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« ETF Update: Home and Abroad | Main | Analyzing Cash for Clunkers »

August 03, 2009

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Comments

Jacques Necker

This argument has been tried earlier. In Weimar Germany, they kept saying the same thing that printing money was not causing inflation. Rather, they were printing money because of inflation! However, when they stopped the printing presses, inflation came to an abrupt end. Inflation is coming. We only have to wait till 2014 at most. It only takes 4-5 years for monetary base to be amplified by fractional reserve banking. Goldman Sachs speculators will win at the expense of American savers.

Mike C

Jeff,

Appreciate the thoughtful response.

Do you really believe that nothing is different? Data? Analytical ability? Computers? There may be a few psychological lessons, but little more. I suggest that you spend a day reading papers from the 30's on many subjects. Then try to convince yourself that the market analogy is still apt. It was a completely different world.

Of course many things are different, but I guess we'll agree to disagree that very little is relevant beyond psychology. I do think government policy makers have learned from the mistakes of the 30s so we won't see a repeat of crazy legislation like Smoot-Hawley.

I've got a friend who is also an investment advisor who mails me his Fred Hickey newsletter. The most recent issue had a quote from a speech John Kenneth Galbraith gave in 1998:

"If you forget everything else tonight, remember this, that when you hear someone say, We have entered a new era of permanent prosperity, then you should immediately take cover, because that shows that financial idiocy has really taken hold and that history, all history, is being rejected".

I happen to catch Barry on TV not too long ago, and I think he was quoting someone else when he said "The only thing we learn from history is that we learn nothing from history".

I believe there are very long wave economic cycles involving the buildup of debt and contraction of debt. There are too few examples to prove this with any statistical validity. Time will tell and I'll concede you may very well be right on this point.

Regarding Rosenberg, I'm not sure what he has said on the birth/death model but I know he has been right on more then a few things but of course he may be wrong on the "contours of the recovery" as he puts it. Perhaps it will be much more robust then those cautious/bearish are anticipating.

oldprof

Mike - I enjoy reading history and I am sure there are many lessons. Few are relevant for the stock market. Analysis of the economy and public policy has changed

Do you really believe that nothing is different? Data? Analytical ability? Computers? There may be a few psychological lessons, but little more. I suggest that you spend a day reading papers from the 30's on many subjects. Then try to convince yourself that the market analogy is still apt. It was a completely different world.

Like you, I have had some market successes -- many, in fact, on the way to a strong twenty-year record. One thing I have learned is not to be too confident about a method that led to a specific good call.

I often consult with Vince about some system that seems to be correct. Many times his verdict is a simple one: Too few cases. Beware of false confidence.

Regarding Rosenberg -- he is completely mistaken on the birth/death model, where I have read his comments. That is the subject where I have the greatest personal expertise. I did not get his work when he was at Merrill, but his errors on the labor market make me skeptical of his other conclusions.

Once again, thanks for your comments.

Jeff

oldprof

Tropean -- I agree that it is "unknowable" and that is why the critics who are so certain are so wrong.

The first effects are going to be massive and positive. The problems -- if any -- will come later.

When there is greater uncertainty, it does not necessarily mean that you should be defensive. It is fine to make predictions, especially if you think you have edge.

Uncertainty and volatility mean that perhaps you should play in smaller size.

Just a thought in response to your good question and comment.

Jeff

Mike C

Tropean said...

Jeff - One must also accept the very real possibility that the impact of the Fed's intervention - unprecedented as it is in scope and scale, and coming at the same time as other historically anomalous government distortion of the markets (GM, TARP, clunkers, etc.) - is simply unknowable.

The current environment seems ripe for analytical modesty and a defensive investment posture.

Tropean, I could not have said it better.

I personally have a high degree of uncertainty regarding the trajectory of the overall economy and stock market over the next 2-3 years. Maybe I’m overestimating the “depth” of my knowledge, but I do consider myself a dedicated student of history. It was that study of history that led me to be aware of the acute danger in the economy and stock market in 2007 while many were resolvedly bullish on the economy and repeatedly emphatic that “stocks were cheap” (before dropping 60%). Prior to this “Great Recession” I had repeatedly emphasized we might have to go back to the 30s and 40s to get context, while I think the consensus view was that was too far back in time to be relevant.

Is it a repeat of that mistake to not also look at that time frame to assess the likely path of recovery both in the market and economy especially in the context of debt and deleveraging? Is it potentially dangerous to take a few positive data points and assume it is “back to business as usual” and the “Old Normal”? Time will tell, but we must all place our bets accordingly. I’m hedged both ways with substantial equity exposure, and a substantial cash position. I’ll let valuation take me out of the market the higher it goes.

Is it possible after the magnitude of financial/credit crisis/disruption that has occurred that Government stimulus and Fed policy can engineer us back on to the same path as the “Great Moderation” that preceded it for the past 10-20 years? Anything is possible, but history says this is remote, and I would simply note that people much smarter than me with much deeper knowledge such as Bill Gross, Mohammed El-Erian, and Jeremy Grantham all see several “lean years” ahead.

Frankly, I consider the GD 2 scenario off the table, but I consider it more likely then the scenario of resumption of the “Old Normal”. There is an enlightening blog (don’t have the link handy) that tracks the newspaper headlines of 1930. It is somewhat disturbing in that they too saw “green shoots” and the light at the end of the tunnel before the bottom dropped out.

A few brief excerpts from Rosenberg’s note:

” Strategists may help you get into the market but as we saw in 2007, they may not get you out in time and the problem with corrections or bear phases is that they can wipe out gains that took five years or more to accumulate.

The reason why we remain skeptical over the sustainability — the operative word for investors — is because the U.S. economy (or the global economy for that matter) has yet to show any ability that it can stand on its own two feet without the constant use of government steroids.

The problem is that the investors who have gone long now will very likely not be so fortunate to get out early when the spasm reverses course, which it will, the question really is when.

Maybe he is wrong, and maybe I am wrong to be extremely cautious here, and maybe $80-$100 in S&P earnings and 1500ish is right around the corner in the next 1-2 years. Maybe Cramer, Kudlow, and Dennis Kneale are right that this is just the beginning of a sustainable bull market (first time for everything) although I’m still a little sick from drinking the kool-aid on Cramer’s “Year of Natgas” meme that literally top-ticked natural gas prices a year ago.

All that said, just about every single intermediate-term and longer-term technical indicator has gone to a BUY. The momentum guys will take this market much higher I think.

jbr

I'm tired of the inflation vs deflation debate. Let me just propose that one needn't choose. Sure, from an aggregate credit supply, money velocity viewpoint we may not have overall high inflation. But, I think we can easily have inflation in the commodities/assets we "need" along with deflation in the commodities/assets we "want".

In other words demand/supply on a case to case basis is still the basic determinant along with speculation.

So, agriculture prices can rise when housing prices are declining. Oil prices can rise when natural gas prices are declining reflecting supply/demand. Walmart can see increasing sales while people trade down from Whole Foods.

Secondly, note that over the past year investing/trading in commodities just got easier due to ETF/ETNs. GLD is the 6th largest holder of Gold in the world, UNG has to figure out ways to not affect the NG futures market because it has such a big market share now. I think we will only see higher levels of speculation in commodities.

Thirdly, someone from Hussman funds recently wrote an article that bear markets often see high volatility in inflation expectations so we may also lurch from one end to the other in terms of expectations.

Fourthly, McCulley from PIMCO recently wrote an article quoting Bernanke on the Japanese crisis and Ben's suggestion was to target a rate of inflation high enough to compensate for the deflation experienced. It will be interesting to view Fed policy with that lens in future.

Lastly, the CPI does not include commercial/residential real estate so it understated inflation before the crisis (OER notwithstanding) and is overstating it now. That could drive inflation expectations and speculation as well.

Tropean

Jeff - One must also accept the very real possibility that the impact of the Fed's intervention - unprecedented as it is in scope and scale, and coming at the same time as other historically anomalous government distortion of the markets (GM, TARP, clunkers, etc.) - is simply unknowable.

The current environment seems ripe for analytical modesty and a defensive investment posture.

Thanks for your work, which I enjoy and learn from.

oldprof

A little learning is a dang'rous thing;
Drink deep, or taste not the Pierian spring

Something to consider...

Mike C

At first, many suggested that we were about to have another Great Depression.

Bernanke?

http://online.wsj.com/article/SB124865498517982625.html

Bernanke Feared a Second Great Depression

In particular, we have already sowed the seeds for a new inflationary bubble

Buffett?

http://www.berkshirehathaway.com/2008ar/2008ar.pdf

"This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury
and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently
been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome
aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation."

Fed Chair Bernanke has explained the plan for an exit strategy, to be implemented when normal and sensible lending resumes.

Hopefully he will succeed, although I would call into question the Fed's track record given the stock bubble in the late 90s and the housing bubble in this decade. Now that was Greenspan's Fed and not Bernanke's so maybe "it will be different this time" but I think one should view the proposition the Fed will navigate the treacherous road ahead with a healthy degree of skepticism.


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