Saturday, November 24, 2007
Investing for beginners
A useful - and free! - essay by Adam Hamilton in SafeHaven, called simply Stock Trading 101.
Hussman's view: white water
John Hussman is an American fund manager and takes pains to show that his judgments are carefully weighed; so his warnings are unlikely to be Chicken Little squawks:
In July, he looked at historical "awful times to invest", and found that July 2007 fits the same criteria. The 10-year outlook for the US investor is not attractive:
Presently, the probable total return on the S&P 500 over the coming decade ranges between -4% and 5% annually, with the most likely outcome in the low single digits.
More recently (November 12), he's considered many indicators and concluded:
I expect that a U.S. economic recession is immediately ahead.
This week (November 19), he remarks that much of the money apparently being pumped into the economic system is simply a rollover of earlier loans coming to maturity: the net increase is very small compared to the total oustanding, and so the rate of monetary inflation is slowing. He quotes Jan Hatzius of Goldman Sachs as saying (in effect) that if souring subprime debt hits financial institutions directly, they are likely to call in loans in order to preserve the ratio between their lending and their reserves, which in turn will slow the economy further.
What should investors do? He quotes the view of famous investment manager Jack Bogle:
"I would say do nothing – ride it out, if your asset allocation is right. The bonds in your portfolio and the long-term growth of businesses will bail you out. Unfortunately 80% of the market is speculators now, not investors. What would I say to the speculator? I would say I'm nervous and I might even say get out.”
So I guess it's the usual couple of points: are you in for the long term, or trying to make a quick killing? And where are you on the 25:75 Benjamin Graham bond-equity balance?
In July, he looked at historical "awful times to invest", and found that July 2007 fits the same criteria. The 10-year outlook for the US investor is not attractive:
Presently, the probable total return on the S&P 500 over the coming decade ranges between -4% and 5% annually, with the most likely outcome in the low single digits.
More recently (November 12), he's considered many indicators and concluded:
I expect that a U.S. economic recession is immediately ahead.
(highlights mine)
This week (November 19), he remarks that much of the money apparently being pumped into the economic system is simply a rollover of earlier loans coming to maturity: the net increase is very small compared to the total oustanding, and so the rate of monetary inflation is slowing. He quotes Jan Hatzius of Goldman Sachs as saying (in effect) that if souring subprime debt hits financial institutions directly, they are likely to call in loans in order to preserve the ratio between their lending and their reserves, which in turn will slow the economy further.
What should investors do? He quotes the view of famous investment manager Jack Bogle:
"I would say do nothing – ride it out, if your asset allocation is right. The bonds in your portfolio and the long-term growth of businesses will bail you out. Unfortunately 80% of the market is speculators now, not investors. What would I say to the speculator? I would say I'm nervous and I might even say get out.”
So I guess it's the usual couple of points: are you in for the long term, or trying to make a quick killing? And where are you on the 25:75 Benjamin Graham bond-equity balance?
Gambling with more than you've got
The world's economy is now like a huge gambling table, and the players collectively are betting several times the value of their assets.FT Alphaville (thanks to Michael Panzner for the alert) gives the above graphs to show how much is at stake in the business of mutual guarantees known as "over the counter" (OTC) derivatives: over $500 trillion. That's not all: Wikipedia's article (last link shown) explains that there is also a separate class of Exchange-Traded derivatives.
These sums are quite unimaginable. But we can compare them with other figures: according to FT.com, the total value of the US and European stockmarkets in March this year was a mere $31 trillion. Wikipedia estimates that the total value of all stocks and bonds in the world is less than $100 trillion.
Our daily lives stand on a thin crust over this boiling financial melange. We'd sure better hope that the experts haven't bitten off more than they can chew.
(Picture source)Thursday, November 22, 2007
US debt - projected
The US Government's own (2006) long-range forecast shows an expected sixfold growth in Federal debt held by the public, expressed as a percentage of GDP, by 2075. The table above is in a section frankly entitled "An unsustainable path" (pp. 208-209).
Three card monte
Frank Barbera points out that Argentina's economy put itself back on track by devaluing the currency. Now,
... the place is booming, crime is way down, and foreign capital has flooded in...
All you had to do was ensure that you weren't the mark in that game:
... someone who was able to place money in precious metals avoided the collapse of the local currency, would now have that previous purchasing power intact, and could have used it in the last few years to buy back many fold depreciated assets in Argentina.
Baby boom, baby bust
Percentages of the population above age 65 in selected countriesClif Droke (SafeHaven, yesterday) summarises Edward Cheung's work, which relates the Kondratieff cycle to demographics. The most spoiled generation in history is entering its retirement phase and starting to draw on its accumulated wealth, so creating a growing undertow in the financial tide.
Wednesday, November 21, 2007
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