Emphatically, I am not encouraging investors to deviate at all from their own investment discipline, provided that it is well-defined, well-tested, and matches their risk tolerance over the complete market cycle. But investors who have no such discipline – who believe that it is possible to simply “hold stocks until they turn down” or “party until the Fed takes away the punch bowl” – these investors are likely to be confounded by the failure of these simplistic notions to provide the comfortable exit they unanimously envision. Today is not 2003, and it is not 2009.
This came after a paragraph or two defending his permabear reputation. In many past posts I have talked about taking bits of process from various sources to create your own process and Hussman has had an influence on my approach in terms of investing for the cycle or longer and sticking to a portfolio discipline that you have a reasonable basis to expect will work.
I diverge from him markedly on when and how to hedge and navigate the market's cycle. The chart compares Hussman Strategic Growth in blue, the Hussman Strategic Return in green and the S&P 500 in orange for the last year. The S&P 500 is not really the proper benchmark but it does create some context for what has gone on in the world and these two funds, both of which can and do own stocks. A little over a year ago Hussman Strategic Advisors launched the Hussman Strategic Dividend Value Fund (HSDVX) which according to Google Finance is up 2.4% in the last year and had 69% cash as of its last (but undisclosed on Google) reporting date.
If you are familiar with Hussman you know he understands markets, cycles and economics. In the last few years the market is up a lot but it has done so with some amount of aid from unprecedented Fed policy which should raise doubts about the underlying health of the economy.
In my opinion the way to reconcile this is to hold off on extreme defensive action (69% cash, if accurate, is extreme) until there is more of a sign that the market is rolling over or otherwise headed downward. For us that has to do with the S&P 500 breaching its 200 DMA but there are several different ways that offer a reasonable, not infallible, basis for warning the market is headed lower.
18 comments:
Long time reader. Some years ago I complained that your use of SP500 was not an appropriate proxy because it did not include dividends. I distinctly recall at the time you protested that statement, but eventually seem to have come around as you remind readers now that SP500 excludes dividends.
I still object to your use of SP500 in comparisons for the same reason. Would you please in the future use VFINX (Vanguard 500 fund) since it includes the total return which includes reinvested dividends?
You wrote: If you are familiar with Hussman you know he understands markets, cycles and economics. In the last few years the market is up a lot but it has done so with some amount of aid from unprecedented Fed policy which should raise doubts about the underlying health of the economy.
There seems to be an extraordinary mis-understanding of how the Fed works. Simply put, they have a break pedal and a gas pedal and they use it wisely as they have many times in the past hundred years. It seems a no-brainer to me and thus it was an easy decision to "back up the truck" and load up in the spring of 2009. Not suggesting for a moment we're smart here, just responding to the actions of the FED.
" Simply put, they have a break pedal and a gas pedal and they use it wisely as they have many times in the past hundred years."
What are you smoking?
the Fed caused the internet bubble, the housing bubble, and are trying their darnedest to ignite a new bubble and they could care less what bubble they cause. This will end BADLY - VERY, VERY, BADLY one day.
True, the fed has a gas pedal and a brake pedal. But they are either blind or myopic and I forgot to add they have a very rudimentary understanding of economics as they do not properly understand DEBT.
Most people think the Fed prints money (I did when they taught me that in my economics courses). Now I understand that the Fed prints base money ONLY. The banks and fractional reserve lending can create up to 20 times the amount of Fed base money (which the banks prudently refuse to do right now).
The banks currently understand the consequences of debt (I know seems new for the banks :).
Until the Fed and this country understands the ramifications of both private and government debt we are screwed. For those who think DEBT does not matter please realize the other side of the ledger sheet will tell you that if DEBT does not matter than cash balances do not matter either. This is the bizarre view point of most citizens, the fed, politicians, etc.
SEG
SEG. Good comment, and I agree, the economic and investing future scares the dickens out of me. As I see it, government borrowing is significant essentially only to the extent of government resources it takes to service the debt, currently around 6% (I think) of revenue. If interest rates were to return to historically normal levels, the percentage of revenue required to service the debt would increase dramatically and that would drive interest rates even higher. Likewise, as the debt balloons to ever greater heights, the percentage of revenue required to service the debt goes up, even if interest rates remain low.
Also, would you define "Fed base money" and discus what backs it up.
Thanks
Be pragmatists...we are all in the same ocean. Just be sure your position relative to everyone else is superior.
You guys think you're the only ones troubled by the Fed's moves?
What is a reasonable alternative?
08:56 here. Yes, SEG, you do have an understanding of how the Fed operates. Having said that, consider that they have had to deal with the most unbelievably irresponsible actions of our legislators and our executive branch for a 100 years now and they have in my estimation done a masterful job in light of those conditions. Think recessions and depressions, two world wars, and a host of other irresponsible events generated by our government. You say it will end badly but I would like to submit it doesn't end. Yes some will have a"badly" experience along the way just as some did in 2008, the internet bubble,20% interest rates, the oil embargo,the world war etc etc.
"Be pragmatists...we are all in the same ocean. Just be sure your position relative to everyone else is superior."
I am a pragmatist. I am up over 175% from the bottom, because I realize the Fed is full of myopic, bubble blowing idiots. I can not control the fed all I can do is go along for the ride (which will continue with corrections).
That does not mean that the debt and money will eventually be made worthless one day. I am in US money and debt today, but if this continues I may have to switch to foreign equities, debt and watch the US decline. I hope we recognize the problems of excess debt before it is to late, but if things continue the way they have I will not be optimistic.
SEG
"Yes, SEG, you do have an understanding of how the Fed operates."
You do not get it. Banks can create 20 (I said 20) times the money that the Fed prints.
It does not matter if it is your local bank, detroit or stockton CA, mortgage debt, student debt, credit card debt, or etc.
If the debt defaults or simply PRINTS instead of defaulting the other side of the ledger sheet becomes worthless or nearly worthless.
It is the DEBT (20 times the Fed) that controls in the LONG run. The Fed controls in the short run. The Fed is saying they are printing 85 billion a month. When the started they only had roughly 800 billion. They are now printing 100+% of what there total reserves were originally. How long do you think this madness will continue?
100 years of past experience means nothing if they are currently willing to run off a cliff.
They could still push this along for some time now to much higher highs in equities and I intend to participate.
SEG
Indeed, the value of the dollar will fall such that it is next to worthless in tomorrow's dollars. But it has always been this way. So what? If that were not the case, then we would have no growth in the economy.
Something everyone knows is something not worth knowing.
"I am up over 175% from the bottom"
I guess I am too since I'm a buy and holder. So what?
*"I am up over 175% from the bottom"
I guess I am too since I'm a buy and holder. So what?*
heck your math and stop making assumptions. The market is not up 175% from the bottom.
BTW I was up (ever so slightly in 2008).
The so what is rather large percentage wise.ghtedsu 613
"Indeed, the value of the dollar will fall such that it is next to worthless in tomorrow's dollars. But it has always been this way. So what? If that were not the case, then we would have no growth in the economy.
Something everyone knows is something not worth knowing."
Take a look at the ratio of M2 vs the Feds Adjusted Monetary Base from 2007 to today (or from 1970 to today for that matter).
Your statement shows your choice not to look at the data (the facts) and how ridiculous things are today. Ridiculous will soon enough show you a change (inflation or deflation) that is very, very different from a gradual decline in the value of the dollar over the last several decades.
Still not totally predictable whether we will have deflation or tremendous inflation or one followed by the other. Look at Japan (which we may not follow exactly) to see the deflation out come. BTW, do not assume if we do not have deflation like Japan that things will be rosy here.
Debt and money printing are totally out of kilter and there will be severe consequences - eventually. Read Hussman for predictions. Hussman has very good understanding of eventual potentials even if his market timing of these potentials is below average due to the extreme nature of monetary policy since late 2008 (below S&P, below my results, likely below Rogers and many others)
SEG
If you're so smart, please share with us your solutions.
SEG,
Your ramblings are incoherent. You repeatedly say this may happen or it may not. Really, what is your point? What actionable information do you have? What are you saying that is better than a coin toss?
There are plenty of intelligent people who support what the FED is doing and plenty who oppose it. Who will be correct? I don't know. Does it really matter?
Trying to convince anonymous posters on an internet blog that inflation or deflation might happen doesn't really seem constructive.
Wow. Great comments today. We have been dealing with the ramifications of our first celebrity Fed Chief in Alan Greenspan. Plant yourselves back in '96 and think about CNBC, etc. I find it very intriguing that the Fed can manipulate any rate associated with consumption. This is always the answer. Let people borrow for less. The service economy, entice people to borrow heavily dream scape is over. Why are student loans above 6%? The borrowing costs for youth are inherently stacked against them living the life their parents had.
The Fed has put itself in a position that in the '80's was arguably proactive and now the policy is only reactive. The Fed continues to over manipulate and further inflate bubbles of all types – equities, housing prices, credit. Bernanke is merely doing what he promised to do. No real plan as to what happens when the latest MBS plan is tapered off. What will mortgage rates be like in 10 years? When all the boomers want to sell the houses they paid .99 cents for that are still worth north of 500k due to outright corruption and fraud in lending and real estate industry and a 10 year at or below 2%?
My assumption is that anyone commenting on Roger's great blog reads Hussman, Mauldin, Bass, et al or other skeptical bears du jour. Bottom line, take home here is the Fed's has no control over the upward trend in prices paid for services and goods the consumer NEEDS (health care, gasoline, tuition, food, heating) and relatively good control over services or goods the consumer WANTS (TV's, technology, autos, etc). The goods and services we need will continue to get more expensive and the goods and services we want will get cheaper. Wage inflation hasn't seemed to help the middle class keep up with absolute inflation as we all know the CPI is not a true representation of what is going on in the markets.
Dunno where it goes from here, but this blog has always offered up taking responsibility for one's own well being.
Randy in San Diego
One thing I can attest. Enjoying the amenities and cuisine of Marco Island and Naples' Fifth Ave. with a couple of spring training games in the company of old friends makes one forget the Fed, bulls, bears and all the market hoopla. The Marriott Resort Hotel and the beach are icing on the cake.....at least for a couple of weeks.
T
"Bottom line, take home here is the Fed's has no control over the upward trend in prices paid for services and goods the consumer NEEDS (health care, gasoline, tuition, food, heating) and relatively good control over services or goods the consumer WANTS (TV's, technology, autos, etc). The goods and services we need will continue to get more expensive and the goods and services we want will get cheaper. Wage inflation hasn't seemed to help the middle class keep up with absolute inflation as we all know the CPI is not a true representation of what is going on in the markets."
Roger, alot of meat here. If this is try, you have an eloquent investing theme of wants vs. needs.
Post a Comment