Submitted by Tyler Durden of Zero Hedge
If there is one post you read today, this month, or this year, this should be it. Absolutely brilliant summary of the predicament interventionism has gotten us into. If you are looking for insight that will save you money when the market turns, this is it.
Anon1 says: Good article, but I have a question that arises from it. If the stock market does NOT gain in value over time, then what is it that people should be placing their money into so they can eat more than catfood in retirement?
I mean, I bought into the "dollar cost averaging" blather from my broker early in my military career (concerning a mutual fund and IRA). If all that is wrong, then what's the point of 'investing' in the market at all (401ks, IRAs, mutual funds, etc) for long-term investment/retirement if the only way to make money on the market is to be a day trader who is constantly buying on bubble ups and selling before bubble pop?
Savings accounts? Gold? Mattress? Ammo? Where's the money supposed to go?
bb says: Tyler,
thanks for the nonsense. my remarks over the 1st 5 paragraphs:
para 1: "stock and commodity markets are mirroring the behavior seen during the giddy days of 2007"
direction of movement does not mean mirroring behaviour. you yourself were yapping that equity indices go up on light volume, gapping, and rallying in the last few minutes of sessions.
para 2: there is no evidence of ongoing serious equity investments by anyone. cash (and t-bills) are at all time share highs in professional portfolios.
para 5: "Geithner recently visited China to, among other things, persuade China to buy more Treasuries."
foreign countries can by MORE t-bills, only if the u.s. is running a trade deficit, but it is shrinking rapidly. the spare cash on hand china has is used for stimuli and commodity shopping around the globe. china simply rolls over its treasuries and hardly adds or not a few billion a month.
i can go on, but it is pointless.
JR says: Hi bb,
Mr. Xie's article may not be perfect, but there is no need to resort to strawman criticisms.
For example, Mr. Xie makes the exact same point about the current account and demand for treasuries in the article, writing:
"In the past few years, purchases by central banks around the world have dominated demand for Treasuries. Central banks have been buying because their currencies are linked to the dollar. Hence, such demand is not price sensitive. The demand level is proportionate to the U.S. current account deficit, which determines the amount of dollars held by foreign central banks. The bigger the U.S. current account deficit, the greater the demand for Treasuries. This is why the Treasury yield was trending down during the bulging U.S. current account deficit period 2001-'08.
This dynamic in the Treasury market was changed by the bursting of the U.S. credit-cum-property bubble. It is decreasing U.S. consumption and the U.S. current account deficit. The 2009 deficit is probably under US$ 400 billion, halved from the peak. That means non-U.S. central banks have much less money to buy, while the supply is surging. It means central banks no longer determine Treasury pricing. American institutions and families are now marginal buyers. This switch in who determines price is shifting Treasury yields significantly higher."
In Debt We Trust says: The PPT's goal is to preserve capital adequacy – not create an unsustainable bull market.
Now that the chosen cabal of primary dealers have gotten their stock infusions, its time to take yields down to get cheap re-financing for uncle sam and co. Oh, and to net the PD's more profits by front running the bond market (like the last 5 minutes of today).
T says: Xie claims monetarism discredited Keynesianism. But hasn't monetarism itself been discredited by this crisis, as Paul Krugman has pointed out? I don't see how Xie can just claim this unthinkingly, especially since world central banks which have been trying to follow monetarism for the past 20 years led us into this crisis to begin with.
Sivaram Velauthapillai says: Anon1: "Good article, but I have a question that arises from it. If the stock market does NOT gain in value over time, then what is it that people should be placing their money into so they can eat more than catfood in retirement?"
I respect Andy Xie for his dissenting views but he is, more often than not, completely off and holds extreme views. His direction may be right but his extreme forecasts have low probability of unfolding (in my eyes.) It's sort of like Marc Faber, who recently said that he is 100% certain that USA will face a bit less than Zimbabwe-level inflation. Even if Faber's direction is correct, his extreme call is likely to be wrong.
Coming back to the stock market, Andy Xie is cherry-picking examples. His examples of poorly performing stock markets ignores several things. First of all, I am sure that he is simply looking at price levels and ignoring dividends. Secondly, he is not thinking of dollar-cost-averaging (investors in most developed countries have done well if they dollar-cost-average–even a DCA investor suffering the 1929 crash did ok during the Great Depression.)
Lastly, if you have a time frame of several decades, you will generally be fine in developed markets. Someone investing in Japan exactly in 1990 probably got killed (assuming they had no bonds–Japanese bonds had a spectacular bull market during that time so it off-set stocks.) But if someone started investing in the 70's or the early 80's in Japan, they are still doing fine. Someone investing sometime after the mid-90's probably wouldn't have lost that much.
"…if the only way to make money on the market is to be a day trader who is constantly buying on bubble ups and selling before bubble pop?"
Day traders do not generally make money, regardless of what all the traders on bearish sites like this (or the bullish Jim-Cramer-worshipping sites) say. There are very few people who have gone anywhere daytrading. Some will post spectacular gains right now by timing correctly but they won't be able to duplicate it–just like how very few traders from the late 90's ever became successful. There are some exceptions (hedge funds like Renaissance Technologies) but the average person is better off not trying to time the market. (If you are good at timing–and a tiny percentage will be–then it's ok.)
I have a slightly bearish bias (don't think the market is that overvalued but it isn't cheap either) but even I would say that a diversified basket of stocks (possbily including developed and developing markets) will likely beat most other assets. Yes, this is just a guess but some prominent investors are on my side. Successful superinvestors, to whom daytraders can't even hold a candle, like Warren Buffett and Jeremy Grantham have suggested that stock markets will probably return 5% to 8% in the next 10 years.
Having said all that, if you are close to retirement (i.e. investing time horizon very small) I would be careful with equities. Even if I'm reasonably confident that equities will return, say, 8% over the next 10 years, it doesn't mean that they won't collapse 50% along the way. People with short time horizons can't afford the risk that they may have to withdraw/liquidate their portfolio when assets have fallen. Unfortunately for these people, bonds, their typical safe-haven, is also overvalued right now. We are in a rare time period when both stocks and bonds are overvalued so retirees and others unable to lock-up money for more than 10 or 15 years have to stay close to cash. All this is just my opinion–a newbie–so take it for what it's worth.
One important thing that people always forget… don't ever assume that making money, even slightly above-average, is easy or risk-free. The only reason equities earn fairly high returns is because you are RISKING your capital. People forget this and are shocked when the so-called safest company with attractive returns ends up destroying one's capital…
Sivaram Velauthapillai says: In Debt We Trust: "Now that the chosen cabal of primary dealers have gotten their stock infusions, its time to take yields down to get cheap re-financing for uncle sam and co. Oh, and to net the PD's more profits by front running the bond market (like the last 5 minutes of today)."
Question for you, if you don't mind:
Do you believe in the free market?
If no, what the hell are you doing investing in a rigged market? (Or are you 100% cash?)
If yes, do you honestly think that the governments and your so-called PPT is more powerful than the market forces? If you believe in the PPT, how come they let the stock market crash of 2007 occur?
KS Fung says: Another new article by Andy Xie (last updated 16 June):
http://vicktorcapitalist.com/blog/2009/06/17/andy-xie-stagflation-and-makret-crash/
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Two main drivers of this market are:
1) Liquidity is drowning the meaning of inflation:
http://pensionpulse.blogspot.com/2009/05/liquidity-drowning-meaning-of-inflation.html
2) Performance anxiety by the big funds that are afraid to underperform and are chasing equities higher:
http://pensionpulse.blogspot.com/2009/06/big-money-suffering-performance-anxiety.html
On that last point, read this on hedge funds rising from the ashes (from Yahoo Teck Ticker):
Just as the market is rebounding from a dismal 2008, so too is the hedge fund industry, which enjoyed one of its best months ever in May.
The Credit Suisse/Tremont Hedge Fund Index was up 4.06% in May, the best month since February 2000. Hedge Fund Research says hedge funds are up an average 9.4% this year through May, the NYT reported.
Strong gains have been registered this year by fund managers who suffered badly in 2008, including Citadels' Ken Griffin, as well as those who profits most from the credit crisis, including John Paulson, Clusterstock notes.
Veteran hedge fund manager Jeff Matthews of Ram Partners is somewhat bemused by all this. The focus on month-to-month hedge fund performance is a direct result of the flood of institutional money into the industry in recent years, he says.
The industry lost its bearings – and its focus on the long-term – when hedge funds became a favorite "alternative" asset of pension funds and endowments, says Matthews, who notably will not publicly discuss his fund's performance or holdings.
The flood of institutional money warped hedge fund fees and caused many managers to forget about hedging because of pressure to capture the market's upside – before the credit bubble burst, of course.
Now the hedge fund industry is going through a right-sizing that probably won't stop until investors (and the media) stop focusing on the monthly performance figures.