15 Thoughts on the Markets 16 comments
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1) Where are we? Is the equity market cheap or dear? Personally, I think it is cheap, and though it might rally in the short run, it could get cheaper. When the financials are compromised, all bets are off. Here are some articles indicating that things are cheap:
- Steve Leuthold (what a guy!)
- Wall Street Journal
And, not cheap, consider the arguments of this humble student of the markets. He considers survivorship bias and war as factors that investors should consider. I agree, and I would urge all to consider that wars often occur as a result of economic crises.
2) The trouble is, quantitative finance is tough. We don’t have enough data. Our models are poor, and until recently, often reflected two major bull cycles, and only one bear cycle. My view is that the equity premium is more like 3% over the long run, and not the 6% bandied about by careless consultants.
3) During the “great moderation,” I argued over at RealMoney that volatility and credit spreads were too low, and would eventually snap back. Okay, we are there now. Volatility is high, and so are credit spreads. The brain-dead VAR models used by Wall Street have been falsified again. Quantitative investors have gotten savaged again; it only works when implied volatility is flat/declining — it is an implicit credit bet.
4) This is a global crisis. Where is it appearing?
- The Gulf States (notable since they have had huge trade surpluses)
- Emerging markets, especially Ukraine
- Japan (and again)
- More emerging markets
5) As I have mentioned before , the IMF, previously seeming irrelevant, has a new lease on life. But how much firepower do they have, and will countries in crisis send them money to aid foreigners?
Consider their new plans for a short term lending facility, and the Exogenous Shocks Facility. They will have a lot to fund in this environment.
6) Might government programs to guarantee bank deposits have caused a shift from stocks to bank deposits? Possible, though for every seller, there is a buyer.
7) How do we pay back what we borrow? Who will borrow more from us? Those are the great unanswered questions as we attempt to bail out many troubled entities. I’m a pessimist here, and think that we will have higher long rates as a result, and that “Bernanke” will become a cuss word. (Among the cognoscenti, only “Greenspan” will do as a proper insult.) On the despondent side, will the US default in 2009? Doom-and-gloomers are always early, and ignore the flexibility in the financial system prior to failure. I see default as more of a 2017-2020 issue.
8 ) Uh, let Lawrence Meyer pontificate. There is nothing good about a zero Fed funds rate. Let him wax grandiloquent about Japan over the past two decades. Consider how low interest rates destroy money markets funds. Consider as well how much low rates destroy saving, something that we have had too little of.
9) In an environment like this, every M&A deal is open to question. M&A is credit sensitive, and higher volatility impairs the flow of credit.
10) I don’t think that GAAP mark-to-market accounting has had a material impact on this crisis. True, many accounting firms have interpreted mark-to-market as mark-to-last-trade, but that is not what SFAS 157 specifies, and firms can ignore their auditors (with some risk). The truth is that the firms that have failed choked on bad balance sheets and inadequate cash flow. It doesn’t matter what the accounting rules are when a company is running out of cash. Cash is impervious to accounting rules.
11) Want a closer view of the Fed and politics? Read this piece at The Institutional Risk Analyst. While at RealMoney I espoused a view that the Fed was more political than economic. This article confirms it.
12) How do I view Greenspan’s apology?
13) At a prior employer, we often commented that credit risk in credit cards appears late in the credit cycle. Well, we are there now. It is seemingly the last form of credit to default on. In this environment, one can lose their home, but losing financial flexibility can be bigger.
14) The FDIC can modify many mortgages, at a cost to taxpayers. It could cost a lot, and many people who made dumb decisions could be bailed out by the prudent.
15) If John Henry were alive, he would be smiling. Let humans make markets, and not machines.
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This article has 16 comments:
Yes, saying the market is cheap is one of the dumbest statements anyone can make. They deny the efficient market theory and they assume they have a crystal ball of real facts. In fact, no one can say where earnings are headed by this time next year. If everyone is making 50% less profit then gee, the market is more expensive than it was a year ago when the market was at 14,000.
They were so hampered by rampant poverty, over-population, non-democratic government types, and massive dominance of the US, Japan and Europe in the global trade during those trying years.
But they were able to surmount all odds and become the emerging markets of 2002 to 2007 as we know them now.
I simply cannot understand why the US is so downright pessimistic.
Perhaps simply most Americans have never experienced poverty and hardship most of their lives.
Start beaming the developing countries' struggle during their "darkest" years to all TV stations in order for the west to be able to place things in proper perspective.
You post an awful lot of links so I only comment on a few of your 15 points.
Point 2) As a statistian I think too you cannot have enough data, with interest I read your 3% estimation on long term equity return. Lets hope your 3% is without inflation...;)
Point 3) I know the VAR risk models only very recently, to be honest I only found them when I smashed the option price mechanism that has exactly the same faults as the stupid VAR models.
As a wise man once said: You can use Value-at-Risk to point you to some risks but this does not protect you from the risk of using that model.
Point 5) Indeed the IMF firepower is a joke, only 200 billion and another 50 billion is just a joke. There is one country that is to blame the most for these far too low reserves at the IMF: that is the USA.
Not her government, those folks are braindead anyway, but the US economists that win Nobel prize after Nobel prize and started thinking they were clever...
Point 7) How do we pay back what we borrow?
This is a very new question inside US economical thinking, until now a refi was the answer to stupid questions like that.
Refinancing is deeply rooted in the USA, we in Europe think that is weird.
Point 8) Indeed there is nothing good at a zero FED rate, but all those years when stock P/E ratio's were 'historically high' were only caused by too low FED rates.
The FED simply does not have what it takes to preserve a fiat money system; inside a fiat money system the fiat money should have some kind of value and that can only be done by relatively high rates.
Point 10) Until now the US financial sector has used the mark to market rule also for writing off her own debt obligations. My estimation is that now it is over 200 billion US$.
Needless to say it is weir to write off on your own obligations; it is bad for your credit ratings but the rating agencies seem to miss that point.
Point 11) Readers of seeking alpha should also have a bookmark to the Institutional Risk Analyst. Those folks often produce good stuff.
Point 14) The FDIC and do a lot but her 'fund' is just one of those fake USA government funds. No real (fiat) money in it but only Treasuries.
Again: The FED (and the US Treasury) simply do not have what it takes to preserve and nourish a fiat money system.
All actions by the FDIC are done with tax payer money & oh oops... There is no tax payer money because the UDA has a deficit!
Oh lets sell more Treasuries to these dumb Chinese and Japanese and the mentally handicapped Europeans! It is a super safe investment anyway!
So far my short comment.
The FDIC can do a lot but her 'fund' is just one of those fake USA government funds. No real (fiat) money in it but only Tresuries.
Again: The FED (and the US Treasury) simply do not have what it takes to preserve and nourish a fiat money system.
All actions by the FDIC are done with tax payer money & oh oops... There is no tax payer money because the USA has a deficit!
Oh lets sell more Treasuries to these dumb Chinese and Japanese and the mentally handicapped Europeans! It is a super safe investment anyway!
Because if the world goes under, the pessimist still dies;
But if the world does not go under, the optimist profits while the pessimist still skulks.
Fairly easy trade off here.
Then few years pass by, the sun keeps on rising and people adapt, and the game starts all over again.
They're looking for other banks to buy, not us citizens and businesses that need to borrow.
Bailout Grade: F - Terrible Idea from the start, the US has always risen from the ashes in every crises. Some businesses and people have to suffer. That's the name of the game if you want to live in this great capitalist country.
I will be following this crisis intently on my site, because we tend to forget about past problems we've created. It's time to learn our lesson.
so what was exogenous about too much leverage and risk??
I'm a sucker for anything that praises Paul Volker.
This quote is priceless (probably because I long suspected it):
I love Alan Greenspan for his clarinet playing and his winning ways, yet I despise his artifices. He shows you how impressionable and ignorant the new media are because he beguiles them. He sprinkles fairy dust over their eyes and they become bemused by the idea that he knows everything. Whereas, in my view, Alan is a lousy macro economist, a poor monetary economist, and is no kind of forecaster. What he is truly is a schmoozer and most of his life he has spent schmoozing. Alan has made the most out of a career of schmoozing.