is it possible that the next time the market crashes and the central bankers can't reflate it because interest rates are already too low, they will tell you that you only have yourself to blame because you should have known the risks considering what happened in 2008?
And the reality is, your advisor should have known about the risks and explained them to you, but if they did that, they would be out of a job themselves.
This is the agency problem that George Soros speaks of.
Those advising you will be forced to put their own interests ahead of yours. To not keep you fully invested in the markets at all times is to lose their job and their livelihood, and nothing will be gained because the next advisor responsible for "helping" you "manage" your money will put you right back in the markets again anyways.
So, it is almost impossible for a financial advisor to make the decision on principle alone, as that would also mean financial ruin for him and his family.
In today's economy, what other job will he (she) be able to find to put food on the table and pay the bills? So, begrudgingly, they do what they must do, in essence, taking little bits in the way of trailer fees and commissions from the many people that entrust them to manage their life savings.
The conventional pre-1950′s thinking was that, given that equities are, by nature, a riskier investment class than fixed income, equity needed to pay out greater than fixed income returns to over-come the structural risk. After all, why would you invest in something without some cash being returned to you over the life-time of your investment (oh, how times have changed!)? Since anyone could purchase U.S. treasury note with guaranteed payment, dividend yields needed to be greater than treasury yields to entice investors to invest in equities.
How great? One researcher found S&P 500 dividend yields from the period of 1871-1967 were approximately 20% greater than AAA corporate bond yields.
February 3, 2011 – BREAKFAST WITH DAVE ROSENBERG
An illusion of prosperity has been created, but it won’t last
I hope you will take the time to click on the links below and read the material I am trying to get middle-class investors to read and understand.
Home prices in the U.S. are resuming a downtrend and soon we will see the household sector having to rebuild its savings without aide from the government. The view that Washington takes care of everything will disappear with looming austerity. This year it is a state and local government story, next year it will be the federal government.
With short-term rates at zero combined with increasing food and energy prices, this is obviously bad news for savers. It is an illusion of prosperity that has been created, but it won’t last. Given the intractable nature of the U.S. fiscal deficit, the Fed needs to encourage more domestic savings but it will not, at least for now, due to near-term deflation fears.
The aim here for the Fed is a reflationary wealth effect via rising equities; buying time until the market for jobs and homes turns around on a sustained basis. The offset is the pinch to real wages from not only ongoing excess capacity in the labour market, which Bernanke does not see ending for another five years, but from the Fed’s own policies that have exacerbated the punishing run-up in food prices.
It sounds like a cliché, but I have little doubt that this cyclical bull market will end in tears. Admittedly, however, there could be more upside near-term, but a last gasp I would expect, especially now that the retail client has thrown up his/her hands, thrown in the towel, and moved back into equities after the market has already doubled. That is human nature, and it is a classic contrary signpost (as per Bob Farrell’s Rule number 5).
I can go on but I have seen this movie before. It will end in further wealth destruction via a stock market blow-up or significantly higher inflation down the pike. Given the record structural deficits and the “kick-the-can-down-the-road” monetary and fiscal policies I see no other outcome. Just remember what happened the last time the Fed contemplated an exit strategy ― that, you don’t need a long memory for. It was not even a year ago and precipitated the near-20% May-June market correction.
De-leveraging - Fairy Tale Ending?
Ultimately, “all the king’s horses and all the king’s men” cannot prevent the de-leveraging of the financial system under way. The extent of de-leveraging is substantial and likely to take time. In recent years, money was cheap and other assets were expensive. As each of the global economy’s credit creation engines breaks down and systemic leverage reduces, money becomes scarce and more expensive, triggering substantial adjustments in asset prices in a reversal of the process.
At best, the government and central bank actions can smooth the transition and reduce the disruption to economic activity in the transition to a lower-debt world. The risk is that well-intentioned steps prevent the required adjustments from taking place, delay recognition of problems and discourage action that must be taken by financial institutions, corporations and consumers.
The Imagination Trade, or the Tinkerbell Market 2.0
"So enjoy the ride while it lasts. As with the credit mania of 2007, investors will assume they can get through the exits when the party stops. And some did, but many were trampled in the ensuing panic."
The Future Belongs To the Adaptable - Nicole Foss
Our position is that being in cash on the sidelines is by far the safest option at this point, and where most people would be better off by far. Those who are still in the markets are playing a very dangerous game. Many of them know this perfectly well, but they can't walk away from the casino. The upside is limited, possibly very limited, and the risks are steadily increasing.
Stock market bubbles (and housing bubbles etc) are ponzi schemes. As with all ponzi schemes, only a few manage to cash out, and the majority are those who do so early. Those who do not cash out become the designated empty bag holders, but that empty bag can look awfully attractive at a market top. Trying to catch the top tick, and wring every last ounce of profit out of a collapsing system, is foolish. Most investors who play that game are likely to lose badly.
They may be convinced that they are clever and quick enough to get out before the rest, but the odds are not good. Also, the rules of the game are likely to be changed along the way, so that one would have to be both right and lucky in order to profit. For instance, shorting is likely to be banned at some point, and speculators demonized. There will be opportunities to make a killing, but many more 'opportunities' to lose your shirt.
Capital preservation is essential in a deflation, and the best way to preserve capital at this point is to be liquid. Cash constitutes uncommitted choices, and in a world of uncertainty, one needs to be flexible. There will be plenty of opportunities over the next few years (both to improve circumstances and avoid disaster) that will only be available to the few who still have the options cash provides. It isn't necessary to have a fortune. Even a small amount of cash can go a long way as deflation causes prices to fall.
Borrowing Returns from the Future - John Hussman
If a return of 3.3% a year (which includes dividends) is what John Hussman sees for the next ten years , what does that leave in the pockets of mutual fund investors after fees? The potential reward does not seem to justify the potentially huge downside risk.
Crisis 2011 - The Other Shoe - Eric Janszen
Market Ingoring Major Problems - Comstock Partners
The Botox Economy - Satyajit Das
Things I Believe - John Hussman
Illusory Prosperity - John Hussman
America Appears To Be Trapped in a Massive Coverup of Control Fraud and Corruption
PM told risk of new GFC significant
Low-wage jobs dominated hiring so far in job market recovery
Albert Edwards, SocGen bear, takes a bite out of China
What Happens When Global Liquidity Dries Up?
Can an ETF collapse?
Michael Lewitt said, "The differential between liquidity at the ETF level and liquidity at the level of underlying stocks owned by the ETF is a recipe for disaster."
Deborah Fuhr - "Product developers are working to fit funds into the ETF wrapper, without maintaining the basic features of an ETF. If this is allowed to continue, we risk confusion, disappointment and disillusionment, which could be very negative for the industry."
Morgan Stanley Challenges "ETF Collapse" Theory
“Under the terms of the authorised participant agreements signed between issuers and brokers, the issuer usually has the right to refuse a redemption for a period of time if it would be disruptive to the fund. The authorized participant would be told that they could not redeem the entire position but would be required to leave a small number of shares outstanding to allow the fund a few days to resolve the situation in a fair and orderly manner for all parties,” says Tagliani.
Sukh's Thoughts: But if short-sellers are unable to cover, how could all ETF holders possibly be made whole? This, and a retail investor mass exodus out of misunderstood commodity ETFs could crush commodities and wipe out many retirement savings plans.
Remember, commodities are an input, and if people can't afford to buy the end product, demand for commodities will collapse! And today, we have a reality of high unemployment, debt-deleveraging through default, and people's unwillingness to go further into debt, paying down debt, and saving more. This combined with a world of overcapacity and falling wages is not a good sign for attaining the never-ending growth the economy needs to stay afloat and make good on its debts and promised entitlements.
Don't Expect Miracles from Monetary Policy
"QE1 didn't work, QE2 didn't work, QE12 won't work." - Stephen Roach
A "Balance Sheet" Recession - Richard Koo
Japan was able to climb out because the rest of the world was still in a credit-fuelled Ponzi expansion. They had the tailwind of the fraud-induced US housing bubble to help them out. The US economy is four times larger than Japan's and the US dollar is the world's reserve currency. There is no economy large enough to bail out the US (and the rest of the world). So, the governments of the world will do all they can to make it look as though they did their best, but there really isn't anything we can do to kick the can down the road that much longer. There has to be a limit as to how large central bank balance sheets will be allowed to expand, and how much inflation exporting nations can absorb. Things will boil over sooner than most people realize.
The Debt-Deflation Theory of Great Depressions - Irving Fisher
Benjamin Graham: "Speculators often prosper through ignorance; it is a cliché that in a roaring bull market knowledge is superfluous and experience is a handicap. But the typical experience of the speculator is one of temporary profit and ultimate loss."
John Maynard Keynes: "The market can remain irrational longer than you can remain solvent" - Keynes' learned his lesson as a result of steep losses that resulted from holding a poorly diversified portfolio - apparently on margin - during a market plunge, years after the Depression trough of 1932. As biographer Robert Skidelski observes, "In the year of the 'terrific decline' which had started in the spring of 1937, he lost nearly two-thirds of his money." - John Hussman
Please, get better informed!
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The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author.