Though I've been hung up on the financial crisis lately, I intend to go back to blogging about our regular topics after this. There's only so much to say about the ongoing economic mess. But before I leave this subject, I want to add a couple of thoughts.
In the various discussions around the Internet, there are always some people who envision a doomsday scenario in which Western civilization will be effectively wiped out. I think this is very unlikely, but any crisis presents a nonzero chance of total disaster. The question is, how can we prepare for it?
And the answer is, we can't.
There is simply no way of preparing for the end of the world. I know that in some circles, it's popular to fantasize about a survivalist scenario. "I've got my guns 'n' ammo," people say, and "I'm ready." But this is nonsense. Do these budding Rambos really think they will be the only ones with guns 'n' ammo? They are at least as likely to be shot as to be the ones doing the shooting. Moreover, what kind of life would it be if you could survive only by killing your starving neighbors? Do these people really want to be Charlton Heston in The Omega Man, living in paranoid isolation and gunning down anyone who looks threatening? It's neither a realistic nor a desirable option.
If it all falls apart, there's nothing to do but go along with the ride and leave your fate in the hands of, well, Fate.
But I don't expect this ultra-pessimistic scenario to play out. If Western civ could survive two world wars, a Cold War, and a Great Depression, it's unlikely to be finished off by a credit crunch.
What is infinitely more likely is that we will muddle through. And that means that these problems, while unsettling, are temporary. This too shall pass. In the meantime, we might consider a few simple truths.
First, there is no point in beating yourself up about what you did or didn't do with your investments. If even Warren Buffett could be taken by surprise by the credit crunch, why should you have anticipated it?
Second, pay no attention to people who inform you that they cashed out of the market when the Dow was at 14,000. I'm not going to say these people are untruthful; I think we all know that nobody ever fibs about their financial prowess, just as nobody ever fibs about their sexual prowess. Even so, people do tend to brag about their investing successes and keep their investing failures to themselves. This is why it's a mistake to envy anybody. You never know the whole story, only the side of it they choose to show you.
Third, it's probably a mistake to say, "As soon as the Dow climbs back to 9,000 - or 10,000 or whatever the magic number may be - I'm going to pull out 100% of my money and stuff it in a mattress." This just puts you on a hair trigger, in perpetual crisis mode. It means you will be primed to take drastic action without having thought it through. It also means you will be obsessively following the markets and waiting for a sudden upward move.
Plus, let's face it: you can't really say what you will do. If and when the Dow does climb back to those levels, the circumstances will be entirely different than they are now. By then you may be sufficiently optimistic that you'll keep your money in stocks, no matter what you tell yourself now. Fear is a powerful emotion, but so is greed. It's hard to pull out of the market when it's going up. So it's probably better not to make plans based on arbitrary milestones and hypothetical situations. Just wait and see what happens.
Finally, it really does seem to be true that your can't serve both God and Mammon. I have found that the more I focus on market conditions, the less "spiritual" I feel. Where your treasure is, there your thoughts will be also, as a certain carpenter once said. Since there is little you can do about the economy anyway, why worry? If there is any truth to the idea of life after death, then our present difficulties are ephemeral and insignificant in the grand scheme of things. And if there is no truth to the idea of life after death, then the only significance in our lives is what we make of them.
Most of these economic problems will sort themselves out eventually. Time is a great healer. Markets are resilient. People are adaptable. And life has a way of going on.
"...any crisis presents a nonzero chance of total disaster. The question is, how can we prepare for it?
And the answer is, we can't."
Actually, MP, there's an entire career field for emergency preparedness professionals. Trick is to start getting people to pay attention to what they can do in a long term crisis to reduce the hardship in their own lives and communities, before the crisis hits. It's hard to do that though when people don't take seriously the threat of catastrophe. And even though most governments have emergency preparedness plans, I don't think they are designed to deal with long term crises. It's just assumed that no matter how bad things will get, it'll pass in a few weeks.
Posted by: dmduncan | February 26, 2009 at 08:42 PM
As I see it, the problem isn't Mad Max, it's TEOTWAWKI (for those unfamiliar with survivalist speech that means The End Of The World As We Know It). Economic crises in the past have led to the rise of dictators (Wiemar Republic), a long period of martial law (Argentina) or, at a minimum, an end to the betterment of social conditions for a decade (US Great Depression). Since I believe we have a responsibility to try to help others I want to do what I can do prevent or at least alleviate the kind of living conditions that I see coming.
Posted by: MarkL | February 26, 2009 at 08:59 PM
Actually, MP, there's an entire career field for emergency preparedness professionals.
True, but the end of the world is not your ordinary emergency. And there is no way to plan for it. So don't worry, be happy.
Posted by: Michael Prescott | February 26, 2009 at 09:48 PM
“Economic crises in the past have led to the rise of dictators”
Hitler came into power after years of joblessness and high inflation in Germany. If you don’t think borrowing trillions and printing trillions will not someday lead to inflation think again. We have artificially set the interest rates low for years to stimulate the economy how long that can continue no one knows for sure.
Wealth can be as harsh a teacher as poverty. Maybe we will learn more from poverty then we did from our wealth. We Americans appear to have this paradigm that we can buy and spend our way out of anything. Skinner mentality appears to be alive and well in America. I understand now they are paying low-income students in Chicago to go to school.
Stating we will be the top educational system in the world by 2020 by using a pay for performance agenda brought a smile to my face as I remember Deming getting so emotional over this topic. He was an eccentric character to say the least. He saw clearly the lack of understanding of variation as it applies to systemic thinking in such an agenda.
How many presidents have promised reform and to fix our educational system and still we decline compared to other countries. You would think sooner or later we would get the message but paradigms are interesting phenomena they continue to exist in spite of the evidence.
The marvel of history is the patience with which men and women submit to burdens unnecessarily laid upon them by their governments.
- William E. Borah (1865-1940)Speech in the U.S. Senate
The best kept secret of a republic: politicans are a reflection of its people. Even William E Borah failed to understand this axiom.
Posted by: william | February 26, 2009 at 10:01 PM
As I see it, the problem isn't Mad Max, it's TEOTWAWKI (for those unfamiliar with survivalist speech that means The End Of The World As We Know It)
It's also a great REM tune . . .
Posted by: Michael H | February 27, 2009 at 07:33 AM
Trick is to start getting people to pay attention to what they can do in a long term crisis to reduce the hardship in their own lives and communities, before the crisis hits.
The actual trick is to get people to see that regardless of what appears to happening externally, every "crisis" has its roots in humanity's tendency to experience their thoughts in the moment as absolute.
Posted by: Michael H | February 27, 2009 at 08:51 AM
Excellent post, Michael. I agree with you on almost everything.
Western Civilization has seen the rise and fall of classical Greece, Rome, the Middle Ages, Rise of Monarchs, so on and so forth. I think it'll stick around a little longer.
Posted by: patrick prescott | February 27, 2009 at 09:00 AM
I agree with you on almost all points. Western Civ has been around since Classical Greece. I think it's a keeper
Posted by: patrick prescott | February 27, 2009 at 09:07 AM
We might perhaps note that Western civ does not actually equate to the neo-capitalist system.
"every "crisis" has its roots in humanity's tendency to experience their thoughts in the moment as absolute."
'Absolutely' right. We must always think about the future, not just the moment, and ensure we are acting sensibly and sustainably.
Posted by: Pete | February 27, 2009 at 12:15 PM
I don't think most people are thinking in terms of the literal end of the planet Earth. I can't even imagine what would cause that any time soon. Not even an asteroid impact or a "supervolcano" eruption would.
But between paradise on Earth and the explosion of the planet there are still a lot of disastrous things that can happen which we can actually prepare for, and which our very own government and the Red Cross advises people to be prepared for. Extended disasters in which the government will either not be able to offer much assistance or render it fast enough.
Human beings have survived some really rough stuff. An ice age, a continental blaze. We can't imagine what changes like that were really like, but they really happened. That's not the stuff of Hollywood.
If the world's coming to a literal end, sure, grab a beer and find a good seat to watch it happen.
But I think "end of the world" is used loosely to mean the death of one normality and the birth of a new one which might be quite hard and challenging to adjust to, but which I would optimistically assert it is possible for us to do.
Posted by: dmduncan | February 27, 2009 at 12:56 PM
"But I think "end of the world" is used loosely to mean the death of one normality and the birth of a new one which might be quite hard and challenging to adjust to, but which I would optimistically assert it is possible for us to do."
Fairly easy if we have ascended (21 December 2012 is Ascension Day).
Posted by: Barbara | February 27, 2009 at 01:18 PM
By "the end of the world," I mean the total collapse of civilization - anarchy, chaos, famine, roving bands of looters in the streets, armed householders shooting at anyone who gets near their door, etc.
I'm not saying no one would survive. I'm saying that (in the words of a Cold War phase) the survivors would envy the dead.
One could prepare for such a scenario by buying guns 'n' ammo, stocking up on canned food, moving to the country and becoming a small farmer, or joining a survivalist society. But I don't think any of these options is really practical. In the end, we are creatures of a polis, as Aristotle said, and our lives aren't really worth living if we are reduced to a state of dog-eat-dog nature.
At least, that's how I see it. Anyway, I don't expect it to happen. I think we will muddle through in our typical stumbling fashion. By this time next year, things may look a whole lot brighter.
Posted by: Michael Prescott | February 27, 2009 at 01:24 PM
I agree we will muddle through it. Just like we did in the 1930s. And we will be much better for it -- more emphasis on family and creating things, reading, hiking, and less on workaholism, greed, and keeping up with the Jones's
As for buying stocks when they are still wildly overvalued in terms of cycle lows by historical norms, I'd recommend people take a pass. Stocks are an asset class just like housing, commodities, bonds, cash, money market accounts, etc. They have no special dispensation on pricing. Buy and hold stocks through an equities bubble makes as much as much sense as buy and hold beach houses through a real estate bubble. Everyone decided they would get rich buying appreciating assets and their prices went up and up and up until they didn't -- and now they will go down and down and down until the asset classes are hated and you don't see a ticker scrolling across every news channel in a worship of wall street money and importance.
Wall Street sold us a bill of goods on how we could all get rich by buying and holding stocks. You can do that -- when you buy stocks at historically low prices like the mid 1930s or 1970s. Buying at hugely inflated prices like people did in 2000 or 2007 or 1929 means getting poor instead.
I'd estimate we are about 1/2 way to the bottom, which I would guess lies about 18 months away and DJIA 3500ish.
Posted by: Matthew C. | February 27, 2009 at 02:57 PM
This is the decline of wealth of a nation, which has been occurring for over 3 decades and such a hot emotional topic few want to discuss it without name-calling or swift boating or misquoting. Or as the course in miracles would teach attack after attack after attack. When the ego is threatened it will usually attack.
Now we have borrowed and printed huge sums of money to try and maintain the same level of wealth. We have even fudged the numbers to try and make the economy look better than what it is. We have lived beyond our means refusing to admit our decline of wealth. The day of reckoning has arrived. Politicians wont tell us this (political suicide) and (hope gets more votes) and we don’t want to believe it for a variety of reasons. Number one reason denial.
I actually believe this can be a positive thing because I think it might make America or any country a more compassionate and understanding country. What works for an individual can work for a society. In a time of crisis there is great opportunities to advance in love and divine intelligence. God (universal law of progress) works in mysterious ways.
Creating wealth has a lot more to do than moving money around. All the indicators are there that we are in a decline but patriotism and nationalism can overwhelm the rational mind. Wealth can be as harsh a teacher as poverty.
In the meantime lets do some more pay for performance and bonuses it has worked so well in the past. Sorry sarcasm here but I smile because every time someone bought up pay for performance to Deming in one of his seminars he would respond with much emotion. It became a badge of honor to be yelled at by Deming. He was the type of a character you never forgot. Sorry one has to be a student of Deming to understand my ramblings. We treated him as a guru even though his character traits left something to be desired.
Toyota listened to his teachings and this helped them become the best in the world at building quality automobiles.
Posted by: william | February 27, 2009 at 03:05 PM
Here's one scenario that's less than roving bands of looters you have to shoot, but still very far away from "Happy Days Are Here Again." It's called "An Abrupt Climate Change Scenario and Its Implications for United States National Security." The link downloads as a PDF.
www.edf.org/documents/3566_AbruptClimateChange.pdf
Posted by: dmduncan | February 27, 2009 at 03:33 PM
Wall Street sold us a bill of goods on how we could all get rich by buying and holding stocks.
I think buy-and-hold has worked pretty well for the past hundred years, on balance. The average annualized return on stocks from 1925 to 1992 was 10.5%. Of course there were very large fluctuations from year to year and even from decade to decade. Still, an investor who bought and held throughout that period would have done much better than investors in almost any other area.
Investing in small cap value stocks would have yielded even better results. As one blog explains,
Note that this time frame includes the stock market collapse of 1929 and all of the Great Depression. So it's not exactly accurate that buying and holding stocks in less than optimal times "means getting poor." It could make you poor if you buy on the highs and sell on the lows, but the buy-and-hold strategy is to hang on throughout the ups and downs.
Posted by: Michael Prescott | February 27, 2009 at 04:33 PM
“The average annualized return on stocks from 1925 to 1992 was 10.5%. Of course there were very large fluctuations from year to year and even from decade to decade.”
There is nothing more misleading in the relative phenomenal world than average. Of course your second sentence here says it all. The large fluctuations from year to year. In fact average is so misleading that there are three ways to calculate average.
Can we predict a countries future by its history? If you use England as an example then we cannot predict a countries future by it history even if we use 100 years of English history from 1840 to 1940.
Do we even know the significant variables that are crucial to predict a countries economic future? I suspect two of those variables might be debt levels and educational achievement levels. Would crime levels be a significant variable such as the number of people in prison and on probation? Would natural resources be a variable?
Posted by: william | February 27, 2009 at 05:53 PM
Michael,
If you are picking small cap value stocks then you could certainly make money over the next decade. There are certainly stocks worth buying out there now.
Bank investors, on the other hand, have been completely and utterly ruined.
If you pick certain start dates, buy and hold looks good, but other dates look rotten indeed -- try 1965 or 1929 for starters. Also, people are not buying and holding for 100 years -- more like 20 on average, and returns have been near zero for certain 20 year periods, like the dates I mentioned (and, I daresay, the year 2000 will have a significantly negative 20 year real ROI, since prices were in an unprecedented all-time bubble vs. earnings!)
I still stand by my statement that selling everyone the dream of getting rich on owning stocks in 2000 and 2007 at the peaks of the bubble was a terrible thing, just like the dream of everyone getting rich on their beach house.
Long-term equity cycles are driven by macro events. The macro events we are dealing with are:
1) Retirement of the baby boomers (bad for stocks for years to come as they sell assets).
2) The end of artificially high earnings plumped up by massive amounts of debt (bad for stocks for the forseeable future, the debt-driven economy is dead for our lifetimes).
3) The souring of Americans on their 401Ks (bad for stocks as the pro-Wall-street mood is dead, dead, dead for many years to come)
4) Big market cycles typically end with P/E in the 5-8 range and dividend yields near 6% (as dividends become the only way to bribe people to own equities). We need a 50% haircut from today's levels for that.
5) The incompetence and dishonesty of the Bush and now Obama administrations and the Federal Reserve about the complete implosion of debt levels.
6) The people who were utterly and completely wrong about this crisis and loved stocks at DJIA 14000 mostly all say "second half recovery" and "great time to buy stocks". The people who were right about it (who I listened to, and sold at 13000) mostly say the stock market is looking at another 40-60% haircut from here.
7) The small investors / 401K owners are still still holding on, hoping desperately for a rally. Expect them to dump assets on every rally for many years to come as they near retirement.
8) Socialism, Obama / Democrat style is terrible for the economy. Witness California, who has been run into the ground by Democrats and their RINO governator.
9) Global Warming hysteria is now in control of energy policy despite the fact that we appear to be heading back into a cold phase. Scientists not blinkered by groupthink and socialism are noticing that temperatures appear to be much more driven by solar cycles than CO2 levels, which are historically a trailing, not a leading indicator of temperature.
10) Job losses driving forced liquidation of 401Ks.
Certainly it is a much better time to buy stocks today than it was a year and a half ago, when stocks were priced twice as high. But I'm afraid it will be a much better time still to buy in a year and a half when the Dow is sporting a 3-handle.
As for "buy and hold", that doesn't work so well when you are retired and need the money, or when you lose the job and need the money, or when you want to start a new business and need the money, and the stock market is at the bottom of a smoking crater and you have to liquidate for a pittance.
I would advise anyone who wants to invest, to buy short-term top-grade corporate paper for companies with immaculate balance sheets, short-term treasuries, a smidgeon of absolutely top-flight small-mid cap equities (if you must!), and sell enough /ES contracts short to hedge your longside exposure.
Then, once the Dow hits a 4 handle, cover your ES contract and slowly start buying only the most impeccable stocks with large dividend yields and rotate out of your fixed-income investments (if you truly have a 20 year time horizon). That is what I would do if I were a long-term investor right now.
Posted by: Matthew C. | February 27, 2009 at 06:22 PM
Sorry I forgot a couple:
11) China revealed as a Potemkin Economy. Read about the overbuilding of malls, skyscrapers, apartments, sports facilities etc. there which makes our overbuilding look like a picnic.
12) The utter collapse of Eastern Europe and the upcoming collapse of the oil economies.
Posted by: Matthew C. | February 27, 2009 at 06:29 PM
As for "buy and hold", that doesn't work so well when you are retired and need the money, or when you lose the job and need the money, or when you want to start a new business and need the money
Well, you do have to adjust your portfolio over time. A retired person should have a smaller percentage of his portfolio in stocks than someone in his twenties. And you should not put money in stocks that you may need in the next five (or even ten) years.
Over short time frames (ten years or less) the risk is high, but over twenty years the risk is low and over thirty years it is negligible.
If you had bought stocks in 1929, right before the crash, and held them for thirty years, you would have made out okay. The Dow peaked at $386 in September, 1929. In September of 1959 it was at $632. This increase does not include dividends, which would have contributed greatly to your gains.
This example actually understates the case, because the buy-and-hold strategy isn't to buy all your stocks in one lump sum and then sit on them. Instead, you're advised to keep adding to your stocks month after month, in good times and bad. If you had started buying stocks in 1929 and then added to your portfolio on a monthly basis (by reinvesting the dividends, say), you would have taken advantage of all those years when stock prices were depressed, which would have more than canceled out the inflated price you paid in '29. You would have made out very well in the long run.
Still, I agree that for investors who are not really in it for the long haul, buy-and-hold is a bad approach. And many people probably convinced themselves that they were in "long-term investors" when they weren't.
Posted by: Michael Prescott | February 27, 2009 at 08:21 PM
“8) Socialism, Obama / Democrat style is terrible for the economy”
Well we all know how well Reagan economics worked and deregulated capitalism and so called free trade policies panned out for the economy. Communism, socialism, and capitalism all ideologies based on wealth generation and gov knowing what is best for society as a means of creating the ideal and just society. None will work as they do not understand nor see a need to understand the underlying reality behind all appearance.
It appears to be a spiritual world manifesting or expressing itself as a physical world so in my view any economic system should reflect those spiritual principles. Is it easy to do? Simple to state almost impossible to do at this stage of human development.
At this stage of our development maybe the best we can do is find a middle ground between government intervention and private enterprise. It is a constant balancing act. We humans are an interesting paradox of human greed, selfishness, fear, and also capable of great service and good towards humanity.
As far as California it has been a leading indicator of the future of other states. As long as we see spiritual principles separate from economic principles problems will arise. We are witness to those problems now.
Posted by: william | February 27, 2009 at 10:54 PM
It's the OctoMom's fault!
Posted by: Marcel Cairo | February 28, 2009 at 01:46 AM
maybe she can have her own show like jon and kate.
she has been offered one million dollars to appear in a movie.
Posted by: william | February 28, 2009 at 02:22 AM
I'm not convinced any strategy based on the past will necessarily apply to the future, particularly during an extended moment of great change. (This applies to much more than just investment strategies.)
Yes, there is a kind of natural momentum or inertia in human affairs, but there are also highly disruptive developments that arise, some much more disruptive than others. (Imagine owning a time machine and using it to periodically visit communities of our Neanderthal brethren until, finally, there were none or, perhaps, communities of our own species at the tale end of the Bronze Age, particularly in the Mediterranean world.)
An investment strategy based on what happened after the stock market crash of 1929 may not succeed at all in the present time and next several decades, then; no one can say unless, perhaps, they have developed some very effective way of comprehending time and probable collective choices.
Certainly there are any number of disruptive developments in the outer world of the last several decades we can point to, including those related to information technology.
Consider the continuing impact of IT on newspapers, as just one example of many.
There are endless ways to view these things, including adopting the perspective that everything in external physical reality reflects inner changes in consciousness.
If you do this, then what does, say, the rise of the Internet symbolize?
I believe there are many futures, while the particular future anyone may experience is directly related to their choices, their beliefs, their values.
This implies that changing these now means experiencing a possibly very different future reality than if you had not done so, while engendering no end of metaphysical speculation regarding the nature of reality, what is "objective," what is "subjective," how the two are connected, etc., etc.
Such speculation can be transformed by engaging in activities such as 2. Preliminary Probable Self Exercise found at http://www.realitytest.com/doors.htm, but this sort of inner exploration doesn't appeal to everyone.
The bottom line, however, is that we choose our future now, in the present, in accordance with our beliefs and expectations.
This means that those engaged in ego loosening explorations today who expect many more to do so in the years ahead will experience futures in which this is reflected in many ways in the mass reality.
Present institutions of all kinds, whether financial, technological, education -- you name it -- were created in eras in which you might say egos were tight. (Adam Smith didn't engage in meditation, so far as I know; many of the founding fathers of the U.S. were associated with some of the strange rituals of freemasonry, true, but it's hard to easily connect those with a discussion of ego-bound vs. ego-loosened. Certainly modern communications technologies didn't exist when many of our societal institutions first came into being.)
Bill I.
Posted by: Bill I. | February 28, 2009 at 07:56 AM
Matthew C, you're obviously very clever (maybe even an economist ...on second thoughts, that's not likely, at the moment there's no such entity as a clever economist!), but you're using terms I don't understand like:
"cap equities"
"RINO governator" (terminator?)
"3-handle", "4-Handle"
"ES contracts"
"50% haircut"
"401ks"
Have some pity on mere mortals.
Posted by: Barbara | February 28, 2009 at 08:59 AM
There are endless ways to view these things, including adopting the perspective that everything in external physical reality reflects inner changes in consciousness.
I just thought this was worth additional emphasis. My suspicion is that inner changes in consciousness are well underway worldwide, and further, that the external physical reality that will eventually emerge will look very different from anything than most anticipate today.
I do have to disagree with Bill’s implication that the Founding Fathers were particularly ego-bound. Greg Taylor wrote an excellent piece in http://subrosa.dailygrail.com/download.html>SubRosa, Issue 3, that explores the Freemasonic and Rosicrucian connection that revolved around the founding of the USA. As Greg writes:
One can only wonder, indeed.
Posted by: Michael H | February 28, 2009 at 09:15 AM
Hi Barbara. You're right, I'm not an economist, I am a software developer and trying to make the transition to a daytrader once I can more than replace my income. BTW I do not recommend trading, for the vast majority of people, an investment strategy is much better (although I differ a bit with Michael about an optimum investment strategy).
Sorry about the jargon. I've been spending far too much of my time on stock, investing, and economic boards and blogs lately.
small-cap equities are the stocks of smaller publically traded companies who have smaller market capitalizations. Mid-caps are medium-sized companies, and large-cap is basically the Fortune 500 / S&P 500 (they are mostly the same largest 500 companies in America).
RINO means Republican in Name Only eg - someone who is a Republican but supports a large, activist government.
3-handle for the Dow means a price between 3000 and 3999. 4-handle means a price between 4000 and 4999.
ES - emini futures contracts. This is a contract on the price of the S&P 500. If you buy and the S&P goes up, you make a profit when you sell. If you sell it short and the price goes down, you make a profit when you buy to cover.
50% haircut = losing 50% of your investment. For example the Dow today has taken a 50% haircut from its high 18 months ago.
401K - this is the retirement program that most corporate employees in America use to save money for retirement.
Hope that helps. . .
Posted by: Matthew C. | February 28, 2009 at 09:22 AM
MP said;"And if there is no truth to the idea of life after death, then the only significance in our lives is what we make of them."
Morality won't exist.Good and evil would just be another word for "Natural".Everything would be a pointless chaotic soup heading towards nothingness.
U make it sound much more optimistic then the reality of it would be ^^
Posted by: Bryan.A | February 28, 2009 at 09:26 AM
Well we all know how well Reagan economics worked and deregulated capitalism and so called free trade policies panned out for the economy.
There is nothing wrong with free trade. It is nothing more than the principle that one person grows wheat, another bakes bread, another teaches college, someone else makes ovens, etc.
What is wrong with the global economy has much more to do with a huge global asset bubble based on the idea of building wealth, that has now burst (and still has a very long way to go, IMO). The other thing wrong with it is materialism and using debt to spend far beyond our means. The bill is now coming due at all levels -- personal, corporate, and governmental, and there is hell to pay!
As for deregulation, I am trying to figure out how the most regulated sector of the economy (banks and finance) where most of the decisions are made by the government and its extension the Fed is an example of "free market economics". Free market economics is when Pets.com goes bankrupt and the stock goes to zero. What we are increasingly seeing now is a terrible system where private shareholders make all the profits when things go well, but go get bailouts from the government when their recklessness leads to the bankruptcy of their companies. Private profits, socialized losses. The socialist Bush administration started this process in earnest, and now the socialist Obama administration is only expanding and increasing it.
The truth of the matter is that government regulators are always captured by the industries they regulate (Tell me, where do think Geithner, Paulson, and Bernanke came from?).
Today we have Fannie and Freddie still out there trying prop up housing prices that still need to fall further . Worst of all, we have government bailing out corporate executives and shareholders who made terribly stupid economic decisions. We do not need more regulation. We need a far more important word: responsibility. Let the people who made extremely poor decisions about buying houses, selling mortgages, and investing in bank stocks (and refusing to sell when they went down and down and down and down) reap the consequences of their actions: foreclosure, bankruptcy, and loss of investment capital.
Communism, socialism, and capitalism all ideologies based on wealth generation and gov knowing what is best for society as a means of creating the ideal and just society. None will work as they do not understand nor see a need to understand the underlying reality behind all appearance.
I am not going to defend the highly regulated corporate socialism practiced in America that is mislabeled as "capitalism". Real capitalism doesn't involve calling Washington DC and getting fat government contracts and making it impossible for smaller, more efficient competitors to get a foothold in your industry.
At this stage of our development maybe the best we can do is find a middle ground between government intervention and private enterprise.
What this means in practice, is you and me paying to bailout the (mostly incredibly rich) executives, shareholders and bondholders at today's failed Pets.com companies like Bank of America, Citibank, General Motors and Chrysler.
Government is influenced by the well connected, powerful, and rich, not by people like you and me, William. The belief that government is a friend to the weak and meek is the way to give more power to the already powerful and power-hungry.
As far as California it has been a leading indicator of the future of other states. As long as we see spiritual principles separate from economic principles problems will arise. We are witness to those problems now
California is a leading indicator of the complete and utter ruination and failure of a huge and massive regulatory and socialist welfare state once hard times hit.
It is hopelessly bankrupt, what must be done (and will be done, sooner or later) is a huge slashing of government spending . Obama and the Democrats are bringing that level of fiscal irresponsibility to the national level now. The Bush administation was bad enough about wasting dollars, but Obama is now wasting them three times as fast!
This will NOT end well. . .
Posted by: Matthew C. | February 28, 2009 at 09:49 AM
If you had bought stocks in 1929, right before the crash, and held them for thirty years, you would have made out okay. The Dow peaked at $386 in September, 1929. In September of 1959 it was at $632. This increase does not include dividends, which would have contributed greatly to your gains.
It also does not include inflation. I suspect in real dollar terms (including dividends) it was close to a wash. And you had to live through watching your account lose 90% of its value!!!!! And it is a 30 year holding period -- pretty unrealistic IMO unless you are under 30 (which very few of us are). Face it, buying stocks in 1929 (or the year 2000) was an incredible disaster from an investment perspective.
Posted by: Matthew C. | February 28, 2009 at 09:56 AM
Great posts, Matthew. What has puzzled me since my long-ago fascination with Ayn Rand is how it is that capitalism and free markets are regularly blamed for society's ills when neither has ever been fully put into practice.
It's pretty clear to me that the quickest solution to this mess is pretty simple: Let the market do what the market will do. There are many adjectives that apply to the idea that those who made terrible decisions should be rescued by those who didn't, but "spiritually correct", is not among them.
For what it's worth, John Mauldin's weekly newsletters have been echoing Matthew's position on the buy and hold strategy for a while now. The most recent two include particularly cogent analysis of the buy and hold strategy over various time periods with various start dates. Access to his archives can be found at the following link (no cost, but does require email registration):
http://www.frontlinethoughts.com/gateway.asp?ref=reprint
Posted by: Michael H | February 28, 2009 at 11:02 AM
"I do have to disagree with Bill’s implication that the Founding Fathers were particularly ego-bound."
I'm not sure they were, Michael. Clearly masonic elements were part of the mix of the new country and all that accompanies them (including tracing rituals to the Knights Templar and earlier). My point was that connecting this to a discussion of ego-boundedness would likely be an arduous and complex activity.
Certainly few leading citizens and rulers in Europe and the colonies in that time were what I would describe as being "ego-loosened." (Think of Frederick the Great, for example, or Voltaire. Such strong egos would require a good dose of a psychedelic substance, perhaps, to become loosened.)
I admit the topic of rosicrucians and freemasons and hidden traditions in general is intriguing, however.
Bill
Posted by: Bill I. | February 28, 2009 at 11:02 AM
she has been offered one million dollars to appear in a movie.
Is it a Spider-Man movie? Spider-Man Vs. Octo-Mom ... That would be cool.
She could play Dr. Octopus' wife.
Her super-ability would be squirting out babies as high-speed projectiles. Sort of like a machine gun. Only with babies.
Someone get Sam Raimi on the phone!
Posted by: Michael Prescott | February 28, 2009 at 01:06 PM
It also does not include inflation. I suspect in real dollar terms (including dividends) it was close to a wash.
That's probably about right. The 1930s were deflationary (average home price fell from $7145 to $3800), but the '40s were inflationary (average home rose to $7450), and inflation continued in the '50s (average home was $12,400 by 1959).
Trouble is, I'm not sure what investment classes would have done really well in that environment. When you go through a Great Depression and a World War, maybe "a wash" in your investments isn't such a bad result.
As for deregulation, I am trying to figure out how the most regulated sector of the economy (banks and finance) where most of the decisions are made by the government and its extension the Fed is an example of "free market economics".
I don't think there was much, if any, regulation of hedge funds and derivatives. They were largely left alone.
Banking regulations were somewhat reduced in 2003, as this post from ARCHN points out.
Chris Cox at SEC also eliminated some regulations, including the uptick rule - a change that may be encouraging short-selling now.
Posted by: Michael Prescott | February 28, 2009 at 01:44 PM
Here are Bloomberg's top two stories at the moment, dealing with a long-term optimist, Warren Buffett, whom MP cited in past disputes with me and others in justification of his own position. The supposedly expert Buffett published an op-ed recommendation, "Buy American Stocks. I America," which gave MP comfort. Now the market is down 20% from the level at which that was printed.
Berkshire Profit Plunges 96% as Buffett Writes Down Derivatives Positions
•Buffett Says U.S. Economy Will Be `Shambles' in 2009, Likely `Well Beyond'
A shambles is more realistic than MP's hope that things will be looking brighter by year-end. But Buffett is just beginning to "get it." He clings to his unfounded buy-and-hold induction. Quoting from the first story above:
"The S&P Index will probably gain in three-quarters of the next 44 years, just as it did in the period since Buffett took over Berkshire in 1965, he said in the letter."
Non Sequitur--especially when you compare America's fundamentals now to then.
In early December (I think) on this site--at any rate when the Dow was a bit below 8000--I recommended that buy-and-holders who hadn't exited yet should get out if the Dow rose to 9000 (which it did at the end of December). I reiterated my earlier-predicted Dow-target of 4500 by late 2009.
Such prediction isn’t mere market timing and doesn't call for looking into any crystal ball--it's all baked in the cake due to the world’s immense public and private debt and unfunded entitlements and (in the wake of the market's recent decline) underfunded pensions and annuities that must either be paid or defaulted on, both with terribly negative knock-on effects for the world economy, due to how everything’s inter-related.
It's a false dilemma to say that we'll either muddle through or go into a Mad Max dystopia. Mid-range gray-scale bad scenes are more likely, such as Argentina's post-default situation.
Posted by: Roger Knights | February 28, 2009 at 03:07 PM
Oops: The last word in this phrase above should be "Am," not "America." (My shorthand translator in Word is to blame. (And my hastiness.))
"Buy American Stocks. I America,"
Posted by: Roger Knights | February 28, 2009 at 03:11 PM
The supposedly expert Buffett
"Supposedly" expert? I hope you're not claiming to know more about investing than Buffett. That would be like me claiming to know more about physics than Niels Bohr.
Buffett has his off-days and off-years like anyone else, but his overall track record is, um, pretty darn good.
Still, I agree that we should not rely on financial gurus, whether Buffett or someone else. We need to make our own decisions.
I'm still hopeful that things will turn around sooner rather than later. But no one should take my word for it, because I make no claim to any prognosticative prowess.
Posted by: Michael Prescott | February 28, 2009 at 04:46 PM
"Her super-ability would be squirting out babies as high-speed projectiles."
I think you'd need Ben Stiller to direct.
Posted by: dmduncan | February 28, 2009 at 04:56 PM
MP wrote (just above):
""Supposedly" expert? I hope you're not claiming to know more about investing than Buffett."
I know enough to come in from the rain, which experts sometimes notoriously don't. (E.g., the financial MBA experts who bought into the securitized debt debacle. Certain non-expert critics, including I think Sen. Moynahan, could see that debt and leveraging were dangerous and pointed this out before the crisis.)
It's irrelevant whether I personally am an expert investor or not. (However, FWIW, I did start betting on a crash to below 9000 by Oct. 31 in September of 2008 when the Dow was well over 11,000, as can be seen in my comments on the Hubdub event-prediction-game website, here:
http://www.hubdub.com/m12063 ) I wasn't SURE there would be a crash, just that it would be a good bet at the odds offered. And I went "all in" on my betting.
The point I made in one of MP's threads sometime in the fall was that his and Buffett's belief in buy-and-hold and in the invest-in-America-and-you-can't-go-very-wrong-for-long paradigm is unwarranted and dangerous. It doesn't matter how long or how successful Buffett's been--without a larger frame of reference than the one he's been using, his inside-the-box success just tempts nemesis. IOW, my point was a philosophically skeptical one--Buffett's induction from US history so far assumes implicitly that no real black swan will knock down his sand castle--i.e., that it's impossible for the US to be hit by a Greater Depression. He's trapped in his paradigm. (Black-Swan-Guy Nassim Taleb on the contrary not only claims that Depression 2.0 will be worse than the 30s, but that it will be the worst crisis for the US since the Revolution.)
""Supposedly" expert? I hope you're not claiming to know more about investing than Buffett."
YOU were the one who "supposed" him to be an expert--and on the basis of that appeal to authority decided that he was more to be trusted than bearish advisories to get into cash. Either your supposition that he was an expert, or your conclusion that expert status and a positive paradigm were better guides than the negative economic factors cited by bears, look wobbly in light of his bad advice to investors in November, when the Dow was over 8500 (if I recall correctly). Here's what you said:
Posted by: Michael Prescott, November 22, 2008
I can't resist linking to this op-ed piece by Warren Buffet, the world's most successful investor. He's buying stocks. In his personal portfolio, he plans to be 100% in stocks soon. So the question I have for those who advocate going all-cash is: Are you a wiser investor than Warren Buffett? Maybe you are. I know I'm not.
Posted by: Roger Knights | February 28, 2009 at 06:40 PM
TypePad seems to have eaten my comment, so I'll try again. (Note to self and others: Always copy-and-save your comment before pressing "post." TypePad's servers are becoming less and less reliable.)
YOU were the one who "supposed" him to be an expert
I wasn't quarreling with the word "expert," but with the word "supposedly." Of course the most successful investor in history is an expert. Using the word "supposedly" as a qualifier is like calling Tiger Woods a supposedly expert golfer."
Anyway, no need to get all hot 'n' bothered. If you can foresee major market moves and act appropriately, more power to you.
There's no doubt that someone who can time the market will make more money than someone who just follows a buy-and-hold strategy. Trouble is, I don't know how to time the markets, so it's not an option for me.
By analogy, I could make more money if I became a top ten professional tennis player. But I don't have the skills to do that. Those few people who do have the skills are encouraged to sharpen their game and head to Wimbledon. As for me, I'll be watching on TV.
:-)
Posted by: Michael Prescott | February 28, 2009 at 08:10 PM
Can anyone envision plausible circumstances, extrapolating from current conditions, if they worsen to GD v2.0, where civil war could occur, and what conditions might lead to such a thing?
Posted by: dmduncan | March 02, 2009 at 06:43 PM
Personally, I don't see a greater depression. The worst we are looking at is a Japan-style "lost decade", If (as seems likely) our political class makes the same mistakes theirs did (and continue to do).
The reason? Simple - Big Government. A far greater portion of our economy is directed by the Federal Government than there was even at the height of the New Deal, and that means there are a lot of people whose paychecks are in no danger of reduction. Eventually, the deficit will get big enough to allow private sector savings desires to be met (remember: government deficit = non government surplus), and consumers will start to spend again. Of course, a proactive policy of payroll tax holidays would get us there quicker than Obama's slow spending plans, but it will get us there eventually.
But of course, we already see signs that as soon as the economy shows signs of recovery, they will start in at "deficit reduction", which will pull the rug out again, but we'll muddle through (with lower output and lower standards of living than we could if anyone could read a spreadsheet)
But all of this talk of how we were "living an illusion" is madness. The wealth we were creating (houses, cars, computers, iphones) was real wealth. Some if it misdirected, maybe, but no one has bombed any factories or killed any software engineers. We still retain the ability to produce just as much as we did last year. (More, in fact, since our fiscal policies tend to lead to systematic underperformance). What we have is spreadsheet problems. Some numbers in some of the columns need to be readjusted. That's it. But those would-be Jeremiahs who preach doom and gloom are convinced that all prosperity must be punished...
Posted by: Jimbo | March 04, 2009 at 05:20 PM