Bailout Plan Drives Up Mortgage Rates

As we have noted often, in tightly coupled systems like our modern financial regime, efforts to contain risk typically make matters worse. As Richard Bookstaber explained in his Demon of Our Own Design, there are two reasons for this phenomenon. First is that processes move through a series of steps that cannot be interrupted, so certain interventions are impossible short of shutting down the entire system (or a fundamental redesign). Second is that any intervention cannot be localized. It inevitably produces other effects that are at best unintended, and generally not neutral.

The latest illustration: one of the big motivations behind the latest “let’s save the banks” initiative was (first) to get interbank lending going, but a second, important goal was to facilitate mortgage lending, with the hope that volumes would improve, and even better yet, rates.

Unfortunately, in another example of unintended consequences, the improvement in interbank lending in occurring at a glacial pace, while mortgage rates went in the wrong direction, and quickly to boot.

From the Financial Times:

US mortgage rates have soared this week in an unexpected reaction to the latest Treasury financial rescue plan, which has prompted investors to buy bank debt and sell bonds backed by home loans.

Interest rates on 30-year fixed-rate mortgages, as measured by, rose to 6.38 per cent on Thursday from 5.87 per cent last week – before the Treasury said on Tuesday that it would take equity stakes in banks and guarantee new bank debt.

Investors responded to the new guarantee by buying existing bank debt, reckoning it could be refinanced with the new government-supported bonds. As they did so, they sold lower-yielding paper issued by Fannie Mae and Freddie Mac, the mortgage companies put into government conservatorship last month….

Fannie and Freddie had been taken into conservatorship by their regulator to help keep mortgage rates low and – it was hoped – revive the housing market.

However, the opposite is now happening, making it more difficult for struggling homeowners to refinance their mortgages and for prospective homebuyers to get financing. As a result, house prices may fall further before they find a bottom…

Some analysts believe that further government intervention in the housing sector could be forthcoming to push down the cost of borrowing and help prices recover.

“Weak housing remains at the heart of the economic and financial turmoil, and the policy imperative will remain improving housing affordability,” said Janaki Rao, analyst at Morgan Stanley. “The possibility of a policy response to what is obviously an unacceptable outcome for policymakers has increased, in our opinion.”

The conservatorship brought down the cost of funding for Fannie and Freddie by making explicit a previously implicit government guarantee of their debt, allowing them to buy more mortgages. Before they were taken over, the fragile state of their finances had limited Fannie and Freddie’s participation in the mortgage market.

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  1. Yves Smith

    Buffett also went famously long in the stock market contraction of 1973-74, when in one Berskshire Hathaway report he described himself as feeling like an ovesexed man in a brothel, there were so many bargains to be had. His enthusiasm for equities considerably preceded the broad market turnaround, which did not start until August 1982.

    Buffett is a brilliant stockpicker, and I am sure he did well in those days (the saying is that even in bad markets there are good stocks) but If we do have a period of high inflation, it will not be kind to financial assets.

    The statements that Buffett makes about equities always being a great place to be are contradicted by the 1930s and the 1970s. And if the authorities mis-manage this situation, it is not clear that the right analogy is to the US in the past (given the policy errors we are making, we should not ignore the fate of Japan). We were far and away the dominant economic power during the Depression and constituted 50% of world GDP after World War ii. The economic center of gravity and our control over our destiny is moving away from us.

    Buffett has always taken a very long time perspective. If you are confident picking stocks and have a very long time frame, then his advice is probably sound. But bottom fishing on one op-ed, particularly when every investment professional recommends against market timing, is not a wise course of action.

    And Treasuries a bubble, so independent of your view of stocks, getting out of Treasuries now is a good move.

  2. Anonymous

    It is always risky questioning someone as successful as Buffett, but he has grown up with one paradigm of investing. He has never (to my knowledge) invested in third world countries or places with considerable political or economic instability. Even with the massive unemployment of the Great Depression, far greater than anything we are likely to suffer this time, the US had more social cohesion than it does today.

    I think you can think about at least three general sorts of outcomes. One is along the Buffett lines, that this experience falls within past parameters in the US and after a bumpy time, growth will resume and stocks will have a nice run, and this will have been a very good entry point.

    A second is along the lines Yves alludes to, that the rescue effort is misdirected, and we wind up in Japan lite. That would suggest very low growth, a fall in living standards, and static to falling equity values.

    The third is that the US and other advanced economies enter into a crippling. unsustainable level of government debt and we see defaults, either explicit or via high inflation. Equity is always subordinate to debt. Anyone who bought any risky local paper assets prior to a default would do badly. Holders of hard assets or people who had cash (as in holders of sound foreign currencies) would do fantastically well operating in the carnage if they were shrewd enough to pick good businesses/operations.

    I imagine Buffett does not think the second or third scenarios are remotely possible. My personal view is that these scenarios need to be weighed by anyone thinking about investing. I do not know what odds to assign them, but they are non-trivial, and either two or three would be very bad for equity investors.

    That might not argue for no increase in equities now, but merely a very cautious addition.

  3. Anonymous

    They made the case for bailing out the GSEs a good one, at least for the foreign holders of the debt.

    Now, the government will have to play whack-a-mole with a new problem.

    If you’re a top bank under the wing of the Treasury you’ll be fine, the rest of the country will ride into a depression on a bobsled.

  4. Anonymous

    Perhaps Mr. Buffet is trying to do his civic duty, by comforting the lemmings as this market plummets. Who better to lead the sheep into the wolves den? There is no reason to get jiggy over this market, nor this economy. Call me two years from now.

  5. Anonymous

    I think it is irrefutable that the enhancement of the
    credit of a weaker party by a strong one, inevitably
    weakens the stronger party’s credit. The only question
    is one of relative size between the two, so that a very
    large guarantor is only marginally diminished by a
    small guarantee. If we look at the size of the present
    and likely future guarantees being instituted, and the
    taxing power of the government at a time of a long,
    drawn out crisis, the prospects of a severe credit
    downgrade on both parties is non trivial. Implosion
    followed by explosion, a la Kistiakowski.

  6. Anonymous

    Anon 6:09 says >>Perhaps Mr. Buffet is trying to do his civic duty, by comforting the lemmings as this market plummets.<<<

    Perhaps a better way to say that is:
    Perhaps Mr. Buffet is trying to do his civic duty, by comforting the lemmings as his market plummets.

  7. fred55


    altho i loathe the simple minded idiocy of linear modeling, separating alpha from beta…

    your argument goes to the idea that us equity markets may do nothing for decades to come, at least net net (so there could be spurts, falls, flurries, but basically we go nowhere for years)

    his argumens is that there are individual stocks to pick

    (a) how good is his record if you factor out size and special deals, in other words remove private placements he could do that we cannot (like GS)

    (b) how good is his record over rolling 5 and 10 year periods; why do i suspect the rolling annualized returns are VERY volatile

    (c) if you had invested according to “if you liked it at 10 you’d love it at 5” youd have ridden down to massive losses enron, leh, autos, banks,… on and on and on

    i think one should assume the massive amt of db pension and ira and 401k money in equities will result in govt doing all it can to goose equity markets directly or indirectly over time, but…

    im so tired of everyone has to listen to buffett because he made a lot of money in another generation which he wouldnt have done if he had started in 1920s rather than 1960s

  8. EvilHenryPaulson

    Others and myself have been harping about such eventualities for some time now. It certainly should have been expected

    What the government should have done is guarantee a certain percentage of face value.

    This will put a floor on the potential losses and do less to distort the risk-reward curve.

    The biggest problem with the debt they’ve guaranteed so far has been the possibility of receiving 0, or if there were pennies on the dollar available post-bankruptcy that it could take months of years before any payment.

    If they’re short on staff, they could just use the same hair-cuts the Federal Reserve uses on the enlarged types of collateral it accepts

  9. S

    Yves, Fred…

    Well Said. Buffet has turned hismself in to a political shill. When he did that GS deal and then got on Tv and said the baiklout had to happen (after being ocnsultued) he permanently tarnished his reputation.

  10. fred55


    buffett has fiduciary duties to his investors. he didnt do anything wrong in fact it would have been wrong for him not to do it.

    what makes it wrong is for sheeple to assume that if he has billions he must be a genius.

    try it like this:

    among other things im a computer scientist i went to get a phd in comp sci a yale almost 35 years ago.

    anyway i started a software business and sold it.

    bill gates started a software business.

    his made more money than me.

    but neither he nor i could make a dime starting a software business today because the market for such is very very different than it was in the mid 1970s when we both started.

    that doestn mean hes not smart or im not smart it means different times different skill sets.

  11. EvilHenryPaulson

    re: Buffet
    I will leave the discussion on his expected returns to what Yves and fred55 have said. I would encourage everyone to view Buffet as a mortal and not a true Oracle which may provide comfort in troubled times.

    I would also like to point out the context of Berkshire primarily being an insurance and reinsurance company. There is cash continuously coming in and it needs to be placed.

    The industry-wide 2005 insurance hikes both exhibited the oligopoly in global re-insurance and its power to influence down to insurance premiums at the individual level. The insurance hikes of 2005 subsidized poor management and have continued to do so. In short, premiums are set at a criminal level.

    I conclude by repeating what Yves said. This market going forward is not about what Buffet is doing, or what has happened in the past; this market going forward depends on the actions government takes. Of crucial importance will be their timing, structure, and execution.

    Anything is possible, a quick rebound is not probable. My comfort comes from the intelligent and nuanced positions developed in the comments of this and other blogs’ comments. They have a track record of accuracy, well developed perspective, and forewarning that is unmatched in recent times

  12. fred55

    as im a fiduciary to people and there money and get hit on for advice too, for my two cents…

    i recommend to my clients only structured products that i build for them. this entails counterparty risk which i either handle by putting it on an exchange or by VERY careful selection and making sure the derivative is unfunded.

    the point is…

    linear investing is probably a real good bet if you’re under 50 with a 20 year time horizon. even 15 years.

    linear investing = normal stuff, plain vanilla, no leverage, nothing weird. your return is 1:1 with your underlying which is itself normal.

    at least for my clients and most over 50 i believe investing instead with principal protection and/or with nonlinear upside such as double the first 4% per year is better.

    it has to do with an individuals utility preference curve and for most people those are asymmetric and shortfall is deadly while overshooting on the upside is not of great marginal value.

    as an alternative, asianing or other averaging is good too.

    unfortunately the min size to build one of these is $5M to $10M (and it also can be built without the usual tax disadvantages of principal protection).

    at retail size i really am at a loss. if its tax sheltered money i guess the best bet is the lowest possible cost structured product such as might be inside a vanguard or tiaa equity structured annuity or similar.

    do not confuse the following they are all dissimilar and important to understand

    (a) model risk of complex derivatives, which doesnt apply if you’re doing plain vanilla and BUYING exposure rather than selling unlimited risk

    (b) counterparty risk

    (c) linear vs. nonlinear investing

    the simple point is, which would you rather have, all else being equal:

    (1) spx index fund, plain vanilla

    (2) spx index fund that ratchets up so that you cannot give back everything you make, at least say 70% of what you make gets periodically locked in, but in return you’re capped at 7% annualized return

    for most people investing for retirement the second choice is better if, repeat if, your view of the market is that it will be for a long time volatile and reversing direction

    derivatives dont kill people kill

    there is no reason that if your view of the market is nonlinear, as is yves’ for example, that you cant make money from that view

    but you cant make money from that view without derivatives

    incidentally pru manages one or two closed end funds i believe which have a ratchet in them. but thats still a derivative mathematically even if legally its a plain vanilla closed end fund investment.

  13. fred55


    NEVER forget personal utility response surfaces. I don’t know what Buffett’s personal holdings are but I suspect if he lost 90% of them overnight it would have no consequence of any kind to him whatsoever.

    I doubt that’s true of anyone here.

  14. Anonymous


    Buffett is a brilliant stockpicker

    That's just it. He's not a brilliant stock picker. In his mind he's not ever buying stocks. In his view he's buying entire businesses even when he's only buying a minority stake.

    His approach to business valuation automatically takes him into the market at low points. And it sometimes will take him out of particular stocks at market tops if his view of the business's future prospects turns negative. This looks like market timing but it's not. It only has the appearance of it because mismatches in Buffett's method of business valuation versus marginal stock values occur more often at market extrema.

    People who want a better insight into his approach should read:

    "Security Analysis" by Graham & Dodd, "The Intelligent Investor" by Benjamin Graham and the back part of "Supermoney" by 'Adam Smith'.

    He's also a world class technophobe who has had lifelong massive personal insecurity problems.

    he described himself as feeling like an ovesexed man in a brothel

    The passage of time revealed this comment was written when his wife was leaving him for another man in San Francisco.

    There’s been far too little attention paid to his partner, Charlie Munger. A qualitative change occurred in Buffett’s approach after Munger appeared. Prior to Munger’s time (pre 1970s)Buffett was a totally passive “stock picker”.

    There can only be one Warren Buffett and that’s good. The Buffett Way writ large is an Rx for massive social and economic stagnation, which is what we have now.

  15. EvilHenryPaulson

    re: anon, 9:22am

    Buffet is known for primarily his record from the 1980s – present. Anyone who could dodge crashes of 1987, emerging markets, the tech bubble, and now the housing bubble would have outperformed even Berkshire Hathaway handily.

    We have had a lot of new debt masquerading as growth within the system during that time. My main thesis at this point in time is that the government will not be able to arrest this fall in debt growth, and in that context the stock market goes from “can’t miss” to “lucky to break even”

    There is no potential new-bubble able to grow so large and so quickly to divert what is a 30 year bubble collapse. When you manage to roll-over each ‘recession’ into a new (debt) bubble for 30 years globally, then the reckoning will be awesome.

    There are 2 times in modern history when such an unwinding of net debt has taken place that I know of: 1867, 1929.

    The only ones who profited at those times were those who could self-finance their growth and gobble up the competition at bankruptcy prices.

    The markets may be much more agile today, but this is a storm of epic proportions. I detest sounding like an apocalyptic wing nut, but there are few narrow paths that avoid pitfalls from here.

  16. Phil

    Speaking as someone who’s hoping to refinance soon and benefit from low interest rates — is it really such a bad thing that mortgage rates are spiking?

    Home values are in the middle third of a 40-60% drop. This will distort even comfortable LTV measurements. The ability to repay, even with a good credit score and a job history, are in question when the economic fundamentals are this shaky. The previous risk models can’t be trusted, and every new mortgage is portfolio. And besides, I may need the money to cover some LEH or WaMu CDS snugly securitized deeply (or maybe not so deeply) in my balance sheet.

    With respect to workouts, the math is different and they should take their medicine. The money they thought was there simply wasn’t and mods limit their long-term losses. If they need tough love from their Uncle to get there, so be it. But if the banks are trying to price risk appropriately for once, that’s a little tough love the consumer needs, and Uncle Sam can save my money (and watch to make sure it doesn’t turn into gouging).

  17. Anonymous

    There is no potential new-bubble able to grow so large and so quickly to divert what is a 30 year bubble collapse.

    There’s one. That’s a “Green Energy” bubble driven by the Globo-Warming drivel of James Hansen and Al Gore. It won’t be as large as the previous bubbles because “Wall Street” represents an ever- shrinking population with ever declining real skills. It’ll just be big enough to take away “Wall Street’s” remaining chips, after which The Street will become just another tourist attraction like Colonial Williamsburg.

  18. Anonymous

    And if the authorities mis-manage this situation, it is not clear that the right analogy is to the US in the past (given the policy errors we are making, we should not ignore the fate of Japan).

    Our outcome won’t be anywhere as favorable. Japan has immense social cohesion that conscious policies of “diversity” have destroyed here. For some odd reason the Japanese keep ignoring the NYT’s advice to “strengthen” their paper flipping economy by flooding Japan with non-Japanese. They also have a longer term view.

    For the soon to be former USA think ex-Yugoslavia, ex-USSR.

    China is the country repeating the 1930s USA experience.

    The only analogy here is in the behavior of paper financial markets at extrema. The rest of the comparisons aren’t nearly so favorable.

    Nor will Obama be FDR II implementing New Deal II, even if his own played-out advisors are repackaging Bank Holiday as Foreclosure Holiday.

    A far rockier American version of glasnost and perestroika followed by political break-up is infinitely more probable.

  19. tompain

    Those of you who are certain that the stock market is headed for an extended disaster ought to ask yourself some questions:

    What do you know that the stock market does not know about the long term outlook for the economy? Are you perhaps overconfident in your own prediction? What if you are wrong? Does it not seem at all likely to you that at a time of enormous fear and uncertainty and forced sales by hedge funds that perhaps the stock market might be underpricing rather than overpricing US businesses in the aggregate?

    Where do you plan to put your money instead of the stock market? Stocks will beat bonds in an extended period of inflation. Stocks have outperformed bonds in 80% of all the 10 yr periods since 1802, 90% of the 20 year periods, and 99% of the 30 yr periods. You think things look really bad now, much worse than they’ve ever been? Is the economic outlook worse today than it was in 1861 with the Civil War starting? Worse than the day after Pearl Harbor? Are you sure?

    From 1939 through 1960, the real return on German stocks was about the same as on US stocks and they outperformed UK stocks, despite the fact that in that period Germany lost a war and was divided in half. The real return on gold has basically been zero for 200 years.

    If you started putting $15/month into stocks at the very peak of the market in 1929 with the stock market about to crash, within 4 years you had more money than someone who put the same money into T-bills. 20 years of that would give you a 13% return on invested capital.

    The stock market is already down 40% from it’s last peak. It is trading today at about what its long term average PE has been. You see the stock market go up and down every day, and this has a psychological effect on you. It scares you and it makes you think you know what’s going to happen. You get comfortable when stocks have been going up and the index is high, and that makes you think buying is a good idea. You get scared when the index is declining and low, and that makes you think selling is a good idea. The time to panic was Dow 14000, not now. You don’t see an indicator every day of what your money invested in bonds is doing for you, or a daily indicator of what inflation is doing to your spending power. If you did, you’d have emotional reactions to those things too.

    The stock market is down a lot but the long term value of the slice of corporate earnings you own if you have a total stock market index fund has not changed that much, only your perception of it has. You didn’t think that over the next 20 or 30 years we’d never have tough economic times, did you?

    The dividend yield on the dow is now 3.6%. If you are a long term investor, a good chunk of your return is determined by that yield. It’s pretty good right now. If the market goes lower you will be able to reinvest your dividends at even lower prices.

    No one should have money they need in the next few years in stocks. But you really should think about the entire set of risks you face over the very long term as you save for retirement. Your biggest risk is not the stock market itself because it is extremely unlikely you will have to sell your entire portfolio at a low price. A much bigger risk is what inflation will do to your spending power 20 or 30 years from now.

    Be greedy when others are fearful, and fearful when others are greedy. It may be too late for the latter in this cycle, but there is still time to do the former.

  20. Matt Dubuque

    Matt Dubuque

    And NOW the blogosphere is throwing an enormous temper tantrum SCREAMING that the Federal Reserve has to guarantee the issuance of commercial paper….

    Would there be unintended consequences from such a move?


  21. thomas j


    Are you so supremely arrogant that you accept hook, line and sinker the meme that bumbling Ben and stuttering Hank are so incompetent they didn’t realize the “unintended” consequence of the bailout plan and bank guarantees would be to result in higher Agency debt yields and more costly mortgages? But, of course, I forgot you accept their “motivations” at face value.

    Anyone who understands the law of supply and demand could readily see that adding more “guaranteed debt” into the credit markets only serves to crowd out any debt that does not have the same level of guarantee.

    Maybe you should start questioning the motivations of the players involved. It might help you to see more clearly the game that is actually being played.

  22. EvilHenryPaulson

    Sorry for not responding to your rhetorical questions point by point, but suffice it to say there are at least a couple of outright deceptions or lies in the metrics you quote with an example being “cheap” P/Es leading me to believe that you are repeating others’ opinions. It’s not worth correcting someone through a 3rd party

  23. tompain

    1) I didn’t say the P/E was cheap, I said it is about equal to a long term average.

    2) Yes, there are other people who hold the same opinions I do, so if you want to characterize me as repeating others’ opinions, I can’t object to it and don’t see what is wrong with it. The question is whether the opinion is supported by evidence. I think it is, and I provided some but not nearly all of it. You provided nothing.

    For those who are interested in seeing more evidence, I suggest “Stocks For the Long Run” by Jeremy Siegel. He provides plenty of data and analysis. You can agree with his conclusions or draw your own.

  24. FairEconomist

    I think the mortgage rates are a reflection of the government’s limited credit. Mortgage rates had stayed relatively low because the government appeared willing to move mountains to keep them down. But the government can only borrow so much, so now that it’s becoming de facto committed to vast expenditures on the banks if it wants to spend trillion on mortgages it will have to pay higher interest. That in turn forces it to charge higher rates.

    @ evilhenrypaulson – I agree, risk-sharing is vastly preferable to complete risk assumption in almost all circumstances because of moral hazard. I wish the TAF and such had risk-sharing components as well. Blanket assumption of bad debt is a bad idea.

  25. EvilHenryPaulson

    Stocks are not around the long term average. Their trailing 12 months earnings are in line with the last 30 years and that is coincident with debt growth. You cannot ignore dividends

    I’m not willing to go through each figure or assertion you quoted to put them into an honest context

    If you were willing to build up your case within your post so that there were no blind assertions, that would be a completely different matter

  26. tompain

    evil –

    Your entire post prior to mine was nothing but blind assertions. I supported mine with specific verifiable claimss and some data. My time is as valuable to me as yours is to you, and my mission in life is not to convince you or any other reader here of anything. I offered my thoughts since they seem to be, shall we say, somewhat contrarian to the majority of what’s posted here, and I thought some might find that helpful. Dismiss them if you want, I don’t care, but it is a little unfair to the readers to simply call them lies and walk away.

    For anyone who cares enough to explore this further, I’ve pointed the way to a book. Evil, if you want to argue about the data, take it up with Jeremy Siegel.

    S, I am not sure whose arrogance and ignorance you are referring to, but your comment, devoid as it is of all content, is singularly unhelpful to anyone.

  27. Anonymous

    I don’t think it’s productive to keep piling on tompain (I hope to some degree that he is correct), but just remember that past performance is no guarantee of future results. It is definitely a non-trivial possibility that the next 50 years are absolutely nothing like anything that happened in the last 200 years (especially with respect to northern Europeans living in either Europe or the USA).

  28. Anonymous

    (especially with respect to northern Europeans living in either Europe or the USA)

    Shock! That’s a racist comment. Someone hit me with smelling salts…

    Quick! Someone jump in now and tell us again how convention-bound orientals are and what free-thinkers the “West” is and that’s why this system will come out on top.

  29. tompain

    12:06, you are correct that there are no guarantees about anything in the future. But you have to do SOMETHING with your money. Stocks, bonds, gold, currency shoved in your basement. NONE of those choices is without risk. If you are saving for retirement you need to be mindful not just of the risk that is slapping you in the face every day when you see headlines about the Dow being down, but also of the other risks: probably the single most relevant one is the risk that inflation will destroy the real value of your bonds.

    Look, there are lots and lots of things that can make our lives miserable in the future that we cannot protect ourselves from. There could be a nuclear war. The volcano under Yellowstone could erupt and destroy most of the western US. A disease with no cure could wipe out a good chunk of humanity. The US could default on its debt. Martial law could be imposed and all of your money taken from you. Or maybe it will be angry mobs that take all your money. A new Hitler could arise here and send you to a concentration camp. You can go on and on with these but still you have to live your life, don’t you? And living your life means making a decision about what to do with your money.

    A couple hundred years of history, not just in the US but around the world, tells us that in a wide, wide variety of environments and situations, stocks do better than bonds. No one can deny that this time could be different. I would only urge you in making your judgment about whether this time is different to make an effort to give yourself a broad context for it rather than rely on your own experience. This feels like the worst thing you have ever lived through, probably. But is the long term outlook for the US really worse today than it was in 1861 when there was about to be a civil war, or 1812 when we might have lost our independence after only a few decades? Is it worse than at the outset of WWII when it was not at all clear that we would actually win that war? Is this time so so different that you really should ignore all of the historical data? Yes, this time could be different, but how high are the odds that it is? And if it IS different, what is the better course? If this is the end of civilization as we know it, will US bonds be safe? I doubt it. Gold? You’re entiteled to your own opinion but my view is that in a true armageddon scenario gold certificates will do no one any good and physical gold will be quickly stolen from you if you are even able to carry it around with you as you roam the country looking for food or work.

    The point is, you can’t just say, stocks are going to be bad. You have to choose an alternative. I’d rather own a claim on the cashflows of the entire US economy than a bar of gold or a treasury certificate whose value can easily be inflated away. Its not 100% security, but there’s no such thing. Over a 10 or 10 yr horizon, it is probably the most secure thing you can do with your money.

  30. Anonymous

    “1) I didn’t say the P/E was cheap, I said it is about equal to a long term average.”

    Not by my metrics. I normalize earnings to take into account shrinking profit margins due to various factors including higher interest rates, declining benefits from outsourcing and free trade, and other things, and I think stocks still aren’t cheap. I think they are at the high end of reasonable pricing. That is not so good if you only buy stocks when they are cheap. And I do my best to only buy cheap stocks, or investment grade debt delivering at least 10% apy.

    Jeremy Seigel’s data is puffery. Go read “Triumph of the Optimists” with its long term data on various markets, and how many decades a stock market can perform poorly. Or read Smithers’ book on Q. Most people I know who knock smithers have lost a lot of money in the market this year and last.

  31. Anonymous

    From 1939 through 1960, the real return on German stocks was about the same as on US stocks and they outperformed UK stocks, despite the fact that in that period Germany lost a war and was divided in half.

    Do you a have ready citation? Surely this doesn’t include companies that were based in what became East Germany? Or in the Sudetenland, in what is now Kaliningrad (ex East Brandenburg) and in the areas handed to Poland.

    About 15 million Germans in total were ethnically cleansed from these regions beginning in 1945.

    If this is the model just make sure you pick areas that are likely to be somewhat stable demographically.

  32. doc holiday

    From Bloomberg: Yields on corporate bonds show investors expect 5.6 percent of the market to go bust, the highest default rate since the Great Depression, according to Christopher Garman, chief executive officer of debt research firm Garman Research LLC in Orinda, California.

    > However, on the other side of the coin, steepening of the money market curve will force investors to take the bait for some yield.

    > 30 year Treasury @ 4.31%

    3 month Treasury @ 0.78%

    Treasury 10-year notes were on course for a second straight weekly loss as the haven appeal of government debt dropped in the wake of Treasury Secretary Henry Paulson's plan for the government to invest in banks.

    Traders this week pushed yields on 10-year notes above 4 percent for the first time since August. The notes also slumped on speculation the Treasury would hold impromptu auctions of the securities to relieve shortages in the market for borrowing and lending Treasuries.

    The cost of borrowing in dollars in London will decline about 2 percentage points as the U.S. begins implementing programs to buy short-term debt from corporations and distressed securities from financial institutions, said Bill Gross, who manages the world's biggest bond fund.

    Gross estimated that one-month dollar Libor will drop to about 2.25 percent from 4.18 percent today, and three-month borrowing costs to 2.65 percent from 4.41 percent.

    >> However, anyone thinking the good times are about to roll, needs to look at this:

    According to Huxley Somerville, a director at Fitch Ratings, $29 billion of these loans will reset by the end of 2009 and another $67 billion in 2010. The drastic increases anticipated on each loan are expected to cause delinquencies to more than double.

    >> That blows me away and with almost every model in the universe broken, the following yield curve markering PR from Fidelity, makes very little sense (at least to me):

    Typically the yield on 30-year Treasury bonds is three percentage points above the yield on three-month Treasury bills. When it gets wider than that — and the slope of the yield curve increases sharply — long-term bond holders are sending a message that they think the economy will improve quickly in the future.

    This shape is typical at the beginning of an economic expansion, just after the end of a recession. At that point, economic stagnation will have depressed short-term interest rates, but once the demand for capital (and the fear of inflation) is reestablished by growing economic activity, rates begin to rise.
    Long-term investors fear being locked into low rates, so they demand greater compensation much more quickly than short-term lenders who face less risk. Short-termers can trade out of their T-bills in a matter of months, giving them the flexibility to buy higher-yielding securities should the opportunity arise.
    In April, 1992, the spread between short- and long-term rates was five percentage points, indicating that bond investors were anticipating a strong economy in the future and had bid up long-term rates. They were right. As the GDP chart above shows, the economy was expanding at 3% a year by 1993. By October 1994, short-term interest rates (which slumped to 20-year lows right after the 1991 recession) had jumped two percentage points, flattening the curve into a more normal shape.

  33. Anonymous

    <<“Weak housing remains at the heart of the economic and financial turmoil, and the policy imperative will remain improving housing affordability,” said Janaki Rao, analyst at Morgan Stanley.>>

    So to 'improve affordability' they will fight hard to keep prices high….

  34. tompain

    12:54, again, the question is not whether stock markets can perform poorly for a long time. They can. The questions are:

    1) how often does that happen and how likely is it to happen now

    2) where is a better place to be during one of those extended periods

    If you want to normalize earnings, it’s fine to take into account all the things you just named, but don’t forget to also take into account pricing. A better way to normalize aggregate earnings over an extended period of time is to focus on return on capital or return on equity, rather than trying to adjust the components that determine these.

    You say you still don’t think stocks are cheap, but again, neither do I. I think they are priced about as they have been over long periods of time, and those long periods of time have tended to give very satisfactory returns on an absolute basis and certainly on a relative basis compared to bonds, gold, etc.

    Maybe they are not cheap. I agree that is a possibility. But let me ask this: are bonds cheap? Is gold? If everyone is very scared, as is obviously the case now, aren’t stocks the most likely assets to be undervalued if anything is?

    Now, what if you are wrong. How long will you stay in whatever the other thing is you are staying in while you hope to get stocks cheaper than they are today. Maybe they’re not cheap, but they don’t have to get cheaper, do they? Meanwhile your treasury is earning you a negative real return. However uncheap you think stocks are, I doubt you think they are priced to give you negative real return over the next 10 or 20 yrs.

  35. doc holiday

    FYI: The curve has been slanting flatter, but remains at the steepest levels in 4-yrs with the 2-10-yr yield spread at 235.

    >> The thing that bugs me, is the panic to re-invent capitalism on the fly and turn this systemic failure around before XMAS and get those credit cards out there in the malls, so that all those fine shoppers can get back to the business of spending more than they have.

    The future prospect of mortgage defaults, credit derivative defaults, bank defaults and the fact that Iceland is sinking, should hopefully be a wake-up call that the good times are not ahead, and IMHO, any hints from people in Treasury or Gross or Buffett that allude to the very generalized bullshit that things are turning around, is false and misleading and criminal in its intent. The proof a turnaround will be a sustainable trend lasting at least 6 months and if anyone thinks this will be an easy winter, then get your wallets out and give your cash to Pimco, then let me know how you feel next summer when the foreclosure rates are increasing!


  36. tompain

    12:59, see “Stocks for the Long Run” by Jeremy Siegel, Chapter 1. In my (very old) edition in is p. 19-20. I believe (but I am not sure) that the data includes the companies that ended up on the other side of the wall. I think what may explain it is that not only did companies but also some shareholders ended up on the other side of the wall. Maybe the westerners ended up with twice as much ownership of half as much assets.

  37. Lune


    I appreciated reading your comments. While I haven’t looked at the statistics myself, I’ll trust that what you say about past performance is true. Nevertheless, I believe there are some non-economic trends that need to be factored in which may make stocks return less in the future than they have up to now.

    Firstly, macro-economically speaking, the rise of stocks from the 1970s to today has as much to do with more people investing more money in stocks than with corporate earnings growth. What I mean is that in the 1960s/70s, stocks were considered risky investments that only the wealthy played in. Everyone else clipped govt coupons or bought bank CDs. The destruction of defined benefit pension plans and the rise of defined contribution plans such as IRAs, 401ks, etc. along with the rise of mutual funds that made investing in the stock market relatively easy for the retail investor, meant that for the first time, stocks were seen as a reasonable investment for the the average joe. This transition from being a risky asset only used by the wealthy and sophisticated, to a low-risk asset used by the far larger middle class, contributed to a onetime gain in stock markets that is unlikely to be repeated (if anything stocks have a huge downside risk of being viewed as risky again). Thus, you see “normal” P/E ratios today that would have been considered exorbitant in the 70s. The fact that it’s taken a 40% drop to get back to historical averages tells you something about the amount of extra money that’s been plowed into the market independent of any fundamental increase in corporate earnings.

    Secondly, I believe demographics will become a huge factor in how the stock market performs. Currently, the baby boomers are in their peak earning years. Thus, they are accumulating the majority of their nest egg as we speak, and they are investing it in the stock market. As the baby boomers retire, they will begin drawing down their accounts (not just their own accounts, but all their pension plans, etc. will start selling assets to meet their expenses). While they will likely pass on a large inheritance (in the aggregate, at least) to their children, much of the wealth they are creating and investing today will be used to fund their retirement. Thus, asset values in the stock market will significantly decline as baby boomers stop accumulating and start withdrawing.

    Finally, your choice of Germany as an example is not random, and the comparison you make to the UK market is telling. If you read “The Four Pillars of Investing”, the author argues that stock markets as a whole exhibit survivorship bias. That is, we tend to look at the stock markets of successful countries, see the returns there, and forget about the countries that never made good on their initial potential.

    While Germany did certainly suffer devastation from WWII, in hindsight, it roared back to become the dominant economy of Europe. OTOH, while the UK ostensibly was on the winning side, it never recovered from its loss of empire, and has now become at best a second-tier economic power. Thus, it is entirely reasonable that Germany’s stock market did better than the UK over the past 50 years. But the trick is, if you were an investor in 1945, would you have placed your money on Germany or the UK? Germany was in ruins, and it was purposefully split in two by the Allies so as to make sure that it would never again be the dominant power in Europe, and the source of so many European conflicts. The UK OTOH, was still the most dominant country in the world (with the US just starting to come into its own). If investors had bet on the UK instead of Germany, they wouldn’t have had the returns that you mention.

    My point is that in hindsight, it’s easy to pick Germany or the US or Japan as the dominant economies of the world. But it wasn’t so easy in 1945. While the U.S. stock market has easily bested bonds and other vehicles in the past 50 years, that has been significantly influenced by a unique combination of factors (transition of stocks from “risky” to “safe” assets, the massive accumulation of wealth of the baby boomers, and survivorship bias as the U.S. transitioned into becoming the dominant economic power) that is unlikely to be repeated (at least by the U.S.). Furthermore, it is facing very real long-term challenges such as the imminent retirement of the baby boomers; loss of economic power vis-a-vis other countries such as China; and dire structural problems in the economy due to the current de-leveraging, exploding medical costs, and ballooning fiscal deficits, among others. In this scenario, are U.S. equities the best long term bet? The answer for me is far less certain than it used to be.

  38. tompain

    lune, I agree with much of what you say, but I ask again the question of what asset you think will do better than stocks, even in the environment you describe.

    I only chose UK and Germany because 1 won the war and one lost, and you’d think that the one that lost would do much worse than the one that won, but it didn’t. The UK didn’t do badly though, and UK stocks outperformed UK bonds.

    You are correct that we cannot be certain that the US will survive. I talked in a prior post about the many scary things that could happen in the future that we cannot protect ourselves against. So, you should probably have some non-US equities in your portfolio, and I apologize if people read my prior posts as call to own only US equities when it really was intended as a call to own equities.

    It is an illusion to think that the challenges the US faces now are somehow unique in history in their magnitude. The imminent retirement of the baby boomers is not more threatening to the economy than the civil war was, for example. Take care not to allow yourself to be biased by the sample of history to which you are eyewitness. Also note that many of the challenges to which you refer have been encountered by other nations, and the data on stocks vs bonds in the long run is compelling all around the world. Part of the reason for this is that every time things get scary, people convince themselves that THIS time it is worse than ever before so they avoid stocks, and that underpricing is what creates the return opportunity relative to bonds.

  39. Anonymous

    “Maybe they are not cheap. I agree that is a possibility. … Now, what if you are wrong. How long will you stay in whatever the other thing is you are staying in while you hope to get stocks cheaper than they are today. Maybe they’re not cheap, but they don’t have to get cheaper, do they?”

    The market has always created opportunities to buy assets cheap because people are irrational, incompetent, short-sighted, and badly incentivized. I hold cash in reserve for when I find them. I’ve always been happy to bet on people acting foolishly, and see no reason to change my approach.

  40. tompain

    2:26, nothing wrong with that, but cash earns next to nothing, so you need to not hold too much of it for too long. You also need to be very good at knowing when other people are acting foolishly, and take into account the possibility that you are wrong.

    I did not say to put 100% of your money in stocks right this instant. But if you are 0% in stocks and all in cash, odds are you will not do nearly as well over the long term as you could have.

  41. Anonymous

    Tompain you say that ” The real return on gold has basically been zero for 200 years.”. Isn’t that the purpose of holding gold, inflation hedge.

  42. tompain

    2:53, gold is fine for a short term inflation hedge but in the long run stocks are better. I am not into holding assets that earn 0 real return.

    Other 2:53, I think it is crazy to assume that we will see any sort of extended deflationary period. We have never had such a think since we’ve been off the gold standard. All the incentives are for the government to go the other way and inflate rather than deflate. They have already flooded the system with cash and are continuing to do things that can only undermine the value of a paper dollar. But, if you think deflation is coming, bonds are WAY better than cash. But guess what? In the periods in its history when the US experienced extended bouts of deflation, stocks did as well as or better than bonds.

  43. joe


    I am not disagreeing.
    But, please don’t be deluded by the fact that nobody is willing to take up your challenge to define the better place to put their money for the next 20 years as proof that the stock market will be the better bet.

    Perhaps you have never heard the terms being reluctantly uttered by very knowledgeable capitalists to describe the current financial conflagration.

    Unprecedented is one that has already been worn out, and folks look for new adjectives on a daily, moving basis.

    Historical data doesn’t inform much in unprecedented times.
    I don’t want to bet you are wrong.
    You may be right.
    I just am not sure that the maladjustment taking place with regard to the position of the American marketplace in the evolving post-crash global marketplace is one that supports the idea that the market is presently under-priced, correctly priced or over-priced.
    Time will tell.
    The fact is that many obviously intelligent people are not convinced by either a bunch of ancient data or that bastion of investor intellect, Mr. Buffett.
    That’s just the way it is.

  44. Lune


    Personally, I think bonds will soon have their day in the sun. Perhaps I’m too influenced by Bernstein’s book “The Four Pillars of Invesing”. Why would I suggest bonds?

    First, bonds have been underpriced in the U.S, for two reasons. For the past 20 years, inflation has been largely contained, and we’ve been lulled into thinking that therefore inflation will always be contained. Inflation is the number one killer of bonds, and with that downside controlled, bonds have become less risky and therefore investors have demanded less yield. I believe that is about to change. As the govt ramps up its printing presses, the fears of inflation are going to begin in earnest and at that point, even treasures will start yielding much more than they currently do. Just look at the returns you could get in the 70s, during the last inflation crisis, to see what yields are prevalent during a time of high inflation expectations.

    Secondly, the U.S., as the dominant economic power, has enjoyed low interest rates because of its stability. Its sovereign rating is considered beyond AAA. That will change as well. Once the rest of the world stops lending to the U.S., we will need to pay much higher real rates to fund our deficits.

    so for those reasons, I believe debt yields are poised to rise significantly, both in nominal and real terms, and may eclipse or at least be comparable to stock market returns at least in the medium term.

    But there’s a more important reason for being in bonds rather than stocks. While everyone talks about the return in stocks, no one talks about the volatility of stocks and what it does to the average investor. You’re correct that if you kept your head about you during the market dips, and stayed in the market, overall you’d do fine. But in reality, the average retail investor doesn’t stay in the market during bad times because he can’t stand the volatility. There are plenty of joe sixpacks right now having trouble sleeping at night, or getting into arguments with their spouses, or contemplating the prospect of having to work another 10 years, or getting ulcers as they contemplate how much of their life savings have been destroyed so far. Is that type of stress in life worth it? For lots of people, the answer is no.

    It’s telling that while the annualized return of the stock market over many decades is indeed ~11%, that’s only if you kept your money in the whole time. In contrast, the annualized return of the average investor is only about 4.5% (barely beating treasuries), precisely because the average investor is unable to stomach the volatility he/she will experience during a lifetime of investing, and invariably enters and exits the market at the exact wrong time during extreme swings.

    While some people might argue that the solution is just to tell people to have stronger constitutions, I believe the more responsible solution is to recognize the inherent psychological factors at play, realize that the average investor can’t tolerate a temporary destruction of 50-75% of their life savings, and would therefore do better in less volatile investments such as bonds.

    As a personal example, all of my money currently is in a money market account in Fidelity, and I rent the house I live in. I sleep soundly at night, and my heart doesn’t skip a beat when the Dow goes down. I watch the financial news more for entertainment value (Jim Cramer is better than any clown I could rent) and for long-term prospects, than any minute-by-minute influence on my financial status. Could I have made a little more money by being in the markets, or owning my house? Perhaps. But would it be enough to pay for the subsequent therapy I’d need and the anti-anxiety meds I’d be popping? Probably not :-)

    (BTW, I probably will get into the stock market at some point, but I’m staying out now not because I know where the bottom is, but because the current volatility is too much for my peace of mind. I’m willing to sacrifice some returns in exchange for a more stable market).

  45. tompain

    Ok, Joe, let’s assume a conflagration is coming. You still have to do something with your money. I certainly did not claim anywhere to be able to prove that the stock market will be the better bet, so I can hardly be “deluded” by posters on this board into thinking that is the case, though I thank you for te advice. Admitting that certainty is impossible to attain, I think the odds are extremely high that stocks will be a better store of value than cash, gold, or bonds over the next 10 or 20 years.

    None of us with savings has the option of not making a bet here. You can say you don’t want to bet I am wrong, but if you are all in cash or bonds or gold, that’s what you are doing.

    Numerous posters keep replying with commentary about how bad the fundamentals are going to be in the US going forward. That’s probably true. But none of these posters has explained why they think they are able to make a better guess at what the long term fundamentals will be than the stock market as a whole incorporates into its pricing. Look at the newspapers, look at tv, look at this blog – do you really think no one but you has noticed that things look grim for the economy? If just about everyone you talk to is saying things are bad, isn’t it more likely that too much rather than too little pessimism is baked in? When people are scared they will most avoid the assets that are most uncertain. That’s equities.

    Look, no one really knows what’s going to happen in the economy or the world in the future. But as I said, we still have to make our bets. The evidence and logic says that of the available asset choices that have been discussed here, stocks are the best bet.

  46. Anonymous

    “in tightly coupled systems like our modern financial regime, efforts to contain risk typically make matters worse.”

    I know what you mean, but does that include the type of banking regulation practiced by grandfathers banker? The purpose of old-fashioned banking regulation is to promote prudential banking and reduce systemic risk. Some primary mechanisms include capital requirements, counterparty clearing systems, and strange concepts like strict lending standards and limited leverage. My dad bought his first house in 1961, and 25% down was an absolute requirement.

    What are the unintended consequences of good old-fashioned traditional risk control?

  47. tompain

    Lune, I understand and agree with most of what you are saying about Joe Sixpack’s fear of bonds. If you know your own behavior is going to be self-destructive when you own equities, you should not own equities, I won’t argue with that.

    I don’t follow your logic when you say bonds will have their day in the sun while you also acknowledge that inflation is coming and that inflation is a bond killer. Inflation IS a bond killer so if you think inflation is coming you should run as far away from bonds as you possibly can because the real value of your investment is going to be crushed. The real value of my equity investment will not be crushed by inflation, because by definition the companies I own will be charging higher prices at the same time as they are experiencing higher costs. Their nominal earnings will grow. Your nominal interest payment will not. Ugh.

    As for your being in money market and sleeping well at night, the only thing I can say to you is to please, please consider how having insufficient assets to retire will one day affect your sleep. Change your definition of what risk is. Risk is not having the market temporarily assign a lower value to the stream of income you own by virtue of holding equities. That would only hurt you if stocks paid no dividends AND you had to sell all your stocks at a time when valuations are depressed. Real risk is looking back after 20 years and realizing that you earned a crappy or negative real return on your hard-earned savings.

    If it makes you too nervous to put a big chunk of your money in equities, then start small, but don’t sit there and watch all your money lose its value in real terms.

    Over a long period of time, it is not just “a little” return that you are sacrificing. It is a LOT.

  48. Lune


    I apologize, I should have made it clearer that I believe bonds in the near future will be a good buy. I wouldn’t hold them right now. Indeed, if anything, I believe Treasuries are experiencing a bubble from the flight-to-quality effect. Exactly when will bonds be a good buy? Not sure if I can time it right, just that once inflation expectations set in, then bonds will be priced appropriately.

    As for my current position, I’m certainly not planning on spending most of my investment lifespan in a money market account. But at this point, I’m not sure exactly which market to be in (U.S. equities? Foreign equities? US bonds? corporate bonds? Euros? Yen? etc. etc.), or what combination and relative weights to use. I don’t think anyone knows. And as per my previous comments, I’m not so sure that U.S. equities will end up on top once again as they have for the past 50 years.

    At any rate, what’s keeping me away from any market is the extreme volatility we are experiencing. Swings of 10% / day were considered extreme even in derivatives such as options and futures. Now we have stock indexes behaving that way. Are you seriously suggesting that joe sixpack (i.e, me :-) invest in a market with volatility that previously was only seen in futures and options markets?

  49. tompain

    Yes, I am VERY seriously suggesting that you invets in a volatile market and that you come to recognize that the truly risky thing is investing when the market is NOT volatile.

    Every year that goes by with you sitting in cash is a year of lost return that can never be regained. The closer you get to retirement, the more time will be working against you rather than for you.

    You do not need to know, you will never know, and no one can know exactly which markets to be in. What you DO know is that 100% cash ain’t it. Stop trying to worry about what the perfect allocation is and start moving toward something that is far better than what you’ve got.

    You live in the US (I guess), so start there, because you want to retire with dollars I assume. Take as much money as you can stand to put into equities and put 70% into Vanguard Total Stock Market Index fund and the other 30% into and of several Vanguard non-US equity funds.

  50. joe


    I shouldn’t have used the word ‘deluded’.
    I meant misled.

    Somewhere, up there ^ in one of your posts, you differentiated between quasi- short and long term; explaining that folks should ‘hold onto’ their short-term capital needs, and “invest” in “something” for the long-term.

    Again, not arguing.
    But I am more of a cooperator than a competitor.
    I don’t want to bet either with or against you.
    In fact, I prefer to let all of those betting types put all of their money in the pool and play poker, or whatever you want to call it.
    Know when to fold ’em.

    I am hoping that after the fall, we will have a new monetary system and a new banking system, and that it will be dominated by many smaller institutions, most of them cooperative banks and credit unions.

    (I understand that is NOT conventional wisdom. But again, “unprecedented”.)

    I am not betting on that.
    Just hoping for it and advocating for it.

    In the long term future I see my meager capital supporting my community and my region by putting my money in a bank that has my community and my region in its own best interest.

    That’s what I see as the coming unavoidable struggle.
    Between knowledgeable folks, differentiated between seeking a cooperative-based monetary solution and you know, the Bulls and the Bears.

  51. Anonymous

    A very interesting discussion all ’round. Ms. Smith, where do you park your money? I’d love to know. As for Mr. Pain, I commend you, not least for your courtesy and ability to hold your temper. Thank you, everrybody (excepting the snarky “S.”)

  52. Anonymous

    “2:26, nothing wrong with that, but cash earns next to nothing, so you need to not hold too much of it for too long. You also need to be very good at knowing when other people are acting foolishly, and take into account the possibility that you are wrong.”

    I’ve beaten a 60/40 stock/bond split by about 5% since the late 80’s. I aim for absolute returns buying stuff that is cheap, and selling at fair value to momentum guys. I like you to recommend dumb money investors to buy and hold. Idiotic moves by dumb money is how I make above market returns.

  53. Anonymous

    I know this isn’t an investment blog, so this will be my only post about that. I see no reason to be in anything other than 100% cash until the dust settles.

    Right now the credit markets are locked up and people are having problems shipping grain. Why on earth would you be purchasing equities when there is even the remotest possibility of actual food shortages in the near future?

    After/If the credit markets unlock I will look to invest *a portion* of that cash in high quality beaten down companies. Buffett is jumping into the fray waaaay too early methinks.

    The Fed hasn’t many bullets left, and if they don’t work, I want my money in a safe, not the furnace.

    “Buy and hold for the long term” may work out OK for some folks, but “Sell when the gov’t takes over the GSE’s” has worked out pretty well for me ;). I am sleeping a lot better than my co-workers right now as a result.

  54. Anonymous

    Or as Will Rogers so famously put it: “It’s not the return ON my capital that I am concerned about, it’s the return OF my capital.”

  55. Anonymous

    How will it serve me to buy equity in a bankrupt firm? At the moment, I’m 100% liquid. I’m thinking about keeping more cash at home, because I expect bank closures. Horizon? — a year of living dangerously.

  56. tompain

    6:03, good for you if what you say is true (I doubt it) but 99% of the population are not as brilliant at stock selection and market timeing as you. People here can do just as well by buying broad index funds and not worrying about which stocks to pick. I don’t know what’s so dumb about that. If you are going to make money of the “dumb money” people that I am encouraging to buy equities, it means you are in equities already.

    6:24, there is EVERY reason not to be in 100% cash. The future cash flows of all of american industry are on sale right now. I don’t know what makes you think cash is a safe rather than a furnace. The furnace is inflation. How are you planning to pay for food during the period of food shortages you foresee (which are not going to happen)? Are you planning to eat the little pieces of paper? I’d rather own a piece of the companies that will facilitate the movement of that food.

    8:47, if you buy the entire market, it does not matter if a few companies in that market go bankrupt. Oftentimes those assets will be bought by other companies you own at bankruptcy fire sale prices, but in any event no single company or few companies can hurt you.

    Many posters here are far too focused on how the stock market might move rather than what the future earnings stream is going to be. If you buy a piece of that future earnings stream at a reasonably good price, you will do ok. If the stock market goes down it will only mean that rats, you could have bought that earnings stream even cheaper, not that your money is gone. Your money is only gone if you are forced to sell at a depressed price. If your horizon is long, that is very unlikely, and you will receive dividends that you can use either for income or to buy more stock at those lower prices.

    I’m done on this topic now. Good luck to all.

  57. cent21

    I don’t think Buffett is advocating bottom fishing. He’s advocating investing.

    You could say he’s being a political shill for trying to set up some negative feedback to stabilize the markets but I think it’s fine for someone in a position of inflewence to do a bit of advocating to break the current sentiment. And I suspect he’s correct that this is a better time to invest than any time in the past few years, unless you time frame is that of a speculator rather than an investor.

  58. Anonymous


    “Better time to invest” suggests market timing, hardly a reputable concept or a sound strategy in “investing”.

  59. Anonymous

    “”Better time to invest” suggests market timing, hardly a reputable concept or a sound strategy in “investing”.”

    Every type of investing, except automatic rebalancing among diversified asset classes uses market timing or stock timing. Buffett stock times.

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