Monday, December 21, 2009
...for owning stocks. With good reason. But what are the odds there will be two such hideous decades in a row?
I think odds are less important than looking at the reasons to buy stocks: dividends or growth and how they will evolve over the next decade. Find companies that can reliably pay a dividend or find companies that can grow without depending on the excess leverage that has fueled so much of the growth over the past decade.
You can expect some sort of bubble, of course...the odds are with that. Human nature.
Equity prices were goosed over the last nine months by a tsunami of government-created liquidity the likes of which none of us have seen before. I'm thinking that game will only last for so long.
Tell me where I'm off base here, but over the next decade won't baby-boomers start drawing down accumulated balances of financial assets to support themselves in retirement? I'm no demographer, but that suggests to me there will be an imbalance in the supply and demand for stocks, all else equal. That doesn't argue for rising prices. But hey, I'm no Buffett - heck, I went to cash in late April with the market only 22-3% off its March 9 lows. The wealth-destructive policies I saw in DC scared me more than the liquidity told me stocks would keep going up. I was flat-out wrong, and may well be again.
I cashed out most long stuff this morning and am now about 70% short.
The PRC just told Obama the era of cheap money is coming to an end. I believe them. That combined with a slo-mo train wreck in commercial paper and I'm thinking the upside party is mostly over as a general statement.
I'm still long some PRC stocks and biomed stuff.
The PRC is business friendly, the USA isn't. True progressives believe that -- given reasonable freedom -- people are capable of coming up with creative solutions to our challenges. Sometimes these solutions aren't obvious beforehand, which is why market competition -- including the market for ideas -- is usually superior to central planning. Worst of all is to write laws into stone, with no sense of their long-term implications.
The PRC's leadership is also mindful of math, science and reason. Our leadership has gone down a rabbit hole where they think none of these apply.
The PRC realizes that if you want growth you need to decentralize. They're trying to do this without losing one-party control. Obama & Co are taking us in the other direction.
Obama & Co actually hate the true private sector. I don't think Obama has had anyone in his life who held a real job. Even a labor-employment expert like Larry Summers doesn't get the private sector -- which is why he keeps getting the unemployment number wrong.
The higher ups in the PRC get their perks -- some bribes and corruption, mistresses and a love nest, etc etc. But they seem committed to the progress of their nation and all the Chinese people.
Obama & Co -- and many Republicans -- are into divide and conquer. We are not "all in this together" so far as our politicians are concerned, They identify and exploit demographic cleavages to their advantage. Ask a smoker.
The bribe/reward factor in China is relatively efficient -- it's grease for their system. What's shocking in the USA is how wasteful our bribery is -- for a pittance in campaign contributions -- or from hiring someone's wife as your DC realtor -- or by putting someone's boyfriend into a Fannie Mae job -- you can move billions.
Lest you think I think that the PRC is all wonderful -- they have a blind spot on the environment and pollution. It's not CO2! ... it's real pollutants and poison. Once upon a time the EPA was a great advance. It was created out of a competitive USA political process and put into place by none other than one Richard Nixon ... the guy with the political strength to "go to China."
Saints Preserve Us ...
Mad as Hell, might I suggest that you ask a businessperson who has ever done or tried to do business in China their view on the merits of their system. You can start with the economic legal (non) system and go from there.
Sadly, the odds are exceedingly high that there will be a second decade of lousy performance in stocks.
Micro factors: The average dividend yield of S&P 500 stocks is now 1.73%. The P/E for the S&P 500 is approximately 140. It averages about 20-30, implying a fair value for the S&P of about 400. By any rational measure stocks are grossly overvalued, courtesy of the Federal Reserve. The last time I checked insider sales were 40X insider buys.
Macro factors: intense competition from China, era of cheap money coming to an end, unprecedented levels of personal, business, and government debt, a banking system that remains on the edge of collapse, massive growth in government, increasing taxes and business regulation. I'm looking hard for a ray of sunshine, but I don't see it.
Precisely what does anyone believe will drive earnings growth in the future? The only way the stock market makes meaningful gains in the next decade is if we experience another round of '70s style inflation.
Separately, the graft, corruption, and incompetence in our financial system which was exposed in the last year is going to have a lingering effect. An entire generation of investors have been completely screwed by investing in stocks. If you are under 40 your returns on indexed investing have almost certainly been negative. If you are between 40 and 50 and you may have broken even; between 50 and 60 and you probably had a decent return, but nothing to write home about--you probably would have done better investing in nearly risk-free bonds. Cogitate on that for a while--in the aggregate the return to investors for investing in risky assets has been negative to zero.
No matter how you slice and dice the empirical data, America's experiment with stock market investing has been a complete failure for two generations of average investors. I'm a 45 year old attorney, white, pro-business conservative, owner of two small businesses, formerly Republican now Independent. I'm the flippin' poster-boy for the mutual fund industry. After the revelations of the past year I bailed out at DJIA $10,400. I'll never buy another share of stock or equity mutual fund in my life. If they lost me then they've certainly lost hundreds of thousands of other investors, and millions more will follow.
Bomber Girl: "Mad as Hell, might I suggest that you ask a businessperson who has ever done or tried to do business in China."
I've done business in China for nearly 30 years. I won't argue with the comment from Mad as Hell. The Chinese are pragmatic. I'm pragmatic.
Mad as Hell: Thanks for the insider view. I am also pragmatic as are my friends in business who found it more profitable and less frustrating to shift their business elsewhere. Glad to hear you are making money.
But do wear a mask.
Bomber Girl: "to shift their business elsewhere"
Business isn't "either/or"; it's "and." I do business in more than 60 countries. I make a profit in all of them.
Keith Bradsher of the New York Times, 9 December 2009 (Article title: "Recession Elsewhere, but It’s Booming in China"): "For more and more consumer goods, China is surpassing the United States as the world’s biggest market — from cars to refrigerators to washing machines, even desktop computers."
It's pretty silly to ignore that market.
You can't ignore China, of course, on any front, political or economic. That said, give me a good old democratic dysfunctional political economy any day of the week.
"give me a good old democratic dysfunctional political economy"
That's what we're in danger of losing. The "directionality" is all wrong.
I'm convinced -- and have been for awhile -- that Obama-Axlerod are very bad people.
"The only way the stock market makes meaningful gains in the next decade is if we experience another round of '70s style inflation. "
Oddly, the stock market seems to have been a flight to safety because of what you describe ... a bubble in the making?
If it weren't for the potential criminal penalties, rather than gold, I'd go out and buy a few bricks of cocaine.
What is money ... store of value ... easily transported ... universally recognized.
There's a movement to radically change California government, by getting rid of career politicians and chopping their salaries in half. A group known as Citizens for California Reform wants to make the California legislature a part time time job, just like it was until 1966.