Paul Farrell from Marketwatch has been getting increasingly apocalyptic over the last couple of years, maybe longer. As best as I can remember he has always been opinionated and I have to tip my hat to the folks at Marketwatch for keeping him on board as blight or more correctly Debt Bomb Explosion might turn off some potential readers. His latest article has the secondary headline of 10 Short Term Tips For Investors Worried About 'Debt Bomb.'
It really is a misery inducing post. After listing ten very dark links he concludes that theyscream: "new meltdown, dead ahead." The ten tips are not necessarily anything you haven't read before but after listing them he goes on to note that "worse yet, 'deleveraging, weak commodity prices, increased government regulation, protectionism and deflation" will also extend the "secular bear market' for years."
He also rails against Wall Street throughout the article which is not new for him either.
I'm not terribly concerned with whether he is right so much as if things do get anywhere near as bad as he thinks what will be the best course of action? What steps can be taken now (or should have already been taken) in case he is directionally correct and even correct on the magnitude.
If the sun stops rising in the United States it will have some effect on many other countries. I would expect, much like in 2008, that effect to be very big--that is not the long term question. To me the long term question becomes 'what next?' There are many countries whose stock markets went down plenty during the bear but came back quicker than the US because despite whatever their connection to the US they were going through more of a cyclical event whereas the US went through more of a secular event which is what I think would happen again in Farrell's scenario (more likely it would all be viewed as one event).
To be clear stock markets from other countries would drop with the US in a debt doomsday but they would not be permanently broken (well some would be) and so would come back and those initial sympathy declines would in hindsight be viewed as great buying opportunities. But there would be some period of extreme nervousness or even panic.
The task of preparing involves figuring out what countries can function without the US, or more correctly get back to some semblance of normal functioning relatively soon after the 'debt bomb' because I promise much of the world will figure out how to function if Farrell's scenario plays out, even if it takes a while.
For what it's worth my opinion all along has been the US as a less attractive investment destination but not a financial apocalypse.
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26 comments:
Wow, you are usually more positive.
Read John Mauldin
Our consumer and commercial debt problems are a problem. We will likely muddle through in and out of expansion and contraction (bull and bear) for a number of years.
The big nut to crack is if US government debt gets excessive. This seems to be the current plan. If US government debt gets excessive it is checkmate for the US and the end of US era.
If these Keynesian clowns stay in control, then put all your money abroad. Keynesian policy is akin to letting the residents run an insane asylum. It is foolish to believe we will become prosperous if we just continue to go deeper in debt.
SEG
usually more positive? I reiterate my opinion at the end of the post which is nowhere near as dour as Farrell, or roubini or Faber.
not expecting a horrible outcome is not the same as contemplating one. all the people making Farrell's argument have a point and some thought should go into "what if" even if one is very bullish
Farrell can be very funny. He's almost bi polar. He was so excited about investing back in the 90s! Heh.
Sorry, it was a tongue in cheek kind of comment. I did not mean to be critical.
I like to be prepared for anything. What if the "Keynesian clowns" are right and that is the only viable recourse? Of course, we won't really know until it's too late.
In all my years of investing, we are now in a period where fundamentals have little meaning.
I follow Roger's thinking that the U.S will not be the investment leader in the future. Now, the trick is contemplating where that leadership will be!
Keynesian policy did not end the depression in the 1930's. WWII got us out of the depression.
The Japanese have followed the Keynesian plan and are at or close to 200% of GDP in debt. Keynesian policy did not work Japan has been in a quagmire for 20 years. Japan tried it, with no benefit, and is now totally screwed due to the debt they have accumulated.
Keynesian policy have never worked any where. I do not wish Keynes policies on any country certainly not our own.
Keynes lost his shirt investing in the markets and had to be bailed out by his parents.
Socialist love this bogus policy being taught as it encourages government control. So the Keynesian myth continues as most professors are socialist even in economics departments.
SEG
No apocalypse but a general lessening of US global influence probably. Farrell has gone rather overboard but for those genuinely interested in exploring the big picture here I recommend this relatively slim but astonishingly comprehensive tome at http://tinyurl.com/yhazs5m (I have no pecuniary interest, it's just a very well researched and written book).
My conclusion is similar to Mauldin's (and SEG's) but the logic and model largely opposite. The personal and commercial debt overhang will probably involve expansion and contraction for some time -- credit collapses involving real estate are typically prolonged -- but this time period will be greatly extended because nearly three decades of spending on geegaws, pork and wars has transferred a great deal of US wealth to other countries and current attempts to control costs while spending wealth where it is actually needed most are being stalled and derided by those whose philosophy and policies caused the crisis in the first place.
If the neo-conservatives and those who have rediscovered their inner Hoover succeed in the truly misguided goal of forcing the federal government to contract spending at precisely the time when it should be offering greater support to the jobless or underemployed, small businesses running out of credit, cities and states running out of revenue, infrastructure repair and expansion, etc then it is I who will be sending more of my money abroad because, with the exception of long US bonds (which will be very valuable in the inevitable deflation), the US will indeed become a poor place to invest.
OTOH if this young president and a feckless congress can actually get some reforms in health, energy, infrastructure and jobs though the blockage -- reforms that are more than cosmetic I mean -- then costs may come under some control and bubbles become less ferocious (less volatility means less money for Wall Street and more for Main Street you see) so the loss of US influence will be much more gradual: Even if we do not fully recover we will at least have time to learn how to enjoy not being the world's police person.
So RW, the future is unknowable, act accordingly
I'm not sure the Japanese quagmire is really a good comparision - yet. Much of the research I've read indicates that Keynesian policies WERE the right thing for Japan - it's just that it took Japan years to start it up, and they didn't do enough. And they didn't shut down "zombie banks." And by then it was too late.
Anyway, this interests me becasue it's a decision I've been looking at for a year now. What do I keep in cash, and what do I go ahead and invest? I'll probably take some profit on a few pieces of the portfolio and keep anything new in cash. Not that I know what I'm doing, of course. hahah.
Anon 8:34, Yes.
Stephen: Ritholtz has a timely post on this at http://tinyurl.com/yhchwnv
Roger, IIRC you don't object to external links including other blogs?
links are welcomed--this is how the blogosphere functions best.
drive-by spammings on the other hand...well those get deleted immediately.
I can never figure out whether Paul Farrell intends us to take him seriously with his end-of-the-world posts. His other bi-polar (thanks SD) personality consistently says "don't worry, invest in lazy portfolios for the long-run".
In any event, I agree with W.Bernstein and others who advise staying the course, because if armageddon happens, what difference will it make anyway, and if it doesn't, you'll be better off financially.
PS: My entry in the next few year contest is a 74-82 scenario for both US and international markets. Good time to be steadily investing through ups and downs.
The Japan argument from the Keynesian is laughable IMO. They followed the Keynesian play book to a T and it did not work (it has never worked anywhere).
The Keynesian argument is Japan should have piled on even more debt to become prosperous. One can always make the bogus argument that Japan should have incurred even more debt for it to work, but it just rings hollow.
Japan is at or close to 200% of GDP. Japan is really maxed out on debt. Trying to continue to argue to increase debt when you are maxed out is essentially saying lets come up with an excuse to not count this failed example of Keynesian policy.
Now Japan has all the debt promoted by Keynesian programs and nothing to show for it. Japan has left their children a deeply indebted country. Do you really want to bankrupt the USA to build bridges to no where?
SEG
As I understand it, Keynesian policy is to deficit spend when the economy is in recession/depression (expansionary fiscal policy) and run a surplus when the economy is expanding (decreasing the upside bubble so the next inevitable down turn in the business cycle will not be so severe). We, the US and the rest of the world, are good at deficit spending during recession/depression periods, but fail to be true Keynesians during expansionary periods because we continue to, at least, spend the revenues that come in and generally continue to deficit spend during already expansionary times (because politicians think the public so demands). It probably is inevitable, due to our aggregate failure to control debt (personal and gov't) over the last 3 decades even during expansionary times, that the time has come where we cannot avoid paying the piper; in other words, deleveraging to a truly sustainable level (something akin to paying off the credit cards) must now take place. The aggregate deleveraging is painful, especially at the state and local gov't levels where balanced budgets are generally mandated, and will probably take 1 to 2 decades before we reach a sustainable starting point for being true Keynesians again.
Isn't part of Japan's problem a lack of abundant natural resources for their economy? Couple that with some of the same problems the United States is having; a national standard of living that is unsustainable. We're now in the era of the great equalization (of global living standards). Developed economies will stagnate will undeveloped countries with lots of labor and natural resources catch up.
Well, if you don't have the resources, you have to import them. Which can be a problem if you do not have a lot of exports - but Japan did.
Good morning RR crew.
I think that the bi-polar approach to investing has a lot of merit actually ;-) I personally hold a bunch of gold / long bonds / cash in a Browne style Permanent Portfolio, this is supposed to protect against the apocalyptic scenario as much as possible. Additionally I also have a smaller amount dedicated to a group of more aggressive short term trading strategies that go long or short asset classes that are trending strongly.
If there is strong up or down volatility anywhere in the world I would like to take advantage of it. If the music stops e.g. major exchanges stop trading, retirement accounts are "annuitized" or Congress hamstrings markets and speculators: then hopefully gold cash or long bond coupons will buy something during what comes next.
The worst case scenario is absolutely not financial though. The worst case scenario is if the US starts or gets pulled into a major war for world dominance.
Keynesianism: I think that a key thing to consider when debating this is when Keynesian expansion accelerates monetary velocity and credit creation and when it doesn't. Keynesian professors and Japanese economists think that Keynesian expansion will always work, and arm-chair Austrians think it will never work. Keynes implied that it would always work, but I don't necessarily think he believed it would.
The real answer is that monetary expansion can have the intended effect in certain circumstances - but it probably wasn't really needed then ;-> It depends on the underlying economic realities: not what politicians wish to believe the economic realities to be.
Keynesian expansion is manipulation of the market through its money. As such the chapters on market manipulation at the end of "Reminiscences of a Stock Operator" may be instructive. In short my view is if a central bank is the dominant interest in creating and spending dollars, then the gig is up.
The problem is EXCESS debt levels
Personal debt
Corporate debt
National debt
They are all excessive and all need to be reduced.
Marc Faber is right. Obama is making Bush look like a genius.
Sigh. Yeah, god knows we had great oversight up until 2009.
If the music stops e.g. major exchanges stop trading, retirement accounts are "annuitized" or Congress hamstrings markets and speculators: then hopefully gold cash or long bond coupons will buy something during what comes next.
Something along these lines does seem like a worst case scenario where essentially the "rules" of the "game" we play when investing/trading are completely changed on us rendering all past decisions/actions completely irrelevant, and essentially any past savings and investing success in some way gets "confiscated" to some new economic/monetary order.
Not sure what if anything one can do to protect against this. Seems like this falls into the realm of political analysis, not investment/market/economic analysis.
Ever since fall 2008, I've had this nagging feeling that on some level in some small way our entire economic/monetary system has a Matrix-like quality to it, and despite having a MBA in finance I'm not sure I really feel like I understand the true reality.
For now I see a stock market that to me bears no resemblance to reality in terms of government at the federal, state, and local levels, the amount of dollars directed towards public assistance like food stamps, and the magnitude and pervasiveness of structural unemployment and underemployment. It is as if the stock market and at least some portion of corporate profitability is utterly disconnected from consumers, labor, wages, etc.
Not sure what my point is if any, just some rambling I suppose.
roger - I'd be interested to hear your thoughts on todays post over at Traders Narrative (http://www.tradersnarrative.com/the-200-day-moving-average-is-your-friend-3635.html) regarding the 200 day moving average. Interesting to note that returns were highest for the 200 day MA (versus other MAs), but still lag a buy and hold strategy. Curious on your thoughts
Joke or some element of truth?
http://www.theonion.com/content/news/u_s_economy_grinds_to_halt_as
i will read the TN piece but I ran the numbers in a post a few months ago going back to 1981 or 1982 and heeding the 200 DMA outperformed quite noticeably--not by a mile but noticeably. I would note my look did not assume any short sales.
Keynes policies don't work, and they didn't work in Japan either. We are twenty years down the road, and its stock and real estate markets are at levels last seen in the 80s and 70s (for real estate).
We are following Japan's situation to a T. Our consumer and corporate debt levels got way too high. These components are now paying down debt, and the government is stepping up its debt creation. So the private sector delevers while government levers up. Japan was fortunate that they had the savings to fund their debt from its citizens. Japan started its government binge while their baby boom generation was in its prime savings years. Now, their day of reckoning may be looming as the national savings rate will drop as the generation that funded the government debt now spends in retirement. Japan won't be able to fund its debt at the low levels if they need outside investors.
Also, Japan's problem was not a lack of natural resources. Their industrial, export economy has been strong throughout this mess. Their problem is simply too much debt and malinvestment.
Richard Koo is making the argument that we need to follow Japan because they never experienced a brutal decline. Of course, I don't know what you call a 70% drop in its stock market and home values selling for 1970s prices, but they didn't have high unemployment.
If we let the market reset by itself, we will experience some harsh pain. However, it won't be as bad as the Depression. The Great Depression was amplified by Smoot-Hawley, which set off an international trade war.
I stopped listening to Paul Farrell when he wrote about a so-called "100-Year Bear Market".
It's hard enough to predict what's going to happen in 100 days, yet alone 100 years. The fact that he quoted analysts who are making century-long forecasts means he's pretty much gone off the deep end.
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