Why I'm Not Worried About the Market

I am not worried about the big, bad sub-prime/credit crunch/weak dollar/inflation thingy any more. I used be be, but not any more. I've had my fill of the nihilistic thinking and I've sweat the complexities of this morass more than I care to admit, but it just doesn't have any effect on me now. Go ahead - drop another shoe.

I'm not worried anymore because I'm gradually becoming downright excited about the inevitable ensuing windfall and economic boom that will materialize out of this mostly psychological crisis. In the same way that a deep value investor steps up to buy distressed out-of-favor-assets at fire sale prices, the federal government can, and has already started to, exhibit confidence and authority by stepping up and making a market in this illiquid paper. It can quietly establish a U.S. version of the "sovereign" wealth fund with the "republic" wealth fund. Irony is everywhere, and what may appear to be a government bailing of our financial institutions will eventually turn out to be the other way around.

Like a tycoon drowning in debt, the holders of this paper are forced to sell their valuable but illiquid assets at ultra low prices and to say "thank you" for this kindly theft. This is where the value is and a tremendous transference of wealth is in the wing. This is essentially a tax that could never have been passed into law. It is providential. The government need not do to much with this "toxic" paper but let the majority of it "run off" to realize full face value over time. The low interest rates will assist to make sure that most of it blooms. The hundreds of billions in gains and the staggering cash flows from payments into our "republic wealth fund" could go a long way to solving the many under funded programs the government has or to reducing the national debt. The weakness in the dollar is either over or close to it.

The confidence and authority the the federal government can and is exhibiting with this investment (in what is essentially the cash flows on the debt secured by our own real estate) will put a floor in the dollar. The heavy metal poisoning that the gold bugs use to usurp the power of confidence and the principles of authority with that of primitive idolatry will start to diminish over time.

Furthermore, inflation is a lagging indicator of a slowing economy. Free market principles will ensure that supply will meet demand. The inflation in the agricultural sector is a good thing for now. The long depressed Ag sector is now nicely profitable and is investing and upgrading their plant and equipment. It will ensure that we will have the ability to handle higher demand as it comes. The Ag sector has needed this pricing power for quite awhile now. It is a very stabilizing phenomenon over time. The oil trade? Well, there has been an awful lot of investment in the industry. There has been an awful lot of drilling going on. There have been some pretty big discoveries. We have seen some fairly large inventory builds. The economy is slowing after all. And of course, there is that issue with the dollar.

Disclosure: Author holds long positions in some of the above-mentioned securities.

Comments

[flatman]

This has got to be a Dennis Kneale pseudonym. The only thing left out was reality.

[Tom Kat]

No, no, no! It's a pseudonym for Alfred E. Newman of "what, me worry?" fame!

[GKM]

LOL Good comments.

Having faith in the "confidence and authority of the federal government" seems down right naive or worse. People always try to call a bottom in a bear market hence no markets go straight down. This makes for great trading opportunities. Keep up the good work.

By the way, Denise (Polly Anna) Kneale started to use the "R" word this week so I knew that we were due for a bounce. Once he starts saying we're headed on a new bull run, I'll re-enter my shorts.

[jbmaria]

"The heavy metal poisoning that the gold bugs use to usurp the power of confidence and the principles of authority with that of primitive idolatry will start to diminish over time."

Yeah, everything "diminishes" over time,I need to know when.
With stocks 'early" is just "wrong".

[tessant]

last time i checked, you were supposed to buy stocks when there is blood in the streets...like now

scott
growthportfolio

[SavCD]

I believe that the Fed is trying to create a controlled level of decline in the dollar, not too fast not to slow. What is clear from looking at the GDP data is that the key to future growth is no longer the U.S. consumer. It is the foreign consumer. The declining dollar is the key to bringing about growth by slowing mports, and expanding exports.

[flatman]

Seems to me we have the choice of a recession which will control inflation or we print money to avoid the credit issues and unleash the inflation genie. Either way pollyanna is not a good investment strategy

[LoyolaTrader]

I actually agree, for the most part, with the article. Warren Buffett's best advice: "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful."
Everyone here sounds pretty fearful. I've increased my portfolio by 20% since this January. even if losses persist for the next 6-9 months before a turn-around, i'm getting a huge discount buying some solid performers in both domestic and international markets. Everyone loves to jump on the bandwagon as soon as the first person yells recession, and then goes on to yell about how its going to be the worst economic conditions since the great depression, but everyone forgets the self-actualization theory...the phoenix rises from its own ashes, and so often does the market. It's all about being able to determine at what prices do equities look so cheap that they actually become attractive to investors, and then everyone begins to rally behind the first wave of purchasers.

[ballsschweaty]

Glad to see that you're Losing Money and Feeling Good About It.

[sdavid0419]

This would have been the perfect scheme (your novel) except the target wasn't the richest of the rich. From what I've read the hardest hit was the NY teachers pension fund. I was thinking similar to you but my reasoning was the very riche were becoming bothered by the nouveau rich usurping their playgrounds. Do you know what its like telling a bourgeois that you can't get him a super bowl ticket at any price? The way I'm seeing this is the upper middle class is taking the hit on this one. I'm kicking myself in the ass for buying a house I could afford when all I had to do was buy my mansion and let the government bail me out.

[LoyolaTrader]

Everyone is going to be losing money in this market unless you are extremely lucky or liquiditated all your assets into cash before january. but instead of selling off my assets at a loss, i'm increasing my shares at lower prices. i know i'll feel good about my decision 6-9 months from now, even if i don't feel so good about losing money right now. not everything is about the short term.

[dsrtwriter]

I agree with the comments about the Ag sector, although it is probably becoming overpriced.The irony of the whole ethanol fad is that it is simply transferring the increased cost of petroleum fuels in the form of increased food prices. I bought a five pound bag of flour this week for $4.41.The same brand was $2.25 at the same store last Fall.No free lunch in alternative fuels,that is for sure.

The tragedy of government's love affair with alternative fuels is that it ignores the reality that petroleum products are actually more cost effective, when all costs are taken into account, and also pretty darn clean burning with current technology. But I would not want to confuse the global warming people with the facts.

Fertilizer is booming as farmers dump phospates on the land to grow crops for ethanol, and the "dead zone" in the ocean off the Mississippi delta grows.So just a transfer from theoretically less greenhouse gases to phosphate destruction of sea life.

Regarding the declining dollar, and its supposed advantage for us in terms of exports, I have to lump that in with the theoretical advantages of free trade (which has not helped our trade deficit with China) as two of the favorite chesnuts of economists. As a top student in Economics years ago, I parroted back this stuff to the professors, since it was "obviously" correct.

Thirty years of experience later, it is more clear to me that a declining currency is more reflective of a country heading for second or third world status. Exports from Bangladesh have also been cheap for years, as their wage rates and currency were cheap.

We have lost our industrial base to China as we "graduated" to a more "sophisticated&qu... service economy, and our dollar has dropped. All good things according to economists. I guess we were supposed to retrain fired manufacturing workers to become rocket scientists, but too late, since the Chinese can do that also , thank you very much.

Sorry for the rant, but the truisms of the advantage of a cheap currency and no trade barriers have not proved out over time. Free trade has made goods cheap for "the consumer", at least until that American consumer's own job finally evaporates and goes overseas or to Mexico.Sure, tariffs were bad in the old days, protecting "inefficient"... industries. But when we have free trade we have just exported intolerable working conditions and toxic waste issues to our trading "partners" as we all wait for our pink slips at work.

Oh, but I forgot, Barak Obama is going to give us all jobs rebuilding the roads and infrastructure,finance... by the government from some fictional tax base.

I feel much better now.

[Dana Cole]

Your article makes a lot of sense to me.
Obviously, the time to borrow money was back in 2003. The time to buy those who loaned it is either now or very soon.

[blah-blah]

Well said...I am so bored of the 'another shoe to fall' stories. People are still writing doomsday scenarios(Barry Ritholtz is a prolific writer in this area) that will never happen.

Who the hell cares anymore? Anyone who can be scared by this has already sold - me? I'm more than happy to take their scary financials off their hands

[gaucho]

Keep smoking that good stuff!!! Keep singing don't worry be happy as the plane loses power and the pilot is saying his last prayers. Hey fool if the market is going down find the dogs and bet against them. Don't fight the market it has a long way to go before bottom. It isn’t going to come back in 1 year like it did in the past.
This crap has been building for years and will not just go away any time soon. The housing market needs to fall at least 20% more which will devastate the wealth effect and place so many houses on the markets at below construction prices. The housing industry will be devastated. The default credit swaps are 45 Trillion and the Derivatives market is over 400 Trillion about 14 times the worlds economy. This is not the 160 Billion S&L crisis your daddy talks about.
The fed is acting like a cheer leader while passing out life vests to the banks. All the time saying, ignore reality and just listen to what I am telling you.
WE ARE IN DEEP SHIT!!! It aint going to get better no matter how much the FED jawbones the problem. No matter how many times some "anonymous” source says that a solution to ABK/MBI is going to be announced in two days. It has been two months and where is the solution?? Oh yea next week at the latest;) Watch closely as I shuffle the CDO/derivative insurance pea to another company and the problem just disappears.

And before you bash gold take these points into account.
1. The US is not the only player in the world economy like in the 1980s.
2. China is the largest consumer of gold now.
3. China has inflation of 7+%, and Indian Inflation and European inflation and US inflation and Dubai/Middle East inflation.
4. Gold and Silver ETFs in US, China and India and others to be announced.
5. China and other countries moving from the dollar to other reserves including gold.
6. Gold production expected to fall 1-4% over the next two years a demand soars.
7. GLD ETC is now the 3rd or 4th largest gold reserve in the world.

Just because the US M3 money supply is growing @ 16% plus this year not including the billions being dumped into the banks and the estimated 1 trillion the FED will pump into the economy this year excluding the expected 500 Billion deficit. And the housing values continue to fall as a hard asset. And oh yea the expected $4.00 per gallon of gas this summer. Inflation, What inflation, we got no Inflation, aint gotta show you no stinking Inflation.
NOW why would you want to go and buy gold?

[LoyolaTrader]

I agree with Gold being a great buy right now. I don't agree with the real estate market plummetting another 20%, nor do i agree that we have "long way to go before bottom". everytime a recession comes along, it takes years to repair because of this or that, and its much worse than the last recession or the last crisis. but somehow, we manage to survive, don't we?

[E.D. Hart]

Read "Black Swan" by Taleb. He pretty much demolishes the argument that "we always manage to make it somehow, so this wont be that bad". A Thanksgiving turkey reason that each day he is fed by the farmer he is safe because he has always been taken care of before. THe turkey has no idea of his fate. Ok, just one of many examples in the book.

In fact, prior to WW1, people were dancing in the streets in London (AND US) as war was declared, with no concept of what the war would extact from the country in blood and treasure. Same for the US civil war. The markets didnt react harshly at frst.

Countless examples exist of exogenous shocks that people seem to to deny, then ignore, then dig in to wait out, thinking it can't get any worse, and then finally seeing each year getting worse....for years. (Take a look at Japans recent market history--Nikkei still hasnt recovered from 1989)

We are witnessing the end of the US Dollar hegemony and the unwinding of 30 years + of profligate monetary policy. To say it is all gonna be dandy because it always works out shows little understanding of monetary history. It may be devastating, or it may simply be awful, but it makes sense to hedge your bets and ask "what if Im wrong?"

Well what if Im wrong? If Im wrong and the housing, financial, and stock markets rebound in a year or two, and we all go back to happyville, then I didnt really lose out because my insurance policy is GG, SLW, XTO, PAL, XES, and other stocks that are about 50% of my portfolio. The rest is blue chips.

Buy and insurance policy and hedge your bets, and ask "what if your wrong?"

[Sixpackistan]

This reads like a Nostradamus quatrain.

[LoyolaTrader]

i do have a good understanding of our economic history (and please, don't compare the US economy to Japan's), i was using the whole, somehow we manage, as a way of avoiding writing a long paragraph. we aren't in wwI or II or the civil war either. i agree, hedging your "bets" is a good idea, its always a good idea to keep a diverse portfolio that will keep you afloat when the economy goes bad, and its no worse and idea to hedge against the greater risk here that the economy continues to plummet. but stocks are just a complex form of gambling, and here, i will take the bet that the market rebounds. yes, the U.S. dollar is getting weaker and weaker against international currency to the point that other countries are replacing the dollar as their reserve currency with the Euro or even gold. but anyone who has taken even a simple lecture on international financial economics knows that a country's currency's performance is not an indicator of the country's economic performance. the weakening dollar may or may not lead us into a greater depression, but i'd bet that it doesn't. certainly no one is dancing in the streets today ignoring the problem, and this post is not ignoring the problem either. I'm simply saying that my bet is that we rebound, and I'm playing my portfolio to my bet. When all is said and done, the U.S. economy is still the largest economy (by a long shot) in the world, and will be for the next 20-30 years barring phenomenon. just like every other crisis and bubble burst in the past haven't crippled us, neither will this. recovery is not a question, it's a definite. the question that people are betting on (or against) is "when do we recover, and how fast?" You could be right, it could be extremely devastating and take more than 5 years to fully recover from this, or i could be right, we could be on the path to recovery within the next 6-9 months. either way, when all is said and done we will still be the largest economy in the world.

[E.D. Hart]

LT--Good points. I dont pretend to know what the future holds. I try to hedge both ways, with commodities, currencies, and quality stocks.

The reference to Japan was that NO ONE PREDICTED IT, AND AFTER IT HAPPENED, THE CONSENSUS WAS THAT IT WOULD WORK OUT IN A COUPLE OF MONTHS, THEN A COUPLE OF YEARS, THEN A COUPLE OF DECADES. (and still not recovered).

Ok so were AMERICANS were smarter, bigger, faster, stronger---it cant happen here--seems to be the view.

It was a reference to human psychology, and how the improbable is discounted, denied, and gradually accepted. The reference to war was the same--people dancing in the streets and the markets reacting positively at first, no idea of what the true shock that lied in wait.

The US housing market has wiped out $3 trillion worth of homeowners equity, and reliable sources indicate that we will likely see another $3 trillion in homeowner equity destroyed, just as baby boomers are hitting retirement.

An article in the WSJ today, tucked away in the back indicated the harmful effects of inflation--that by the end of the 70'S the average PE multiple had fallen to 7. That when iflation increases a percent yoy, the corresponding return in markets is miniscule. Others point ot the corporate margins being at all time highs, and can only fall.

Falling margins, falling PEs, falling homeowner equity--its a perfect storm. (odwn the road next year--higher taxes, higher interests rates) It spells lower markets for some time to come. My own prediction is (since predicting is free) that the DOW will hit 9000 sometime before the end of 2010, when we start to dig out of this hole.

Your right--we will survive.

We will be the largest Economy (until 2035) , but maybe not the best run (See Canada, Singapore) nor the highest return (Brazil), nor the most efficient in the use of resources for education and healthcare (two areas we spend way more than other developed countries on average, with much worse results--Im an educator).

Im optimistic for the future--we will find a way through this crisis, but the shock is much bigger than what people are positioned for.