Obviously, if I thought I had any real insight into the movements of the stock market I'd be keeping those insights private and using them to get rich. But the fact that stock markets worldwide seem to be melting down does seem noteworthy. Idle speculation? Investment tips?
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Financial Collapse Blogging
22 Jan 2008 10:07 am
Comments (60)
"When the US sneezes, the world catches a cold."
For background, I like John Lanchester's LRB piece from last month, because it covers some of the technical stuff as well as the social/cultural aspects of 'the City'.
A fundamental economic gap of that type does open up a distance between people, however many other things you have in common. He happened once to mention what he (as a head of department) pays new recruits, straight out of university: ‘45k a year, with a bonus of between ten and twelve grand guaranteed.’ I pointed out that in many cases that would mean these 22-year-olds would be earning more than the heads of department in the universities they’d just graduated from. He shrugged and laughed. ‘It is what it is,’ he said.
Perhaps you should ask to be paid in euros?
Stock up on ammunition and MRE's.
Re Kaufman's comment "When the bubbles break they break fast."
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1) Wrong.
This recession was set up a year ago --when the smart money saw the derivative trainwreck and started moving into safe Treasury bonds, thereby driving the long term rate down and inverting the yield curve.
2) The "bubble break" stuff is just bullshit that the NEw YOrk Times puts out to convince the sheep that when they're being fucked by the big boys, it's just an act of God. Like Hurricane Katrina.
3) I TOLD you people a year ago that this recession was coming. See http://www.matthewyglesias.com/archives/2006/12/the_sweet_sweet_fed/index.php#039025
An excerpt:
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" Ah, Matthew. You don't realize the evil genius of Karl Rove.
When the bill for 6 years of corruption, venality, and economic incompetence comes due, someone has to be the designated scapegoat. And if Nancy Pelosi doesn't make sure that it's the Republicans, then it's going to be her.
The Republicans are handing the incoming giddy Democrats a big brown bag of cat manure called an "inverted yield curve."
It's the Fed's job to now make sure that bag bursts."
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Read'em and weep, Rubes.
No one really knows what will happen.
Just fund your roth IRA to the max with a diversified indexed fund (I like vanguard products).
Roth IRA's are amazing.
Well, an hour in and I'm down 20 grand. So no investment tips here.
Investment tips?
Canned food. Ammunition.
Plastics, Matthew.
Times like these I'm happy to be sheltered in the world of academe.
I've lost a lot of money, but 60% of my money was in cash and bonds before the crash. I don't mind losing money as long as everyone else loses more.
Its' probably more like irrational pessimism.
Now I know how my grandparents felt in late 1929 . . .
Moral hazard is for the little people.
What thehova said. Unfortunately, some companies don't offer indexed 401K funds (like mine) so spread your investments out among several different mutual funds, put a third to two-fifths of your money in bonds and make sure you've got savings in a money market fund (which tend to do great when the stock market goes down).
Otherwise, buy into index fund each month. Hold (unless absolutely necessary) for 30 years. See small gains over the years sometimes lagging big but meteoric managed funds; see big return over decades.
It's surprisingly strong at this hour only down a point and a half or so. Given the overwhelming focus on the news yesterday about international markets crashing (and HRC bringing it up in the debate... way to fuck my stocks, Hillary!) I think a lot of people are stepping in to buy and stabilize prices w/ good opportunities coming up as casual investors bail. At least my Chipotle shares are holding strong today despite drops comeasurate with the DJIA throughout the sector. Too bad I initially invested twice what I put into Chipotle into BP :) ... one of these days BP's investment in alternative energy will pay off, I swear.
I think we're seeing worldwide reaction to the Demcratic candidates' economic proposals in last night's debate.
Investment tips?
Bet heavily on Megan McArdle to tell us it's all going great because we have such bitchin' iPods and how would you like to live in the 1970s when they had no MacBooks.
Re the probability of left-tail financial events, Joesph Stiglitz said "Once-in-a-hundred-years events occur every 10 years.”
Invest a fixed amount each pay period (dollar cost averaging), maintain fixed overall percentages of different kinds of investments (buy low, sell high), buy index funds (low cost, successful companies are the ones that survive). Now, was that so hard?
Re thehova's comment "Just fund your roth IRA to the max with a diversified indexed fund "
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I dunno. I'm not a financial adviser, but my limited understanding of Roths is that there are
No tax benefit on deposits, the federal government has a record of your wealth, the profits on deposits are taxable (with a 10% penalty for early withdrawal), you are limited in what you can invest in ,and your holdings are in US dollars which have lost much of their value in the five years -- and stand to lose even more as the Fed cuts interest rates to pull us out of the death spiral.
By contrast, if you bought gold coins 5 years ago and buried them in the ground, your investment has gained roughly 300% in dollar terms and no one knows you have them.
People look at investments in current dollar prices -- which is foolish. Adjust for inflation. By that standard, the Dow Jone in 1995 had clawed it's way up to about where it was in 1929. It gained some in the 1995-2000 timeframe, but has basically been FLAT since.
Which shows the stupidity of those who advise "buy and hold". Actually, they're not stupid -- they just have some dogs to sell you and don't want you to catch onto what's going on until years after the fact. Con artists used to call it "blowing off the mark".
And lots of indexed funds don't even perform up to the level of the DOW,especially after you take out the management fees. And if you take out taxes as well, oy vey!
Plus if bad times set in, it seems to me that it would be best to be out of the market entirely.
In which case, a guy named FerFAL , who lived through the crisis in Argentina, had some interesting information/ advice: http://www.frugalsquirrels.com/cgi-bin/ubb/ultimatebb.cgi?ubb=get_topic;f=1;t=044387;p=0
Wups, put my optimistic post up before seeing the emergency fed cut. The American tourism industry must be LOVING this economic downturn now that no one will be able to afford to leave the country.
Here's a chart of the Dow Index adjusted for inflation:
http://www.dogsofthedow.com/dow1925cpilog.htm
Yes, your understanding of Roths is very limited-
1) The profits are not taxable, that's the whole point- you pay with post-tax dollars but then get free growth and withdrawals (assuming you wait until retirement, of course.) Some people argue that the government might change the rules in 30 years and start taxing them, but President Huckabee might also convert everything to a sales tax, so you can't really guess about that kind of thing.
2) You are only limited in investments if you use certain custodians. Open a Roth at Etrade, for example, and you can buy anything you want.
2a) US holding problem is solved by 2- invest in foreign stocks. Or heck, invest in gold shares if that's what you like.
Since I'm a member of the working class, I have no insider cronies in high finance circles. And since I lack a PhD in Economics, I have only superficial understanding of the market. So, I take my investment advice from someone whom I trust--i.e., from someone who isn't trying to make any money off me and from someone who shares my values. And that happens to be Michael Moore.
He said, once, that the market is run by people who control the rules, and all I need to know about it is that I'm not in that group. They're running things to make money for themselves, they set the rules that way, and the game is rigged in their favor. Period. It's not that I can't make money on the stock market, or the housing market, or whatever table they've opened to get me to invest/gamble the money I've earned. I could make it rich off the lottery, too. But probably not. I'm a member of the working class, and my sure bet is focusing on my wages and benefits, on doing what I can to make that area better. Making money off money? That's their casino.
Fed rates cuts like we've been having tend to increase inflation.
To see what that does to stocks , look at the graph of the Dow I posted above. If you bought stocks in 1966, then by 1982 they would have been worth about 15% of what you had invested in them (in real terms, not current (inflated) dollars).
Note to other commenters: While I enjoy Don's ramblings as much as the next guy, I wouldn't put too much stock (er...no pun intended) in a guy who thinks you can track the value of your stock investments without adding in dividends. Once you add in dividends (and the value of a stock is just the PDV of a stream of dividends), equity investments have averaged something like 7-8% in real terms since 1900. The headline Dow figure doesn't really mean much.
Also, I am an economist, and the current crisis is not really that bad. I would say, given current trends, that we're closer to 1987 or 2001 than we are to 1991 or 1973. Further, just looking at PPP, which holds in the long run, you should expect the dollar to *gain*, not *fall*, over the next few years.
Just an adjustment for the Chicken Littles.
Re SP's comment "Some people argue that the government might change the rules in 30 years and start taxing them, but President Huckabee might also convert everything to a sales tax, so you can't really guess about that kind of thing."
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No, but you can look at a federal government which --during the baby boomers prime earning years -- has run up a debt of almost $10 TRILLION.
You can see that that same federal government has roughly $50 TRILLION in unfunded promises to the AARP -- the most powerful lobby in Washington.
And you can see that future governments have one of two choices to raise money for those IOUS: soak the rich (who make campaign donations) or loot the IRAs of the Middle Class.
So who do you "guess" is going to be fucked badly in the next two decades?
Hint: IRA assets are listed to penny in government databases and those assets (in Traditional ones anyway) are trapped --can't be withdrawn until one reachs 65 without a 10 percent penalty on top of taxes.
Hint2: Re "getting control of spending", The rich men who give the bulk of campaign financing have made a heavy bet on overseas investments -- in China and elsewhere. Those investments , especially in Middle Eastern oil leases, turn to shit if the US military loses it relative advantage. So what are the odds of a "peace dividend" -- a deep cut in the defense budget --in the next 20 years?
It's not that I can't make money on the stock market
Actually, it is. You, the individual investor, can't beat the market, no matter how smart you are. (I'm assuming your talking about speculating.) You can't beat the market. So, yeah, what you said.
My Schwab IRA is dedicated to high-yield stocks - FRO(16%), SFL (9%), and PVX(15%). Every so often I take the dividend proceeds and either reinvest them in the same stocks, or look for a new, cheap high-dividend stock.
I also have a 401k, etc.
Also, I am an economist, and the current crisis is not really that bad.
LOL.
"Starting in the 1980s, Tetlock surveyed professional know-it-alls, including academics, think tankers and journalists, and asked them to make predictions about future events around the world.
The results, published last year in his book Expert Political Judgment, are pretty humbling. The experts he surveyed did no better with predictions in their field of study than "dilettantes," experts from other fields who were just drawing on their general knowledge. Some, in fact, did significantly worse."
Good thing he did not privatize Social Security, but pension funds are hurting, they are invested big in the markets. This is the world now, problems are global, yet we think the solutions are national.
"Investment tips?"
Buy.
Invest in a company that is developing a time machine. Then go back to last fall and buy a short fund.
Actually, with or without a time machine, if you have a few bucks lying around, a short fund or ultrashort fund wouldn't be the worst investment for the next few months.
BRKB
It's a fortress.
The emerging markets are the ones getting socked the most, but they've been bubbling upwards for a couple of years.
Call me crazy, but I'm not willing to invest a lot of faith in a chart from a web site that claims it can repeatedly beat the Dow Jones Industrial Average. To be blunt, the DJIA is a lousy barometer of overall stock performance and most people who say they can show you how to beat the stock market don't know what they're talking about.
An index fund will do poorly in bad years; true. But there are usually no management fees (I go through Vanguard), you generally get a return that outpaces inflation or better and you avoid the pitfall of managed funds, two-thirds of which do worse than the market overall.
Stocks are a sideshow. Not having a clue as to the nature of workings of the financial markets and through them the economy is missing the very foundation of our entire cultural condition. That includes all politics including international relations, justice and the rule of law and even the environment.
At now mid day it seems a stick save of stocks has been achieved but that is as I said just a sideshow. Trillions of dollars in arcane financial instruments created out of debt and counted as wealth have now gone poof. No rate cut is going to bring them back to life. Their creation was a political act, but nobody noticed.
There's a big problem with Roth IRAs (and traditional ones for that matter) that it took me some time to realize.
The benefit is touted as the fact that your earnings grow tax free. Unlike a regular brokerage account if you make 100% in a Roth you don't owe a dime in taxes on the profit.
See the downside yet? What happens if you, like me, have lost money on net in your Roth IRA? Unlike a taxable brokerage account you cannot take a tax deduction on your losses.
Roth IRAs are sheltered against tax deductions on investment losses. Not a good trait for the average Joe who invested from 1999 thru the current day.
In effect, IRAs magnify the direction of the stock market. If your IRA goes up you are a bigger winner than if you'd had your money in a taxable account. Unfortunately that principle works on the downside as well. If you lose in an IRA your losses are greater than if you'd been in a plain vanilla taxable account.
Always looking out for the little guy aren't they?
Invest in a company that is developing a time machine. Then go back to last fall and buy a short fund.
Hm. Let me just point out that if the machine ever worked successfully, you'd already be invested in that short fund.
Quoth cure: "equity investments have averaged something like 7-8% in real terms since 1900."
I love it when people quote statistics covering the last century to prove how good an investment stocks are. Usually they are trying to sell me something.
I got out of everything about 2 weeks ago right after the New Year and have enjoyed watching the slide ever since. No one can say they didn't see it coming if they knew what to look for. And I'll get right back in as soon as the capitulation happens and the upturn begins again. These sort of things *create* opportunity.
"Once-in-a-hundred-years events occur every 10 years.”
Checking my watch, the last Great Depression was a loooong time ago.
Of course, if American society were driven by some sort of Generational Cycle ...
That graph is Logarithmic! Useful for compressing
order of magnitude changes into a single figure.
However, for the individual, money is measured linearly, so twice as much money is twice as good.
Hence, the Dow doubled, ABOVE the 1929 peak,
between 1992 and 2000, then maintained those gains
till now.
"What happens if you, like me, have lost money on net in your Roth IRA? Unlike a taxable brokerage account you cannot take a tax deduction on your losses."
Yes, that's a valid critique. But remember that you can invest in a risk free money market account with your Roth IRA if you want.
And if you are in your 20's, 30's, 40, or 50's you will be investing for a period longer than a typical recession.
but yeah, generally, the younger you are, the more you will reap the benefits of a Roth IRA
Scott Ferguson: If you look at the last 30 years or even last 15 years, the average equity return is even larger.
I'm not saying stocks are always winners (all my money is in bonds...), but simply that the Dow Jones average does not accurately reflect the return you get on equities since it doesn't include dividends. There are well-known statistics tracking return on equities if you reinvest the dividends. The high long-run return to equities is simply a fact, not a sale pitch.
A finacnial-planner friend of mine once recommended Roth IRA CDs. If you suddenly need cash, you've already paid income tax on the principal (although if you want to take out the interest as well, you'll need to pay tax and penalty). If you don't need the money until retirement, then the interest will accumulate tax-free. If your bank goes belly-up, your deposit is insured by the FDIC.
The downside, of course, is that the interest rate sucks--it might even be below the rate of inflation these days. But it would be prudent to have some of your savings tucked away like this.
For the rest, as others have noted, find index funds with low management fees (anyone who's charging more than 0.50% is shafting you). Vanguard and TIAA-CREF are the least shark-like mutual fund companies out there. If you really want to minimize how much you think about these things, Vanguard has some "if you're retiring around year X put all your savings in here" meta-funds.
"Vanguard and TIAA-CREF are the least shark-like mutual fund companies out there. If you really want to minimize how much you think about these things, Vanguard has some "if you're retiring around year X put all your savings in here" meta-funds."
TIAA-CREF is a bit confusing, with all their annuity crap. Also, when I started my job last fall they botched all my allocations and stuck everything into money markets. Not happy so far.
"Hm. Let me just point out that if the machine ever worked successfully, you'd already be invested in that short fund."
That really depends on your view of the universe, doesn't it? In the infinite number of universes model, you wouldn't already be invested in the short funds because you would actually travel to a different universe where everything is identical to this one, except you invested in short funds. Of course, you'd probably have to kill your doppleganger in that universe, which wouldn't be fun.
I just heard on CNBC that wolume on the NYSE has been dropping since opening. There is no panic, sorry to disappoint y'all.
read this book.
it's short and written for the lay-person.
and then if you have time this one too:
http://www.amazon.com/Unconventional-Success-Fundamental-Approach-Investment/dp/0743228383
longer but details how the for-profit mutual fund industry rips you off.
In the infinite number of universes model...you would actually travel to a different universe where everything is identical to this one, except you invested in short funds.
I'll see you at the Rumfuddle!
News article re Democratic leaders in a panic to stimulate the economy: http://news.yahoo.com/s/ap/20080122/ap_on_go_pr_wh/economy_stimulus
Re my 10:26 am post, I fucking told you so.
Too little and too late.
Karl Rove is grinning.
It's not that I can't make money on the stock market
Actually, it is. You, the individual investor, can't beat the market, no matter how smart you are.
There's a big difference between "making money" and "beating the market". The stock market as a whole has made money (positive TSR, or pick your favorite metric) over most periods in the past. There are certainly downswings, but the market compensates you for higher volatility through higher returns than you would see in bonds or cash investments.
Re right's comment "There are certainly downswings, but the market compensates you for higher volatility through higher returns than you would see in bonds or cash investments "
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When is the market going to compensate me for those hi-tech dogs that died in 2001?
Which brings up Cure's comment "Once you add in dividends (and the value of a stock is just the PDV of a stream of dividends), equity investments have averaged something like 7-8% in real terms since 1900"
You'll notice that Cure picks 1900 --not 1929.
You'll also notice that he doesn't address my point re the stock market in the period 1966 to 1982.
My info is that long term real gains with dividends added is around 2-3 percent,depending on start point. But there have been decade plus windows of major declines. Whether the small real gain compensates for the risk is a judgement people have to make for themselves.
Strangely enought, some people actually lose money in the market. LOTS of people, actually.
The Dow Index , if anything, OVERSTATESs the gains. There are few companies on the Index that were there 40 years ago -- most have gone bankrupt. For the reason why, see Clayton Christensen's "The Innovator's Dilemma".
The Index does NOT show those bankruptcies -- failures just get taken off the list. It's kinda like judging the performance of a school system by the careers of the top 10 students of the graduating class.
Re "It's kinda like judging the performance of a school system by the careers of the top 10 students of the graduating class."
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Actually, I was wrong. The DoW Index is more like going in 20 years AFTER a high school graduation, selecting the 10 most successful students, and claiming THOSE 10 students represent the performance of the school system.
1) A recession has been in a cards since, oh, the last recession. The cure for that recession bubbled the housing market while everything else got worse.
2) The US is deeply in the hole to everyone. On a margin call (that is to say, if we were going to forcibly go over to a gold standard like people were saying Ron Paul wanted (which isn't actually what he was after)) we would be bankrupt about six times over, in paper terms.
3) The stock markets have been over-priced since 1987. They were over-priced IN 1987, which is why 'computer-trading' resulted in a 'technical correction' which resulted in a crash. To restate that, the stock market was bubbled. The market tried to correct, and the Fed and NYSE and so on, acted to prevent the correction. Stock fell to a level that was still over-priced. The market tried to self-correct again in 89-90, and then again in '96, and then again in 2000-2001. But our financial masters have repeatedly stepped in and prevented this from occurring. The Dow should've fallen to somewhere around 4500-5000 in 2001, and after inflation, but also including worsening economic conditions, it ought to fall to 6-7k. If you want stocks to be worth a little bit less than the high perfect price. Since everyone and their dog is going to do everything they can to prevent this (free market! ha! ha!), figure 9k.
You shoulda gotten out at the top, Matthew. Too late now, unless you're nimble enough to sell short. Risky. Your best bet is to hold on and wait (like, you know, ten years). About the only thing worth doing is getting rid of credit card debt and maybe swapping out stocks based on paper (financial, tech, that sort of thing) for long-term stuff that people always need, like energy and industrials and crap. If you have the liquidity, you really ought to buy, but not for some time.
max
['Look for... the bottom label...']
"Hold (unless absolutely necessary) for 30 years. See small gains over the years sometimes lagging big but meteoric managed funds; see big return over decades."
I've got news for you:
Let gold yell for you
By The Mogambo Guru
http://www.atimes.com/atimes/Global_Economy/JA18Dj01.html
"Now, I save my energy, as I have a chart from chartoftheday.com, which "illustrates the Dow adjusted for inflation since 1925". As they say, "There are several points of interest. For one, when adjusted for inflation, the bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s. It is also interesting to note that the inflation-adjusted Dow is now less than three times higher than where it was in 1929 and a little over double where it was in 1965. Not that spectacular a performance considering the time frames involved."
Then they go on to show how the damned Alan Greenspan and his despicable Federal Reserve created so much monetary inflation that all that money and debt slopped over into everything. Chartoftheday.com continues, "However, the magnitude of the bull market of 1982 to 1999 (even when adjusted for inflation) was truly of historic proportions. While the Dow is currently more than 1,000 points above the dot-com peak that occurred eight years ago, today's chart does illustrate that on an inflation-adjusted basis the Dow still trades below its 1999 peak."
So nobody made any money in the stock market in over eight years! Hahaha! "Investing for the long term"! Hahaha! "Investing for retirement"! Hahahahaha! What idiocy!
And what the chart shows, but nobody is saying, is that it wasn't until 1960 that the Dow rose high enough to equal the very peak in 1929. "Investing for the long term"! Hahaha!
In short, inflation ruins everything, and yelling about it won't make it better. You have to let gold yell for you."
"Investment tips?"
Why yes, I do have some thoughts. If your expenses (student loans) are in dollars, try to get your income (paycheck) in Euros instead of Won like a sucker (me).
Damn damn damn damn.
Comments closed February 05, 2008.
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Heads in the Sand
When the bubbles break they break fast.
Excellent read for the week. Kindleberger's Manias, Panics and Crises: A History of Financial Crises.
http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471389455
Posted by Nick Kaufman | January 22, 2008 10:15 AM