This was copied off the Prudent Bear Chat board and posted on a board in China in August 2007. It appears it is about to disappear and I am saving it here. I remember writing this in some context and it was clearly written before Bear Stearns went broke. it follows.......
First of all, I think you need to get your eyes off subprime.This is a scapegoat and nothing else. It just happens to be the first guy at the theoretical poker table I mentioned above to run out of chips and they didn't bring more. Truth is these are some of the better loans out there, not the worst. They just happen to be the worst of the mortgages, but there is some collateral behind them and something to get in the end, even if it doesn't get close to 100%.
What happens in credit? First of all a paradoxical situation occurs. When a credit line is put into an account, both the bank and the borrower are liable. Lets say the bank gives the borrower $10,000 in his account.The bank owes the borrower and the borrower owes the bank. There really isn't any capital involved here, as it is additional liquidity, not capital. The borrower might have put up collateral and that is the capital, but it can only be liquidated, not turned into the loan. Once the borrower spends the money it enters other accounts. The bank is now liable to some unnamed depositor or may in fact have to cash a check,which he pays by selling securities to the Fed. Again, we have 2 entities liable to the depositor now. But, the bank is not only liable,but is owed an amount even greater than he is liable for. On a daily basis, interest is added to the amount created out of thin air, making the amount due greater than the AMOUNT CREATED. Thus the entitiy that owes the debt is also owed the debt.
What really transpires here on a short term basis and to a greater degree ona long term basis is the banks liabilities begin to look real. So do their assets, meaning this credit begins to take on some kind of net worth identity that it really doesn't possess. It really doesn't exist in sum, but is nothing more than liabilities shown as assets. The asset is the net worth of the bank and the collateral, which at the end of a credit cycle is generally inflated well beyond real value. Thus it eventually comes down to the worth of the lender and at what point is that impacted.
I was once exposed to a legal argument that a bank cannot lend its liabilities. It was backed up with one court case after another stating just that fact.So, in order to be lawful, a bank cannot make a loan in excess of its net worth. It cannot put out to any customer more than it can guarantee. If you look at the diagram I started out with, that the bank starts out as debtor and creditor and continues to hold that spot until the money is repaid, the principal is clear that it must have enough assets of its own to pay to the depositors any losses its lending might sustain. This is the crux of the current problems that are so far beyond what is being talked about here and so far misplaced in something called subprime mortgages that few can see what is about to transpire.
Lets start out with what makes banking work and eventually fail, the no mathematical solution of banking. Banks are generally trying to expand their portfolio for good reason. It is the only way over the long run they get their interest or acquire the default property instead. The older system was more elusive for bankers because people knew what the money was, the gold. But, the current system is really no different than the older system, except 12USC95a,which was adopted by Roosevelt denies the depositor access to his gold or for that matter the currency. This trading with the enemy act, which declared war on the US public standing in the way of banking, is now the basis of what many of us see as a facist arrangement between Wall Street, the Fed and the US government. It is an arrangement that is bound to enslave the people of the US and most likely the people of the entire world, if the reach can be extended.
In any case, this act together with the no mathematical solution, has made bank credit the money of the world today. This is as true in Europe, Japan, China and the third world as it is in the US. Because the banks are lending at interest what is considered money today, the borrower always owes more than can be paid, as one balance grows exponentially and the other just sits there. You can bet on a given day without default that the banking system is owed more money at the end of the day, net than at the start of the day. It doesn't matter how much repayment is done on a given day or how much lending, the fact is an amount multiplied by 1.08 is greater than the same amount multiplied by 1.03. There are other factors here, but this is the main one.
But, what transpires over time is the bank goes from owing this money in a round about manner to the borrower who owes it back to the bank to owing the money to unnamed depositors who received the credit from the borrower. Here is where the problem eventually comes back to bite the banks, the initial holder of the credit and the eventual holder of the credit are not the same people. The other problem is that if the borrower fails to get the deposits away from the eventual holders, they have no ability to pay the bank. Thus, the bank becomes liable on its own or it has to continue the shell game the best it can,hoping when it is time to call the pot, the hand has worked out.
What do the banks have forcollateral? Titles, that is what. Courthouses exist as much for bankingas anything else. We could do very well without county clerks if not for liens. Of course the taxing authorities might have a problem. But,the titles only go so far, in part because in this stage of a credit cycle, the price of titles has been bid up so high by those that still have money on the books that their value is really elusive. But, this escalating collateral value gives additional credit to a system that has to have it and in some fashion, allows for higher prices for all assets. Remember, the bad debts are being rolled now in a game of double or nothing where the dice are supposed to eventually bail out the last bad bet.
Now comes this idea that risk is gone. I keep harping on this in the stock market when some ass brings up the idea of buying stocks. I get this crap that I don't trade, but if I never traded, I wouldn't be here. If I didn't understand something about risk and return I wouldn't be here, but be posting on some bull board some pollyanna news. The idea that risk doesn't exist is behind stocks. We never saw a 3% dividend at any point in 2002. In fact, it barely reached 2%. Never in history had the dividend rate on stocks fallen below 3% without some kind of reprecussive move against the holders value. Here it is in our 12th year of uninterrupted dividend yields under 3%, something that had never been sustained for more than 2 months straight at any time previous. The risk is seen as inflation,so the return on a portfolio of stocks can now be accepted to be under the return on treasuries. Everyone is betting on inflation to destroy the value of bonds and keep raising the price of stocks. They forget that corporations can go broke in hordes.
Then we come up with these financing models. Well, the whole damn world has adopted them.What do they mean? Well, they mean that the smart money has gotten on the same side of the trade everywhere, meaning the dumb money is left to bail them out. The risk they have avoided is now in their corner and they are all huddled together as academic geniuses with vicious creatures locked in the room with them. They hold all the positions, so they now hold all the risk. It was okay when this type game was the exception, but the entire industry has adopted it and the risk that was shifted for a fee is now FULLY OWNED. There has been no one paying the fiddler and we are now seeing people laughing at him, like he don't have a 44 magnum in his case that he is about to brandish and demand payment. The party goers spent all their money on booze and goodies and now the fiddler is going to be paid, probably with Rolexwatches and diamonds.
The losses have been going on. The more deposits created, the more losses in the pile somewhere. The more assets are bid up, the more a few people decide to take their cash and get on the sideline. The more cash that resides on the sidelines, the more the debtors are deprived or should I say in a better sense, denied access to what they need to extinguish the debt. Remember the bank acts as surety and also is the true debtor. What is the bank holding?
Doug (Noland) has done such a fantastic job adding to the knowledge I already possessed and the more I have read of what he writes, the more I find I don't know. I hear things like the carry trade, but the carry trade can be hedged and doesn't need to be unwound. I don't see Doug write much about that. What I see him doing is drawing a picture of this old west style of lending that seems to go on without hesitation. What I do understand is finance and accounting and compound values, which history has proven cannot be sustained (take 1.01 to the 2000th power and seewhat you get and take 1% of that figure. That is how much a penny would have compounded to since the birth of Christ. Ask yourself where it all went?). I also understand that the borrowers and the depositors in a bank are not the same and that the value of collateral is fleeting.
There are some arrogant people here. One was talking about buying a $900K house for $300K when it gets there. There is the delusion that we are the ones that are going to have money left to pick this stuff up. If the populace shifts to gold, bet is the bank credit not only holds upin value, but increases relative to all assets. This is an uncertainty that anyone who has a clue what they are facing knows they don't know.Few realize how big a role the dollar and all this lending has played in liquifying credit around the world and what a collapse in banking and lending in the US would do around the world. I think the action of the past week has already shown the weakest links aren't in the US, but in Europe, where they have their own real estate bubble and subprime mess, not to mention a lot of croney capitalism and funny Eastern Europe deals.
I read it somewhere, but we are about to find out who is broke. I think the names are going to shock the general public and a lot of people on this board. Wall Street is likely to holda lot of casualties and the big 3 US banks are going to have to either hold on by the skin of their teeth, operate in insolvency under secret permission of the government, ala Japan or go broke. The fed fund liabiities of Citicorp as reported by Doug were in the stratasphere.This means they are among the biggest credit crammers and holders of uncollectables. It also means they are going to impact the entire banking system. I think BAC and JPM are both in the tank. These 3 makeup a good part of the American credit machine. Lets see how smart the US is in solving their Japan type problem here and if the politicians have the guts to close their handlers? As far as Wall Street? Who have been the high flyers? GS, Merrill, Bear Stearns? The biggest flyers are probably the ones up to their necks in alligators. I am watching the prices on the Dow, with 20 point fluctuations round trip in maybe 90seconds. These guys have a weak grip on the wheel this time and a panic could wipe some of them out overnight. I played some wild markets in 1998, but I didn't see the 2 or 3 second changes in the Dow quotes I am seeing here. Sure if they were headed into a certain direction like the ramps into the close, there were some big changes, but these 4 to 8 point clicks in no determined direction weren't going on. These guys are attempting to shake this market to their advantage and I think they are wounded. They are talking about these outfits selling at low multiples to forward earnings. The idiots on CNBC are trying to let these guys sell their options, as there may not be earnings, but huge losses. The current picture throughout the banking and financial system can be compared to Enron situation, where what has been hidden in the closet is about to come out. Didn't Enron report fantastic profits right up to the last quarter?
It is all a game of who owes who and who can pay? We are about to deflate and it will take more than the Fed providing funds for us to inflate. Easy credit is about to go out the window and someone on the political scene is going to be blamed for what is about to happen. What is about to happen is a house of cards is about to fall around the world, the boy has his finger in the dike and it is drown or pull it out and drown.
Thursday, February 19, 2009
Tuesday, February 10, 2009
Buy the Rumor, Sell to Who?
Today the Dow fell 380 points and the SPX was down over 40, blamed on Congressional testimony by Timothy Geithner and a few other things. This is more of the same that has been going on for some time, really nothing at all. Making money in the market the past 20 years has been too easy.
Buy the rumor, sell the news used to be a real play in the markets. It was a speculator ploy that the news would provide the buyers to sell out and take the profits for the next trade. Now, it is buy the rumor, sell to who because the who's that can buy have already bought. This is contrary to the past and one of the reasons this bear market is going to break more speculators than any in history. Not speculators who got trapped on the top, but speculators that are continually hit on the way down. The bag passers become the bag holders as they acquire stock in an attempt to pass it onto the next guy on the next hot chance.
We have had the greatest set up in history for this bear market, one of the least volitile periods ever between early 2003 and early 2007. There was hardly 2 really bad days in a row during this entire period, which almost doubled the SPX in 5 years. Put together with the prior decade where the market losses were never very permanent and we have a market where many are looking to step in and find a buying level that will be left behind in a few weeks, never to be seen again. The 2000-2002 bear was really one of the worst in history, but the winners appeared to be those that never got out and missed the next 5 years.
There is a misnomer that money gets out and on the sidelines when the market goes down, that it is sold down by money being pulled out. This is far from the truth as the money taken out by the seller is replaced by money paid in by the buyer and the money on the sidelines is the same. Also, the SPX is worth in excess of $8 billion a point, making the loss today around $336 billion in that index alone. This is around the amount of money that was being put into mutual funds around the year 2000 annually, so one years deposits were swallowed in a day. The losses keep piling up and faith in the market gets smaller, as those that stayed in the last time now have a loss to show for their efforts.
I believe the big thing is that companies aren't as cash flush as has been advertised. Pfizer made a takeover bid for Wyeth and the effect was to devastate Pfizer due to the size of the cash deposit needed to do the deal. There was a time this money would have been used to buy back stock, giving liquidity to speculators that were buying rumors and selling news. This money isn't there any more and the effort to get out in front of the news leads to lower prices over and over.
As the bull market continually gave longs dips to add to winning positions, this bear market is doing the same for big money shorts. The buyers buy and then they attempt to sell while bears are adding position. It was a definite that the Obama election was going to rally the market, when upon it being final, the market fell some 2000 points in a little more than 2 weeks. It rallied from there and the rally was supposed to carry over into January and get a boost from the official installation of Obama. Now the next stage is the bank bailout and the stimulous package. A friend of mine had been following a market direction service and getting good results. He told me at the beginning of the year they were calling for a nice rally to last several days. They changed their direction and were right again, but then around January 20th, they called for another rally, saying it would gather steam as news about the package passing and all that went on. I don't believe these guys, because they are using bull market readings to predict the actions of an all time bear market and that won't work. The rally lasted all of 3 days and Janaury finished with the worst loss in history for January. That makes every month down since August, even though they told the entire world that October 10th was bottom. So, October, November, December, January and now February have a good chance of being down after the bottom is in.
Buy the rumor, sell the news used to be a real play in the markets. It was a speculator ploy that the news would provide the buyers to sell out and take the profits for the next trade. Now, it is buy the rumor, sell to who because the who's that can buy have already bought. This is contrary to the past and one of the reasons this bear market is going to break more speculators than any in history. Not speculators who got trapped on the top, but speculators that are continually hit on the way down. The bag passers become the bag holders as they acquire stock in an attempt to pass it onto the next guy on the next hot chance.
We have had the greatest set up in history for this bear market, one of the least volitile periods ever between early 2003 and early 2007. There was hardly 2 really bad days in a row during this entire period, which almost doubled the SPX in 5 years. Put together with the prior decade where the market losses were never very permanent and we have a market where many are looking to step in and find a buying level that will be left behind in a few weeks, never to be seen again. The 2000-2002 bear was really one of the worst in history, but the winners appeared to be those that never got out and missed the next 5 years.
There is a misnomer that money gets out and on the sidelines when the market goes down, that it is sold down by money being pulled out. This is far from the truth as the money taken out by the seller is replaced by money paid in by the buyer and the money on the sidelines is the same. Also, the SPX is worth in excess of $8 billion a point, making the loss today around $336 billion in that index alone. This is around the amount of money that was being put into mutual funds around the year 2000 annually, so one years deposits were swallowed in a day. The losses keep piling up and faith in the market gets smaller, as those that stayed in the last time now have a loss to show for their efforts.
I believe the big thing is that companies aren't as cash flush as has been advertised. Pfizer made a takeover bid for Wyeth and the effect was to devastate Pfizer due to the size of the cash deposit needed to do the deal. There was a time this money would have been used to buy back stock, giving liquidity to speculators that were buying rumors and selling news. This money isn't there any more and the effort to get out in front of the news leads to lower prices over and over.
As the bull market continually gave longs dips to add to winning positions, this bear market is doing the same for big money shorts. The buyers buy and then they attempt to sell while bears are adding position. It was a definite that the Obama election was going to rally the market, when upon it being final, the market fell some 2000 points in a little more than 2 weeks. It rallied from there and the rally was supposed to carry over into January and get a boost from the official installation of Obama. Now the next stage is the bank bailout and the stimulous package. A friend of mine had been following a market direction service and getting good results. He told me at the beginning of the year they were calling for a nice rally to last several days. They changed their direction and were right again, but then around January 20th, they called for another rally, saying it would gather steam as news about the package passing and all that went on. I don't believe these guys, because they are using bull market readings to predict the actions of an all time bear market and that won't work. The rally lasted all of 3 days and Janaury finished with the worst loss in history for January. That makes every month down since August, even though they told the entire world that October 10th was bottom. So, October, November, December, January and now February have a good chance of being down after the bottom is in.
Saturday, February 7, 2009
This government reminds me of 1974
The economy is different, but the government actions of the present remind me of the mess that came out of the oil embargo recession of 1973-1975. We are in an entirely different game here than then and the likelyhood of high inflation I believe is less, but the idea that its potential be ignored would be sticking your head in the ground and ignoring the obivious.
There were different pressures in the mid 1970's than there is today and I believe the economy went down for different reasons. In the 1970's we had a confluence of things all come together at once. We had the boomer generation moving into the workforce, the great society exerting its strangle on government expenditures, the debasement of the dollar, the end of the Viet Nam war, commodity cartels and massive world bank and third world nation loans by western banks. These all came together to hit the American economy at once. Plus, there was the Nixon impeachment, the crippling of the executive, which exposed the US as weak at the time.
I don't believe the financial position of the US government was any worse in the mid 1970's than it was going into this current mess. If anything, the trend growth of social expenditures has eased and even to some extent reversed from what it was then. There is more pressure on the government due to an aging boomer generation and its potential impact on Social Security and Medicare, but there is less present threat militarily than there was then, not that it will remain that way.
What happened in 1974 to 1978 left the US economy in shambles, at least on a fiscal basis and it had to be corrected. We had the swing of congress to the left from a more centrist position and the election of Jimmy Carter and government spending went from out of management to out of control. An inflation induced recession was met with an inflation inducing package of government stimulous that resulted in interest rates of over 20% for the prime rate. If the Volker legend is to be believed,it took 10 years to get over the mistakes of the 1970's.
There are simularities to the 1970's here, but there are also differences. What is hard to guage is the influence of the around the world indebtedness of the US. There really isn't any history to reference as to the driver of world demand being a debtor, contrary to thousands of professed expert opinions. This is one of the wildcards, but it is a wildcard that will come into play if the current administration acts as if this new debt is meaningless. This factor cannot be overlooked, but it can't be stared at through magnifying glasses as the only thing to watch either, as some are doing. The role of the dollar is more a role of collateral for trade than it would be if it wasn't the reserve currency and the biggest danger is if commodity producers, namely OPEC decides they are done with the dollar. For many reasons, this is also not likely except on philosophical grounds.
First of all, it is entirely possible that the finance games going on right now become self financing and the US balance of trade actually levels out, thus resulting in new demand for dollars internationally, demand that won't be supplied this time. There have been comparisions with Germany during the depression on a website I like to visit, but I don't believe they apply here. Germany was a defeated power, stripped of its capital with no capacity to finance itself internationally. The US is international finance in a nutshell to some degree and the unit of finance is the dollar. Also, there is not any gold to be swapped this time around, so this is going to be a wait and see situation. It appears the stimulous is going directly to domestic black hole projects, the eternal we need more money businesses of education and health care. The all economy consuming black holes at that. If this money goes back into buying US savings bonds and tax receipts, the cost will be borne domestically. But, this is beside the point.
The real simularities between now and 1974 are the level of emerging market and third world expansion and the bull markets in commodities. If these two games go on from here, we are going to a diminishing value of the US dollar on an international basis. Still, domestically we might see flat prices or even lower prices. The $64 billion component of this condition is if? I believe the international and commodity equations have more to do with dollar demand for foreign products than anything else and the rest of the world is going to need a sizable influx of dollars to continue their expansion. I believe that countries like China use US bonds as central bank collateral to issue their own currencies and thus forgo the expense that the US economy must face to support its own financing. This is foreign to most folks and it may not even be true, but I believe there is a lot more validity in it than most believe. A slow down in dollars means a slow down in the capacity to expand domestic credit for many of these countries on stable paper. This is a deeper subject than one might think.
Here is where today differs from 1974. The parents of boomers had saved money and few were burdened with much consumer debt. The boomers on the other hand not only have been poor savers, but their savings has taken the form of shortcuts like the use of home equity and the projection of absurd returns due to absurd academic studies out of the stock market, which cannot be mathematically true due to the divergence of compound rates. We are looking at trying to whip a dying horse to get up and run again. The horse has taken repeated shots of adrenalin, but his oat bucket has been empty for some time. It is going to be hard to inflate this economy for long or as far as that goes, get it to run for long. The horse needs a long rest and time to store up some food for the next trip.
I believe this study might be why we had the 1970's and the 1930's. The solutions of the 1930's were tried in the 1970's because they were believed to have worked in the 1930's. There was a preception in the 1930's that more inflation would fix the situation, but they deflated for a few years before this was even tried. The real problem was the degree of indebtedness the economy is under and it was naturally cleared out to some extent in the 30's, but it appear they are going to try to keep this debt intact today. This is another subject and soon to be the subject of a scathing post I am going to write, as there is something wrong with Enron and Worldcom stockholders and bondholders losing everything while the Wall street and NY banks along with a few others are accorded a free pass. I am stunned as to what is being done today, after seeing what was done to the Texas banking system in the 1980's, at a time when former Fed officials admit the NY banking system was defunct and insolvent, yet treated as solvent.
In any case, we are in a repeat of the mid 1970's in a lot of ways, but my idea is that the elevator is going in the opposite direction. The hyperinflation argument rides on the idea that dollars are printed without collateral, that the rest of the world monetary system doesn't rest on the dollar in some fashion and that without American demand there are going to be runaway prices for goods worldwide. The dollar had been artificially fixed going into the 1970's and convertable into gold, a change that had to throw the entire exchange game into orbit. This situation is 180 degrees reversed today. If the elevator is going the same direction as the 1970's, then we will see the excessive world demand and inflation, but with it much higher long term interest rates and financing problems for America. I believe it will be a boom America won't participate in, which means that it is highly unlikely to happen.
There were different pressures in the mid 1970's than there is today and I believe the economy went down for different reasons. In the 1970's we had a confluence of things all come together at once. We had the boomer generation moving into the workforce, the great society exerting its strangle on government expenditures, the debasement of the dollar, the end of the Viet Nam war, commodity cartels and massive world bank and third world nation loans by western banks. These all came together to hit the American economy at once. Plus, there was the Nixon impeachment, the crippling of the executive, which exposed the US as weak at the time.
I don't believe the financial position of the US government was any worse in the mid 1970's than it was going into this current mess. If anything, the trend growth of social expenditures has eased and even to some extent reversed from what it was then. There is more pressure on the government due to an aging boomer generation and its potential impact on Social Security and Medicare, but there is less present threat militarily than there was then, not that it will remain that way.
What happened in 1974 to 1978 left the US economy in shambles, at least on a fiscal basis and it had to be corrected. We had the swing of congress to the left from a more centrist position and the election of Jimmy Carter and government spending went from out of management to out of control. An inflation induced recession was met with an inflation inducing package of government stimulous that resulted in interest rates of over 20% for the prime rate. If the Volker legend is to be believed,it took 10 years to get over the mistakes of the 1970's.
There are simularities to the 1970's here, but there are also differences. What is hard to guage is the influence of the around the world indebtedness of the US. There really isn't any history to reference as to the driver of world demand being a debtor, contrary to thousands of professed expert opinions. This is one of the wildcards, but it is a wildcard that will come into play if the current administration acts as if this new debt is meaningless. This factor cannot be overlooked, but it can't be stared at through magnifying glasses as the only thing to watch either, as some are doing. The role of the dollar is more a role of collateral for trade than it would be if it wasn't the reserve currency and the biggest danger is if commodity producers, namely OPEC decides they are done with the dollar. For many reasons, this is also not likely except on philosophical grounds.
First of all, it is entirely possible that the finance games going on right now become self financing and the US balance of trade actually levels out, thus resulting in new demand for dollars internationally, demand that won't be supplied this time. There have been comparisions with Germany during the depression on a website I like to visit, but I don't believe they apply here. Germany was a defeated power, stripped of its capital with no capacity to finance itself internationally. The US is international finance in a nutshell to some degree and the unit of finance is the dollar. Also, there is not any gold to be swapped this time around, so this is going to be a wait and see situation. It appears the stimulous is going directly to domestic black hole projects, the eternal we need more money businesses of education and health care. The all economy consuming black holes at that. If this money goes back into buying US savings bonds and tax receipts, the cost will be borne domestically. But, this is beside the point.
The real simularities between now and 1974 are the level of emerging market and third world expansion and the bull markets in commodities. If these two games go on from here, we are going to a diminishing value of the US dollar on an international basis. Still, domestically we might see flat prices or even lower prices. The $64 billion component of this condition is if? I believe the international and commodity equations have more to do with dollar demand for foreign products than anything else and the rest of the world is going to need a sizable influx of dollars to continue their expansion. I believe that countries like China use US bonds as central bank collateral to issue their own currencies and thus forgo the expense that the US economy must face to support its own financing. This is foreign to most folks and it may not even be true, but I believe there is a lot more validity in it than most believe. A slow down in dollars means a slow down in the capacity to expand domestic credit for many of these countries on stable paper. This is a deeper subject than one might think.
Here is where today differs from 1974. The parents of boomers had saved money and few were burdened with much consumer debt. The boomers on the other hand not only have been poor savers, but their savings has taken the form of shortcuts like the use of home equity and the projection of absurd returns due to absurd academic studies out of the stock market, which cannot be mathematically true due to the divergence of compound rates. We are looking at trying to whip a dying horse to get up and run again. The horse has taken repeated shots of adrenalin, but his oat bucket has been empty for some time. It is going to be hard to inflate this economy for long or as far as that goes, get it to run for long. The horse needs a long rest and time to store up some food for the next trip.
I believe this study might be why we had the 1970's and the 1930's. The solutions of the 1930's were tried in the 1970's because they were believed to have worked in the 1930's. There was a preception in the 1930's that more inflation would fix the situation, but they deflated for a few years before this was even tried. The real problem was the degree of indebtedness the economy is under and it was naturally cleared out to some extent in the 30's, but it appear they are going to try to keep this debt intact today. This is another subject and soon to be the subject of a scathing post I am going to write, as there is something wrong with Enron and Worldcom stockholders and bondholders losing everything while the Wall street and NY banks along with a few others are accorded a free pass. I am stunned as to what is being done today, after seeing what was done to the Texas banking system in the 1980's, at a time when former Fed officials admit the NY banking system was defunct and insolvent, yet treated as solvent.
In any case, we are in a repeat of the mid 1970's in a lot of ways, but my idea is that the elevator is going in the opposite direction. The hyperinflation argument rides on the idea that dollars are printed without collateral, that the rest of the world monetary system doesn't rest on the dollar in some fashion and that without American demand there are going to be runaway prices for goods worldwide. The dollar had been artificially fixed going into the 1970's and convertable into gold, a change that had to throw the entire exchange game into orbit. This situation is 180 degrees reversed today. If the elevator is going the same direction as the 1970's, then we will see the excessive world demand and inflation, but with it much higher long term interest rates and financing problems for America. I believe it will be a boom America won't participate in, which means that it is highly unlikely to happen.
Wednesday, February 4, 2009
Who was left holding the bag?
As I was watching the tape on the market today, I noticed Bank of America (BAC) was down to a new low. As a little time passed, Fannie Mae (FNM), AIG and Citi (C)came across the tape. Adding in, LEH, BS, FRE and GE, there is easily a trillion dollars in loss in market cap on this small group of stocks. In fact, $1 trillion is most likely a very marginal loss. Citi traded for as high as $57 in December 2006. Interpolating their current price of $3.56 and their market cap of $19.42 billion, Citi alone represents a loss of $291.5 billion. I know the float on Citi was expanded when it was attempting to bail itself out in 2007 and 2008, but this almost $300 billion isn't that far off.
AIG was traded for as much as $100.25 back in 2000. Its current price is $1.03 and its current cap is $2.77 billion. It is easy to figure roughly $265 billion lost here. BAC traded for $55.08 in November 2006. Its current price is $4.77 and its cap value is $23.88 billion. This is another $250 billion loss. So, these 3 financials have shown a drop in cap value of $806 billion, literally the entire TARP or stimulus program being debated right now.
At the peak of the market, back in 2000, MSFT, CSCO, INTC and GE all had cap values in the $600 billion range. To say their value was conservatively around $2.4 trillion combined wouldn't be too far off. INTC traded for $75.83 in August 2000. At its current $14 price, its value is $77.86 billion. It is clear that INTC has bought a lot of its stock back, as this implies a $344 billion loss and a $421 billion top price. I recall the quadrupling of INTC stock between late 1998 and mid 2000 in the blow up of the tech bubble and now we are well below the 1998 price. Pretty sorry performance for a must own stock isn't it?
My point of all of this is someone owed these stocks all the way down. It is quite likely much of this stock was owned by different people than owned it for much of the gains on the way up, thus were left holding the bag. It is clear now that the way you own stocks is you have to find what the next game is and get on it as soon as possible and short the last game. Shorting is dangerous, but it isn't as dangerous as being long the high rollers of the last bull.
If this philosophy is true, then the stocks you don't want to own this time are GOOG and AAPL to name a couple. I would venture GS is another that is probably a poor stock to own. There has been much urging on CNBC that the listener get on these stocks as soon as they can possibly find the money to buy them, which tells me the holders of these stocks are urgently looking for buyers or bag holders to get them out of them. I read the public never in history has made any money out of a stock market bull run and this one appears to be no exception. We are now looking at over 50% of the past 20 years being above the current price and more money goes in on the way up than goes in when the market is down. It is probably time to look over the worn over stocks like MSFT and INTC (I saw a video with Marc Faber and he was bullish the old 1990's tech leaders longer term) and keep an eye on them. MSFT is down to less than 1/3 its peak value. The exception is GE, which I believe is in business only because of political connections and Fed intervention and has been doomed for a good decade due to their financing arm.
AIG was traded for as much as $100.25 back in 2000. Its current price is $1.03 and its current cap is $2.77 billion. It is easy to figure roughly $265 billion lost here. BAC traded for $55.08 in November 2006. Its current price is $4.77 and its cap value is $23.88 billion. This is another $250 billion loss. So, these 3 financials have shown a drop in cap value of $806 billion, literally the entire TARP or stimulus program being debated right now.
At the peak of the market, back in 2000, MSFT, CSCO, INTC and GE all had cap values in the $600 billion range. To say their value was conservatively around $2.4 trillion combined wouldn't be too far off. INTC traded for $75.83 in August 2000. At its current $14 price, its value is $77.86 billion. It is clear that INTC has bought a lot of its stock back, as this implies a $344 billion loss and a $421 billion top price. I recall the quadrupling of INTC stock between late 1998 and mid 2000 in the blow up of the tech bubble and now we are well below the 1998 price. Pretty sorry performance for a must own stock isn't it?
My point of all of this is someone owed these stocks all the way down. It is quite likely much of this stock was owned by different people than owned it for much of the gains on the way up, thus were left holding the bag. It is clear now that the way you own stocks is you have to find what the next game is and get on it as soon as possible and short the last game. Shorting is dangerous, but it isn't as dangerous as being long the high rollers of the last bull.
If this philosophy is true, then the stocks you don't want to own this time are GOOG and AAPL to name a couple. I would venture GS is another that is probably a poor stock to own. There has been much urging on CNBC that the listener get on these stocks as soon as they can possibly find the money to buy them, which tells me the holders of these stocks are urgently looking for buyers or bag holders to get them out of them. I read the public never in history has made any money out of a stock market bull run and this one appears to be no exception. We are now looking at over 50% of the past 20 years being above the current price and more money goes in on the way up than goes in when the market is down. It is probably time to look over the worn over stocks like MSFT and INTC (I saw a video with Marc Faber and he was bullish the old 1990's tech leaders longer term) and keep an eye on them. MSFT is down to less than 1/3 its peak value. The exception is GE, which I believe is in business only because of political connections and Fed intervention and has been doomed for a good decade due to their financing arm.
Saturday, December 27, 2008
The most misguided analysis in history
The more I read and study the current economic situation, the more amazed I am that the people with the platforms to speak haven't a clue what happened and what is going to happen in the world economy. In the news media, there is too much talk about the level of consumer spending and too much begging for consumer spending to pick up. This is going to be the great shock of so many, as we have seen the real peak per capita in consumer spending for the forseeable future, maybe 20 to 50 years forward. The banking industry, the consumer goods industry and the capital goods industry are going into a long flat spell worldwide. First the growth will turn negative, then it will flatten out to zero and there will be no growth along with sizable cuts in dividends, as companies struggle to survive. Without growth, the dividend rate has to reflect either the deflationary loss in future income or the real risk of holding stock. In either case, we are looking at dividends in the 6% to 8% range for most stocks and figuring the market in general is about half that, we have another 50% decline in the market at a minimum. This will combine with a 50%decline in dividends, meaning we probably have a 75% decline at a minimum, taking the SPX into the 200 range and the Dow to the 2000 level.
There is a tendency to credit groups and blame groups. I am writing this in response to the blaming of Greenspan and Bernanke in a article I just read. I think Paul Volker has as much to do with this mess as either of these 2, with his death grip monetary policy in the 1980's, but the role of all these 3 guys in all areas of their field is much less than thought. I know this idea will generate an argument 1000 miles long in print.
I have also been reading nonsense about the Chinese and their lending back to the US helping to perpetuate this mess. The money machine was in the US and when combined with the Chinese central bank, only the skids were greased a little more. The nature of a reserve currency is it runs deficits and ends right back in the country of origin, as other countries use it for monetary collateral and long term income. If the Chinese created this money cycle, how did they get the dollars in the first place?
If I were to point a finger at anyone, it would be Robert Rubin. But, much of this ball was rolling when Rubin took office in 1994. Rubin taught Greenie about the non-existance of bubbles, if Greenspans book is to be believed. The 2000 Nasdaq peak was by a factor of 2 or 3, the biggest major market bubble in history. That market alone was 100% of GDP at the peak and I believe the 1929 market peak was only 80%. The then valuations of CSCO, INTC, MSFT, ORCL and WCOM was near the valuation of the entire Nasdaq at the present. Those 5 stocks combined wouldn't buy CSCO at its peak at the present and they were nowhere near being the overvalued portion of the Nasdaq. I believe the Shiller housing index would have had to reach a level double or triple where it peaked in order to mirror such excess. The Nasdaq bottomed at 1300 on October 8, 1998 and peaked in March (I believe the 10th) in the neighborhood of 5200 for a 300% gain in 17 months. Though Greenie helped in this matter, it was the enabling acts of Rubin (collateralizing the issuance of money is what is important in money, not the interest rate, the gold or how much money the Fed says you can have) that produced this bubble. The Clinton administration put more slugs in the fusebox once this market bubble got started than Greenie could have ever managed. There was no 10% margin in this market, aka 1929 and was more a factor of continued support of cash flow through government activity. Rubin, the US treasury secretary, had at least some power over the activities of the IMF. Even so, I can only point a broken finger at Rubin.
Getting back to blame, I mentioned Volker. Volker did the US a favor by shocking it into the idea that borrowed money could get expensive, but he didn't stop inflation. Ronald Reagan stopped inflation. I know the Democrats out there are going to have a fit over this one, especially since Volker is one of your darlings today, but this in fact true. Inflation had become institutionalized and like it or not, Reagan put an end to it, either intentionally or by accident. The biggest factor in inflation was income tax bracket creep. People that are making $30,000 a year today weren't intended to have a tax bracket when the brackets were drawn out or if they were, it was to be 10% or so, maybe 14%. But, if Reagan hadn't have done what he did to taxes, the $30,000 a year guy would be paying taxes like he was a $200,000 year guy. In fact, I don't think the $200,000 a year guy pays taxes like the $30,000 a year guy did in that code. Those of us old enough to remember, recall that $30,000 a year was a magic income around 1970, the dividing line between whether you were doing okay or had arrived. Today, it is a secretarys salary in corporate America. Cutting the taxes and forcing government to cut its rate of growth of expenditures changed the institutional makeup of the US.
In short, what Volker did with interest rates, probably doubled the Reagan deficits after 1984 and created the sudden asset appreciation that produced the trend of the early 1990's that created the bubble mania. Even so, the link I propose here could be weakened by argument and I am not prepared to go at length to crucify or defend Volker. I think the ease out of the interest rate squeeze was 5 years too late at least and should have been done by 1985. Instead of easing in 1984, Volker tightened and that in itself produced a financial crisis of its own. In any case, the move from Volker to normal was an extreme shift in financial valuation and the fuel that created the real ogre of the 1990's to 2007 bubble, home finance.
I was selling real estate when I graduated from college in 1978. At the time, interest rates were a high 9% and the Iranian revolution threw a real bomb into the gearing of the US economy. As I pointed out, the structural composition of the US was such that in order to stay even with inflation, you had to outrun inflation, which produced a spiral. Higher income produced higher taxes which produced a decline in living standards which produced a need for higher prices and the spiral was on. What else this procedure did was produce an automatic tax increase for the government through the progressive income tax, which wasn't indexed to inflation in those days (Reagan could have done nothing more than reverse taxes to inflation adjusted 1976 levels and inflation adjusted the tax rates to 1976 and left them unchanged and done the same thing but left more upper income in the future for the government), so government spending went out of control in the 1970's. The spending and income trends of the 1970's projected on trend from 1960 to 1975 would have produced deficits in the $900 billion range by 1990. I have generated these figures out of actual numbers on spread sheets, so I am not making this one up. In any case, what I am trying to propose here is the shock that interest rates on mortgages going from the 8% to 9% range to almost permanently for 11 years to above 10% and many years above 13%. After moving to mortgage lending, I recall the first refinance boom was a move to under 12% on 30 year fixed money.
There was another psychology created out of this rate structure, the psychology of the CD holder. Conservative people that had cash were able to put their cash in CD's and earn significant income. My father accumulated cash through his own endeavors, inheritance and through a lawsuit for extensive injuries he sustained in a fall and during the 1980's was able to earn more money retired out of CD interest than he made working some years. Of course I am leaving out inflation, but I am also leaving out his travel expenses. It was a shock to a lot of these older people when their income out of their $200,000, $300,000 or $500,000 in cash dropped from $30,000, $45,000 or $75,000 to something like $6000 or $9000 or $15,000 in the first Greenspan thaw around 1991. These people had adapted their lifestyles to high interest rates giving them income and they needed to speculate to support their lifestyles. The stock market had already benefitted for several years from the marginal declines in interest rates along with the gradual restoration of value lost in the 1970's to inflation and the trend drew interest. Remember, the Dow in the early 1980's was in the 800's and despite the 1987 crash, the market was well into the 2000's and rising come 1990. The passing of 3000 together with the decline in the Fed funds rate to 3% from some amazingly high number was a combination that made a mass move into stocks a no brainer. Since very few Americans, including many on Wall Street, had no clue as to financial valuation of stocks, the sky was the limit. (More and more is coming out about the education of those on Wall Street quite often being something besides financial and more connected to what school they went to or who their daddy is than what they know about valuations).
The other side of this coin was real estate. My complaints about Volker are massive and for much of his early term, Greenspan continued Volkers actions. I believe these actions created one of the worst financial recessions in history, the 1990-1992 mess that cost Bush I his office. There were housing crashes around the US and the affordability of homes had been pushed down to lower levels. When the built up decade of high interest rate mortgages suddenly were refinanciable at single digit levels, the gates opened for a housing boom. FNMA and FHLMC became major players in the financial world and the paper machine of the US. Complicit in this matter were the efforts of HUD and the congressional panels that oversaw housing matters. Stemming from an act in the mid 1970's designed to encourage lending to low income people, a 1995 act dictated to these GSE's they find a way to lend more money to these lower income buyers. But, I don't believe this was the real impact behind the housing boom or the stock boom. I do believe that the shift in rates and rising activity in equity extraction created the 1990's stock bubble. It doesn't take a lot of fire to clear a crowded arena, nor does it take much additional money to push a crowded stock market into a mania.
My contention is that the securitization of mortgages and the effects of lower rates going into the early 1990's and beyond unleashed an amount of equity and spending power out of housing that was totally financed under the guise of government guarantees and Wall Street hype that created this entire world economy. The Chinese buying mortgages and government bonds only explains a part of this mess. Something had to generate the extreme levels of cash in the first place to have moved that much money to China and I believe the above described mechanism was it. China itself is part of this bubble and thus will not escape its effects, not because they are going to lose their money they put back in the US, but because their business model is built on being financed by this Wall Street/GSE machine. So are the earning of the US corporations as well as the European and Asian ones as well, as we are seeing at the present. Toyota has fallen on hard times along with Ford and GM.
Michael Koo, of the Japanese Central bank, is the closest I have seen in coming to grips with what is going on. The populace is spent out and the corporations of which they are customers is over capacity and overleveraged. In some ways, Koo says that the current direction of stimulous packages is the right path to avoiding depression, but that it won't get us back to where we were on the peak or anywhere near it. That will take time. Some speak of the great shape the balance sheets of corporate America are in, but I beg to differ. If they were so cash rich, there wouldn't be a credit crunch would there? Also, some speak of cash on the balance sheet, but I doubt a lot of it is real cash. By this I mean there are current liabilities and current assets and in a lot of cases, I doubt the reliability of the current assets, which exposes the cash to the current liabilities and the company to bankruptcy. Instead of being highly solvent, many of these companies are going to be liable to the full extent of their cash balances.
I have seen some mention brokerage firms as having $X of cash per share and I highly doubt that money actually belongs in whole to the firms involved. In fact, I would be highly watchful of the solvency of any Wall Street firm or its ability to meet withdrawals. I see a lot of cash in the minerals and oil and gas business, but I know enough people that were in the oil business before to have doubts about their receivables. Few people realize the deflationary pull that has set in and how fast cash can evaporate.
My point in all of this is that the roots of this mess go way back. I am not sure that Greenspan, then Rubin, then Bernanke weren't all doing all they could to forstall a collapse that was caused by the interest rate and generational structure of the US in the 1970's and 1980's. I believe from my own experience that Volker kept rates too high for a lot longer than Greenspan and Bernanke kept them too low. I also believe the perceived government guarantees of the GSE's contributed to excessive securitized debt and thus the monetization of consumption in the US and therefore the world. The size of this bubble doesn't meet a a border,nor was it caused by a single asset class like subprime mortgages. It was caused by a series of bubbles that were caused by a shift of perception by a group of people worldwide without the experience and knowledge to intelligently invest in such assets.
Now, the last bubble is bonds. Bonds aren't a bubble, but an asset class. The financial bubble has broken and it isn't possible for there to be another bubble. I think people are going to be surprised, unless the entire mess collapses, how long treasuries stay below 3%. I believe the minimum will be 2020 before we see a sustained rise of treasury bonds above 3%. Aren't we all shocked that Japanese 10 years have spent more than a decade below 2%? Remember, the dollar is the reserve currency.
So many people keep thinking this is a housing problem, but it isn't a housing problem, but a problem with financing and raising more cash. The source of new cash for the US for 2 decades or longer was home equity and to some extent, commercial real estate equity and stock equity. This became the source of cash for the world. The entire world will need to deleverage out of this mess and any attempt to become the US by another country will lead to its immediate collapse. I believe that most mortgages will be under water before this mess is done and that all markets will be affected. I am in the housing business at this time and due to the current condition of the local market, DFW, I have to resist the temptation to buy more all the time. It would be a good idea to see what summer looks like.
There is a tendency to credit groups and blame groups. I am writing this in response to the blaming of Greenspan and Bernanke in a article I just read. I think Paul Volker has as much to do with this mess as either of these 2, with his death grip monetary policy in the 1980's, but the role of all these 3 guys in all areas of their field is much less than thought. I know this idea will generate an argument 1000 miles long in print.
I have also been reading nonsense about the Chinese and their lending back to the US helping to perpetuate this mess. The money machine was in the US and when combined with the Chinese central bank, only the skids were greased a little more. The nature of a reserve currency is it runs deficits and ends right back in the country of origin, as other countries use it for monetary collateral and long term income. If the Chinese created this money cycle, how did they get the dollars in the first place?
If I were to point a finger at anyone, it would be Robert Rubin. But, much of this ball was rolling when Rubin took office in 1994. Rubin taught Greenie about the non-existance of bubbles, if Greenspans book is to be believed. The 2000 Nasdaq peak was by a factor of 2 or 3, the biggest major market bubble in history. That market alone was 100% of GDP at the peak and I believe the 1929 market peak was only 80%. The then valuations of CSCO, INTC, MSFT, ORCL and WCOM was near the valuation of the entire Nasdaq at the present. Those 5 stocks combined wouldn't buy CSCO at its peak at the present and they were nowhere near being the overvalued portion of the Nasdaq. I believe the Shiller housing index would have had to reach a level double or triple where it peaked in order to mirror such excess. The Nasdaq bottomed at 1300 on October 8, 1998 and peaked in March (I believe the 10th) in the neighborhood of 5200 for a 300% gain in 17 months. Though Greenie helped in this matter, it was the enabling acts of Rubin (collateralizing the issuance of money is what is important in money, not the interest rate, the gold or how much money the Fed says you can have) that produced this bubble. The Clinton administration put more slugs in the fusebox once this market bubble got started than Greenie could have ever managed. There was no 10% margin in this market, aka 1929 and was more a factor of continued support of cash flow through government activity. Rubin, the US treasury secretary, had at least some power over the activities of the IMF. Even so, I can only point a broken finger at Rubin.
Getting back to blame, I mentioned Volker. Volker did the US a favor by shocking it into the idea that borrowed money could get expensive, but he didn't stop inflation. Ronald Reagan stopped inflation. I know the Democrats out there are going to have a fit over this one, especially since Volker is one of your darlings today, but this in fact true. Inflation had become institutionalized and like it or not, Reagan put an end to it, either intentionally or by accident. The biggest factor in inflation was income tax bracket creep. People that are making $30,000 a year today weren't intended to have a tax bracket when the brackets were drawn out or if they were, it was to be 10% or so, maybe 14%. But, if Reagan hadn't have done what he did to taxes, the $30,000 a year guy would be paying taxes like he was a $200,000 year guy. In fact, I don't think the $200,000 a year guy pays taxes like the $30,000 a year guy did in that code. Those of us old enough to remember, recall that $30,000 a year was a magic income around 1970, the dividing line between whether you were doing okay or had arrived. Today, it is a secretarys salary in corporate America. Cutting the taxes and forcing government to cut its rate of growth of expenditures changed the institutional makeup of the US.
In short, what Volker did with interest rates, probably doubled the Reagan deficits after 1984 and created the sudden asset appreciation that produced the trend of the early 1990's that created the bubble mania. Even so, the link I propose here could be weakened by argument and I am not prepared to go at length to crucify or defend Volker. I think the ease out of the interest rate squeeze was 5 years too late at least and should have been done by 1985. Instead of easing in 1984, Volker tightened and that in itself produced a financial crisis of its own. In any case, the move from Volker to normal was an extreme shift in financial valuation and the fuel that created the real ogre of the 1990's to 2007 bubble, home finance.
I was selling real estate when I graduated from college in 1978. At the time, interest rates were a high 9% and the Iranian revolution threw a real bomb into the gearing of the US economy. As I pointed out, the structural composition of the US was such that in order to stay even with inflation, you had to outrun inflation, which produced a spiral. Higher income produced higher taxes which produced a decline in living standards which produced a need for higher prices and the spiral was on. What else this procedure did was produce an automatic tax increase for the government through the progressive income tax, which wasn't indexed to inflation in those days (Reagan could have done nothing more than reverse taxes to inflation adjusted 1976 levels and inflation adjusted the tax rates to 1976 and left them unchanged and done the same thing but left more upper income in the future for the government), so government spending went out of control in the 1970's. The spending and income trends of the 1970's projected on trend from 1960 to 1975 would have produced deficits in the $900 billion range by 1990. I have generated these figures out of actual numbers on spread sheets, so I am not making this one up. In any case, what I am trying to propose here is the shock that interest rates on mortgages going from the 8% to 9% range to almost permanently for 11 years to above 10% and many years above 13%. After moving to mortgage lending, I recall the first refinance boom was a move to under 12% on 30 year fixed money.
There was another psychology created out of this rate structure, the psychology of the CD holder. Conservative people that had cash were able to put their cash in CD's and earn significant income. My father accumulated cash through his own endeavors, inheritance and through a lawsuit for extensive injuries he sustained in a fall and during the 1980's was able to earn more money retired out of CD interest than he made working some years. Of course I am leaving out inflation, but I am also leaving out his travel expenses. It was a shock to a lot of these older people when their income out of their $200,000, $300,000 or $500,000 in cash dropped from $30,000, $45,000 or $75,000 to something like $6000 or $9000 or $15,000 in the first Greenspan thaw around 1991. These people had adapted their lifestyles to high interest rates giving them income and they needed to speculate to support their lifestyles. The stock market had already benefitted for several years from the marginal declines in interest rates along with the gradual restoration of value lost in the 1970's to inflation and the trend drew interest. Remember, the Dow in the early 1980's was in the 800's and despite the 1987 crash, the market was well into the 2000's and rising come 1990. The passing of 3000 together with the decline in the Fed funds rate to 3% from some amazingly high number was a combination that made a mass move into stocks a no brainer. Since very few Americans, including many on Wall Street, had no clue as to financial valuation of stocks, the sky was the limit. (More and more is coming out about the education of those on Wall Street quite often being something besides financial and more connected to what school they went to or who their daddy is than what they know about valuations).
The other side of this coin was real estate. My complaints about Volker are massive and for much of his early term, Greenspan continued Volkers actions. I believe these actions created one of the worst financial recessions in history, the 1990-1992 mess that cost Bush I his office. There were housing crashes around the US and the affordability of homes had been pushed down to lower levels. When the built up decade of high interest rate mortgages suddenly were refinanciable at single digit levels, the gates opened for a housing boom. FNMA and FHLMC became major players in the financial world and the paper machine of the US. Complicit in this matter were the efforts of HUD and the congressional panels that oversaw housing matters. Stemming from an act in the mid 1970's designed to encourage lending to low income people, a 1995 act dictated to these GSE's they find a way to lend more money to these lower income buyers. But, I don't believe this was the real impact behind the housing boom or the stock boom. I do believe that the shift in rates and rising activity in equity extraction created the 1990's stock bubble. It doesn't take a lot of fire to clear a crowded arena, nor does it take much additional money to push a crowded stock market into a mania.
My contention is that the securitization of mortgages and the effects of lower rates going into the early 1990's and beyond unleashed an amount of equity and spending power out of housing that was totally financed under the guise of government guarantees and Wall Street hype that created this entire world economy. The Chinese buying mortgages and government bonds only explains a part of this mess. Something had to generate the extreme levels of cash in the first place to have moved that much money to China and I believe the above described mechanism was it. China itself is part of this bubble and thus will not escape its effects, not because they are going to lose their money they put back in the US, but because their business model is built on being financed by this Wall Street/GSE machine. So are the earning of the US corporations as well as the European and Asian ones as well, as we are seeing at the present. Toyota has fallen on hard times along with Ford and GM.
Michael Koo, of the Japanese Central bank, is the closest I have seen in coming to grips with what is going on. The populace is spent out and the corporations of which they are customers is over capacity and overleveraged. In some ways, Koo says that the current direction of stimulous packages is the right path to avoiding depression, but that it won't get us back to where we were on the peak or anywhere near it. That will take time. Some speak of the great shape the balance sheets of corporate America are in, but I beg to differ. If they were so cash rich, there wouldn't be a credit crunch would there? Also, some speak of cash on the balance sheet, but I doubt a lot of it is real cash. By this I mean there are current liabilities and current assets and in a lot of cases, I doubt the reliability of the current assets, which exposes the cash to the current liabilities and the company to bankruptcy. Instead of being highly solvent, many of these companies are going to be liable to the full extent of their cash balances.
I have seen some mention brokerage firms as having $X of cash per share and I highly doubt that money actually belongs in whole to the firms involved. In fact, I would be highly watchful of the solvency of any Wall Street firm or its ability to meet withdrawals. I see a lot of cash in the minerals and oil and gas business, but I know enough people that were in the oil business before to have doubts about their receivables. Few people realize the deflationary pull that has set in and how fast cash can evaporate.
My point in all of this is that the roots of this mess go way back. I am not sure that Greenspan, then Rubin, then Bernanke weren't all doing all they could to forstall a collapse that was caused by the interest rate and generational structure of the US in the 1970's and 1980's. I believe from my own experience that Volker kept rates too high for a lot longer than Greenspan and Bernanke kept them too low. I also believe the perceived government guarantees of the GSE's contributed to excessive securitized debt and thus the monetization of consumption in the US and therefore the world. The size of this bubble doesn't meet a a border,nor was it caused by a single asset class like subprime mortgages. It was caused by a series of bubbles that were caused by a shift of perception by a group of people worldwide without the experience and knowledge to intelligently invest in such assets.
Now, the last bubble is bonds. Bonds aren't a bubble, but an asset class. The financial bubble has broken and it isn't possible for there to be another bubble. I think people are going to be surprised, unless the entire mess collapses, how long treasuries stay below 3%. I believe the minimum will be 2020 before we see a sustained rise of treasury bonds above 3%. Aren't we all shocked that Japanese 10 years have spent more than a decade below 2%? Remember, the dollar is the reserve currency.
So many people keep thinking this is a housing problem, but it isn't a housing problem, but a problem with financing and raising more cash. The source of new cash for the US for 2 decades or longer was home equity and to some extent, commercial real estate equity and stock equity. This became the source of cash for the world. The entire world will need to deleverage out of this mess and any attempt to become the US by another country will lead to its immediate collapse. I believe that most mortgages will be under water before this mess is done and that all markets will be affected. I am in the housing business at this time and due to the current condition of the local market, DFW, I have to resist the temptation to buy more all the time. It would be a good idea to see what summer looks like.
Saturday, December 6, 2008
You never get even over the long run
I want to comment on the stock market as it is a financial instrument. Shiller has adjusted this data in a good way I believe. I did a huge study on this data and what I figured out was that inflation from 1926 to 2003 was a compound 3%, that the beginning dividend rate in 1926 was 4.8% and if you bought stocks on that date in the form of the SPX or its equivalent, you would have made 4.8% plus 3% inflation plus about another 1% in real terms. If you take the dividend yield out of the data for 1/26, you get .61/12.65 or 4.822%. The CPI adjusted price for 1/26 is 157.72. The last data on this was for 6/08 where dividends were 28.71. If you adjusted the 6/08 data to a 4.822% dividend, the price would be 595.38, which is a factor of 3.77 over a period of 82 years. This demonstrates a real growth factor of about 1.5%(this would be accurate at 89 years).
Here is the rub of this data though. There are a couple of factors here, what was the price at the peak of the last debt bubble and the 10 year average trailing PE. The factor for 1/26 was 11.34 and the factor for 6/08 was 22.39. This is a rough factor of 2 and if you divide 1341.25 by 2, you get about 670, in the region of the 595 that I mentioned. If you move back to 1929, you get a trailing PE/10 of 32.56. Though much more expensive than 6/08, the 1929 PE paled compared to 43.22 at the peak of the SPX in 3/00. But, at the summer 07 peak the rate hit 27.40, not quite there, but in the region of 1929. This factor peaked in the 1960's, a sweetspot of all time economy in the US at 24.06 and going forward dropped to 6.64 in August 1982. It also dropped to 5.57 in June 1932. This supports real values in the 25% range of the top, maybe lower.
The other factor is if you look at dividend growth between 9/24 and 9/29, you get a growth from .55 to .94, a factor of 1.709 times. This is a little over 11% compound. Dividends peaked between June and December of 1930, another time when corporations failed to conserve capital in time. If you take the same time frame, 10/02 to 10/07, dividends went from 15.88 to 27.22 for a factor of 1.714, almost identical to 1929. There was one difference in the fact that the dividend rate actually went up in 2002-2007 where as it went down in 1929. The other difference was the nature of the credit system. The bubble that pushed stocks higher in the 2002-2007 period was much bigger.
There is one more point. The price in 1929, adjusted for CPI, is 403.79. The dividend yield for 9/29 was 3.003%. If you took the 10/07 peak and adjusted it to a 3.003% dividend, you would get 27.22/.03003 or 906.36. The CPI factor for 10/07 in this demonstration is 1.0681772898 to give a price of 968.15. The factor for peak to peak is 2.39766 for a period of 78 years. This is about 1.15% real growth in price(1.011 divided 78 times into this factor reduces it to 1.0214, meaning it is within .1%). If you took this 79 year period, you would find stocks returned 3% plus 1.1% plus inflation.
Let me say that again: If you took this 79 year period, you would find stocks returned 3% plus 1.1% plus inflation. Do you know what 4.1% over inflation is? It is damn short of what staying in a corporate bond fund would return you. It is about 7%, but this is if you hold from peak to peak. If you take the price of the SPX for November 1985, you get 404.39. What is this? It is when you got back to even for the second time for owning the SPX from the 1929 peak. The first time was 11/58.
People think stocks change form, but buying a basket of stocks is not that much different than buying a basket of bonds. Your yield to maturity is what you get when you buy. There isn't some kind of magic that comes in over night like the tooth fairy and give you a bonus for you losses. These are solid facts about something that mirrors the SPX.
Why my fixation on dividends? Because that is all a stock every pays its holder passively. If a stock is acquired by another company or the company buys back stock to reduce the float, it never pays a dime of dividends, the holder eventually ends up with zero. The return on a stock is its dividend rate plus its growth rate. Thus if you hold the SPX as a stock, which for the great unwashed is the only way to hold stocks (there is too much money for everyone to be buying the few prime stocks or for that matter, move into dividend stocks), you can't do any better long run than what long run is. Markets that pay low dividends as this one has for most of the last 20 years (current dividends are declining and not high and the worst time to hold stocks is when dividends are declining as the growth rate is negative and stocks have to adjust their prices to take into account the declining payout). My point is you get your long run at the price you buy and there are only deep bears and bubbles that present opportunities to buy or sell. I venture a regular non bubble, non bear market is probably in the SPX 500 range or lower.
Here is the rub of this data though. There are a couple of factors here, what was the price at the peak of the last debt bubble and the 10 year average trailing PE. The factor for 1/26 was 11.34 and the factor for 6/08 was 22.39. This is a rough factor of 2 and if you divide 1341.25 by 2, you get about 670, in the region of the 595 that I mentioned. If you move back to 1929, you get a trailing PE/10 of 32.56. Though much more expensive than 6/08, the 1929 PE paled compared to 43.22 at the peak of the SPX in 3/00. But, at the summer 07 peak the rate hit 27.40, not quite there, but in the region of 1929. This factor peaked in the 1960's, a sweetspot of all time economy in the US at 24.06 and going forward dropped to 6.64 in August 1982. It also dropped to 5.57 in June 1932. This supports real values in the 25% range of the top, maybe lower.
The other factor is if you look at dividend growth between 9/24 and 9/29, you get a growth from .55 to .94, a factor of 1.709 times. This is a little over 11% compound. Dividends peaked between June and December of 1930, another time when corporations failed to conserve capital in time. If you take the same time frame, 10/02 to 10/07, dividends went from 15.88 to 27.22 for a factor of 1.714, almost identical to 1929. There was one difference in the fact that the dividend rate actually went up in 2002-2007 where as it went down in 1929. The other difference was the nature of the credit system. The bubble that pushed stocks higher in the 2002-2007 period was much bigger.
There is one more point. The price in 1929, adjusted for CPI, is 403.79. The dividend yield for 9/29 was 3.003%. If you took the 10/07 peak and adjusted it to a 3.003% dividend, you would get 27.22/.03003 or 906.36. The CPI factor for 10/07 in this demonstration is 1.0681772898 to give a price of 968.15. The factor for peak to peak is 2.39766 for a period of 78 years. This is about 1.15% real growth in price(1.011 divided 78 times into this factor reduces it to 1.0214, meaning it is within .1%). If you took this 79 year period, you would find stocks returned 3% plus 1.1% plus inflation.
Let me say that again: If you took this 79 year period, you would find stocks returned 3% plus 1.1% plus inflation. Do you know what 4.1% over inflation is? It is damn short of what staying in a corporate bond fund would return you. It is about 7%, but this is if you hold from peak to peak. If you take the price of the SPX for November 1985, you get 404.39. What is this? It is when you got back to even for the second time for owning the SPX from the 1929 peak. The first time was 11/58.
People think stocks change form, but buying a basket of stocks is not that much different than buying a basket of bonds. Your yield to maturity is what you get when you buy. There isn't some kind of magic that comes in over night like the tooth fairy and give you a bonus for you losses. These are solid facts about something that mirrors the SPX.
Why my fixation on dividends? Because that is all a stock every pays its holder passively. If a stock is acquired by another company or the company buys back stock to reduce the float, it never pays a dime of dividends, the holder eventually ends up with zero. The return on a stock is its dividend rate plus its growth rate. Thus if you hold the SPX as a stock, which for the great unwashed is the only way to hold stocks (there is too much money for everyone to be buying the few prime stocks or for that matter, move into dividend stocks), you can't do any better long run than what long run is. Markets that pay low dividends as this one has for most of the last 20 years (current dividends are declining and not high and the worst time to hold stocks is when dividends are declining as the growth rate is negative and stocks have to adjust their prices to take into account the declining payout). My point is you get your long run at the price you buy and there are only deep bears and bubbles that present opportunities to buy or sell. I venture a regular non bubble, non bear market is probably in the SPX 500 range or lower.
Thursday, December 4, 2008
I had written something I intended to post here on another site and the internet didn't feed and lost it. It was in response to a challenge about the stock market moving back to the mean and overcorrecting and going even lower. The mean revision that was being discussed was the PE ratio, but I choose to focus on the dividend rate. In any case, if there wasn't a mean, there couldn't be a return associated with stocks and that is what I propose to show.
Back in 2003, I was going to write a book, but I chickened out. The name of it was going to be, "Is it Safe to Get Back in the Water", meaning, is it safe to get back into stocks. During that period, I did my own personal study on long term data posted by Robert Shiller of the housing index fame, dealing with stocks. The famous return on stocks that is quoted uses 2 years, 1926 and 1950. 1926 was the last year prior to the great run up in stocks prior to the Great Depression and 1950 was the peak in dividends, so either would be a likely year to choose to mark stock returns from. 1926 because it would impress upon people that a depression couldn't stop the market and 1950 because dividends were at all time highs and it would clearly be a year to produce a great return.
In any case, Shiller had everything from earnings to dividends and the CPI number for every year from 1870 on and through this I was able to construct a model of how stocks were valued. I had been taught a formula in college about the value of a stock and the market would be valued in the same fashion. In fact, the data could actually verify what the simple model was. The formula, P=d/(k-g) is a simple discount formula where dividends are discounted the required rate of return minus the rate fo growth. Like all financial formulas, it is actually pretty simple, but finding the components was not. Through this, I made assumptions as to why the market itself was so absurdly high, as dividends were only in the 1.6% range after a sizable adjustment down from a price where dividends on the SPX were as low as 1.08%.
I decided I would use 1926 as a base year as well and what I found was that from 1926 to that time, which I believe was 2003, the long term rate of inflation was 3%, the starting dividend rate was 4.8% and the growth rate was in the 1% range, giving a long term return of about 9%. This would confirm a risk free rate of return plus 2.8% to 3% as being about normal for stocks, as treasuries would generally yield inflation plus 3% over the long haul and BBB long term debt about 5% above inflation. Bonds are safer than stocks because they at least recapture some of their value in what is certain eventual default and bankruptcy of a company.
Contrary to the bullish side of the equation, I didn't focus on the price of stocks, but rather the growth of dividends and the starting rate of dividends. A bull might say that 4.8% is too high of a dividend, but if I had used something like 3%, the rate of return would have been much slower. In fact, I could have moved to the 1929 peak and did just that.
This is where I can draw the parallel to reversion to the mean and what the return on a stock really is. If one is going to compare 1926 and 2003, they need to compare based on the dividend rate and not the price of the market, as they are 2 different things. Maybe 4.8% is too high, but then you have to adjust downward what stocks yield. I do know that 1% was too low and 2% was too low and likely 3% was too low because prior to the 1990's every time the yield hit 3%, the market failed to go higher. The best it could do was move higher with growth. There was 125 years of data lying there and suddenly history didn't apply. Anyone with a brain knows better.
To move forward, I must clarify something. This is something no one has ever mentioned in the public arena of buying stocks or an SPX fund, but there is no averaging in on the market. If you buy a stock and hold it forever, you get what you bought and nothing else. Thus, the mistake of buying a bond with too low of a yield can be made up by the end of the term of the bond, but that can't be done with stock. Thus if the historical yield of the stock market is inflation plus 5.8%, you can't pay inflation plus 4% and ever get back to inflation plus 5.8% without the market making a huge mistake. You can only make inflation plus 4% and that is if you hold the portfolio forever. You could hope for a bigger fool to come along and pay a price sufficient to produce a yield lower than 4% then you could make more than 4% by selling, but not holding. Thus the long term success of buy and hold for a market fund is predicated on whether the return in the future is lower or higher and the lower the acceptable return, the higher sales price that can be achieved. But, the forever return is always going to be where you bought in.
Why can't the growth be higher? There may be times when it is higher, but in truth there is only so much money in the system, so many resources and real growth is quite likely to not involve more money, but lower prices. Another thing is the differential in compound returns. If you take 3% for instance and compound it for 24 years, it doubles. 6% takes 12 years to double, but in 24 years it is 4 times its original size. In 48 years it is 16 times its original size while the 3% is only 4 times. Thus over the 48 years that the typical person would accumulate and live off stocks, the economy would have to support something that could be 4 times its size when it started. The factors don't work and the value of the stock market cannot grow at any appreciable pace greater than the economy as a whole. If you took the more extreme numbers of 9% and we were looking at 6% nominal in the economy, we would have a double in 12 years for the economy and 8 years for the stocks, meaning stocks would have to relatively double the economy over 24 years, as 9% produces an 8X while 6% produces a 4X. The compounds cannot be sustained on any real basis. This is actually true whether you pay dividends or buy back stock.
So, there is only 1 way that you can get an after inflation return on stocks of 6% and that is to price them that way. Stocks haven't been priced in that fashion for 25 years. The question is, why? Growth hasn't been that fantastic, actually pretty normal and below historical for a long period of prosperity. I can only offer 2 reasons, one being the natural, debt bubble that produces excessive money in search of a return and the other being an adoption of a fiction in investing. I believe today that the first reason is the primary reason, but the stock bubble couldn't be so persistent and defended without the fiction.
Here is the fiction. When I went to college, they were teaching something called portfolio theory. What portfolio theory actually meant was you could take several properly correllated risky assets and put them in a portfolio and the portfolio would over time produce the return expected out of the assets. To invest in any one of the assets would produce a return that ranged from either a total loss to a huge bonanza in excess of anything planned. Thus, you could take history and buy it and it would work as long as the assets themselves were priced reasonably going in. Nothing could be done if the assets were bought at yields much lower than necessary.
In seeing this, I wrote a paper years ago called "Who destroyed Portfolio Theory"? My contention was and still is that Wall Street took statistics and came up with this idea that stocks returned X% over time and that all you had to do was buy a portfolio and you would get the return. With the adoption of that attitude along with the credit bubble (money bubble)people started pouring money blindly into S&P funds. Over a period of 10 years or so they drove the yields down on stocks to near 1% before the bubble sprung a leak that was repaired 3 years later. Thus the assumption that all you had to do was pour money into a mutual fund and the fund would make you rich. There is really little chance that once this procedure started that Wall Street set out to take full advantage selling stocks at as high of prices as they could.
Which is the return for stocks? Is it inflation plus 2% or inflation plus 6%? I have seen about everything inbetween adopted in my lifetime. I believe that in 1982 the dividend yield on the SPX topped 6%. Thus from that time on, you could expect a real rate of return of almost 7% plus inflation. IN 2000, you could only expect a return of about 2% plus inflation. This is one reason the market could only make a double top in 2007 against its value 7 years earlier and have only dividends to show for it.
This is what mean reversion is all about. I don't know if the reader has been able to follow what I have written, but figure this one. There is a lot of talk about the 10 year bond being below the dividend rate. They talk about this like it has never happened when in fact the entire period between 1900 and 1950 the dividend rate on the broad market was higher than the yield on treasuries. I would venture that most of the following 15 years were also a period when bond yields were lower than stock dividends. This is in part because inflation wasn't certain and growth was even less certain.
If we return to normal money in a normal growth market, we will again see t-bills priced at inflation plus 3% over any given time frame. We will see long term growth on stocks of between 1/2% and 1% above inflation and we will see risk premiums above 4% again. In fact, the 1966 and 1929 tops were met with 3% dividend rates and the latest dividend I have on the SPX is 28.71 which gives a 957 price on the SPX for a historical top. As dividends fall and stocks fall out of favor and the bubble deflates, we have a long way to go down. We aren't talking about getting 10% on stocks when inflation might be zero and dividend and profit growth negative.
Back in 2003, I was going to write a book, but I chickened out. The name of it was going to be, "Is it Safe to Get Back in the Water", meaning, is it safe to get back into stocks. During that period, I did my own personal study on long term data posted by Robert Shiller of the housing index fame, dealing with stocks. The famous return on stocks that is quoted uses 2 years, 1926 and 1950. 1926 was the last year prior to the great run up in stocks prior to the Great Depression and 1950 was the peak in dividends, so either would be a likely year to choose to mark stock returns from. 1926 because it would impress upon people that a depression couldn't stop the market and 1950 because dividends were at all time highs and it would clearly be a year to produce a great return.
In any case, Shiller had everything from earnings to dividends and the CPI number for every year from 1870 on and through this I was able to construct a model of how stocks were valued. I had been taught a formula in college about the value of a stock and the market would be valued in the same fashion. In fact, the data could actually verify what the simple model was. The formula, P=d/(k-g) is a simple discount formula where dividends are discounted the required rate of return minus the rate fo growth. Like all financial formulas, it is actually pretty simple, but finding the components was not. Through this, I made assumptions as to why the market itself was so absurdly high, as dividends were only in the 1.6% range after a sizable adjustment down from a price where dividends on the SPX were as low as 1.08%.
I decided I would use 1926 as a base year as well and what I found was that from 1926 to that time, which I believe was 2003, the long term rate of inflation was 3%, the starting dividend rate was 4.8% and the growth rate was in the 1% range, giving a long term return of about 9%. This would confirm a risk free rate of return plus 2.8% to 3% as being about normal for stocks, as treasuries would generally yield inflation plus 3% over the long haul and BBB long term debt about 5% above inflation. Bonds are safer than stocks because they at least recapture some of their value in what is certain eventual default and bankruptcy of a company.
Contrary to the bullish side of the equation, I didn't focus on the price of stocks, but rather the growth of dividends and the starting rate of dividends. A bull might say that 4.8% is too high of a dividend, but if I had used something like 3%, the rate of return would have been much slower. In fact, I could have moved to the 1929 peak and did just that.
This is where I can draw the parallel to reversion to the mean and what the return on a stock really is. If one is going to compare 1926 and 2003, they need to compare based on the dividend rate and not the price of the market, as they are 2 different things. Maybe 4.8% is too high, but then you have to adjust downward what stocks yield. I do know that 1% was too low and 2% was too low and likely 3% was too low because prior to the 1990's every time the yield hit 3%, the market failed to go higher. The best it could do was move higher with growth. There was 125 years of data lying there and suddenly history didn't apply. Anyone with a brain knows better.
To move forward, I must clarify something. This is something no one has ever mentioned in the public arena of buying stocks or an SPX fund, but there is no averaging in on the market. If you buy a stock and hold it forever, you get what you bought and nothing else. Thus, the mistake of buying a bond with too low of a yield can be made up by the end of the term of the bond, but that can't be done with stock. Thus if the historical yield of the stock market is inflation plus 5.8%, you can't pay inflation plus 4% and ever get back to inflation plus 5.8% without the market making a huge mistake. You can only make inflation plus 4% and that is if you hold the portfolio forever. You could hope for a bigger fool to come along and pay a price sufficient to produce a yield lower than 4% then you could make more than 4% by selling, but not holding. Thus the long term success of buy and hold for a market fund is predicated on whether the return in the future is lower or higher and the lower the acceptable return, the higher sales price that can be achieved. But, the forever return is always going to be where you bought in.
Why can't the growth be higher? There may be times when it is higher, but in truth there is only so much money in the system, so many resources and real growth is quite likely to not involve more money, but lower prices. Another thing is the differential in compound returns. If you take 3% for instance and compound it for 24 years, it doubles. 6% takes 12 years to double, but in 24 years it is 4 times its original size. In 48 years it is 16 times its original size while the 3% is only 4 times. Thus over the 48 years that the typical person would accumulate and live off stocks, the economy would have to support something that could be 4 times its size when it started. The factors don't work and the value of the stock market cannot grow at any appreciable pace greater than the economy as a whole. If you took the more extreme numbers of 9% and we were looking at 6% nominal in the economy, we would have a double in 12 years for the economy and 8 years for the stocks, meaning stocks would have to relatively double the economy over 24 years, as 9% produces an 8X while 6% produces a 4X. The compounds cannot be sustained on any real basis. This is actually true whether you pay dividends or buy back stock.
So, there is only 1 way that you can get an after inflation return on stocks of 6% and that is to price them that way. Stocks haven't been priced in that fashion for 25 years. The question is, why? Growth hasn't been that fantastic, actually pretty normal and below historical for a long period of prosperity. I can only offer 2 reasons, one being the natural, debt bubble that produces excessive money in search of a return and the other being an adoption of a fiction in investing. I believe today that the first reason is the primary reason, but the stock bubble couldn't be so persistent and defended without the fiction.
Here is the fiction. When I went to college, they were teaching something called portfolio theory. What portfolio theory actually meant was you could take several properly correllated risky assets and put them in a portfolio and the portfolio would over time produce the return expected out of the assets. To invest in any one of the assets would produce a return that ranged from either a total loss to a huge bonanza in excess of anything planned. Thus, you could take history and buy it and it would work as long as the assets themselves were priced reasonably going in. Nothing could be done if the assets were bought at yields much lower than necessary.
In seeing this, I wrote a paper years ago called "Who destroyed Portfolio Theory"? My contention was and still is that Wall Street took statistics and came up with this idea that stocks returned X% over time and that all you had to do was buy a portfolio and you would get the return. With the adoption of that attitude along with the credit bubble (money bubble)people started pouring money blindly into S&P funds. Over a period of 10 years or so they drove the yields down on stocks to near 1% before the bubble sprung a leak that was repaired 3 years later. Thus the assumption that all you had to do was pour money into a mutual fund and the fund would make you rich. There is really little chance that once this procedure started that Wall Street set out to take full advantage selling stocks at as high of prices as they could.
Which is the return for stocks? Is it inflation plus 2% or inflation plus 6%? I have seen about everything inbetween adopted in my lifetime. I believe that in 1982 the dividend yield on the SPX topped 6%. Thus from that time on, you could expect a real rate of return of almost 7% plus inflation. IN 2000, you could only expect a return of about 2% plus inflation. This is one reason the market could only make a double top in 2007 against its value 7 years earlier and have only dividends to show for it.
This is what mean reversion is all about. I don't know if the reader has been able to follow what I have written, but figure this one. There is a lot of talk about the 10 year bond being below the dividend rate. They talk about this like it has never happened when in fact the entire period between 1900 and 1950 the dividend rate on the broad market was higher than the yield on treasuries. I would venture that most of the following 15 years were also a period when bond yields were lower than stock dividends. This is in part because inflation wasn't certain and growth was even less certain.
If we return to normal money in a normal growth market, we will again see t-bills priced at inflation plus 3% over any given time frame. We will see long term growth on stocks of between 1/2% and 1% above inflation and we will see risk premiums above 4% again. In fact, the 1966 and 1929 tops were met with 3% dividend rates and the latest dividend I have on the SPX is 28.71 which gives a 957 price on the SPX for a historical top. As dividends fall and stocks fall out of favor and the bubble deflates, we have a long way to go down. We aren't talking about getting 10% on stocks when inflation might be zero and dividend and profit growth negative.
Subscribe to:
Posts (Atom)