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Dive! Dive! Dive! 
20th-Feb-2004 01:28 pm
(The purpose of this entry is so that I can look stupid for crying "Wolf!" and, thus, so that you can be laughing at me six months from now when the NASDAQ is up at 6000 and the DOW has hit 20K or whatever. Really, for the sake of all the folks who are about to get burned, I really would like to be wrong about this.

... then again, for the sake of the various bets I'm placing, and for the sake of the re-election chances of a certain venomous turd (or collection thereof), perhaps not...

and, for those of you who have been following this story, no, there really isn't anything new that's triggered this; just the gut feelings piling up + some vague signs in the latest S&P 500 charts that a non-guru like myself can interpret as "exhaustion"
Summary:  If you are currently heavily into the stock market, now might be a good time to be getting out.
Or if you don't want to get all the way out, at least get half out. Diversify. There's nothing dishonorable about having a big chunk of your assets sitting in money market.

You probably won't manage to catch the top, but in the long run, you'll be very happy to have been out of there when the 16-ton weight came crashing down.

Yes, I'm surprised that we didn't start sliding a few months ago, but that still doesn't really change anything. This "recovery" is largely explainable in terms of one-time effects (GDP spike attributable to Iraq war buildup, last gasp of the refi boom, taxcut checks coming back) and thus not sustainable. The powers that be are clearly trying to juice things along until the election, but unless there are some really odd tricks up their sleeves, I don't see how they're going to make it given that they are out of ammo (interest rates can't go lower; they can't start another war;...)

The year is now 1973; "LBJ" has fucked us over deficitwise and OPEC has just cut production. Obviously, some things are different this time, e.g., the US is now a net debtor nation rather than a net creditor, we are way more dependent on foreign oil, and the US dollar now has viable competitors in the contest to be everbody's favorite World Reserve Currency (read EURO). And we are more dependent than ever on the good graces of Japan and China who are both buying T-bills like mad to keep the dollar propped up.

"Buy and hold" may have been a nice strategy for the roaring bull market of the past 20 years but as far as equities are concerned, we're in a secular bear market and the rules are different now; "Buy and hold" might well mean waiting 10 years to get your money back.

Or, if you're really intent on doing "Buy and hold" then you need to find something that's currently in a long-term bull market: like gold or silver. That's pretty much it for bull markets these days.

Anyway, you've now been warned.
20th-Feb-2004 01:59 pm (UTC)
Yeah, that's what we need... another capital loss to add to the one we've been carrying over for the last THREE YEARS. THANKS, BUSHIE
20th-Feb-2004 02:06 pm (UTC)
Can't start another war, hahaha, anyway....
20th-Feb-2004 03:41 pm (UTC)
During the filming of [City Lights] the stock
 market crashed. Fortunately I was not involved because 
I had read Major H. Douglas's Social Credit, which 
analysed and diagrammed our economic system, stating that 
basically all profit came out of wages. Therefore, 
unemployment meant loss of profit and a diminishing of 
capital. I was so impressed with his theory that in 1928,
 when unemployment in the United States reached 14,000,000, 
I sold all my stocks and bonds and kept my capital fluid.

"The day before the crash I dined with Irving Berlin, who 
was full of optimism about the stock market. He said a
 waitress where he dined had made $40,000 in less than 
a year by doubling up her investments. He himself had an 
equity in several million dollars' worth of stocks which 
showed him over a million profit. He asked me if I were 
playing the market. I told him I could not believe in 
stocks when 14,000,000 were unemployed. When I advised 
him to sell his stocks and get out while he had a profit, 
he became indignant.  We had quite an argument. "Why, 
you're selling America short!" he said, and accused me 
of being very unpatriotic.  The next day the market 
dropped fifty points and Irving's fortune was wiped 
out. A couple of days later he came round to my studio, 
stunned and apologetic, and wanted to know where I had 
got my information." 

[Chaplin, Sir Charles Spencer. My Autobiography. London: Penguin Books, 1964.

For those who like to read at least two sides before taking action, here's an article by James Glassman that sides with Irving Berlin's optimism.</pre>

Being from B.C., I'm familiar with the Social Credit theory. I haven't been in the U.S. long enough to believe in the power of the market when millions of jobs have been lost or outsourced. I had thought that "King Joe" worker, with his wages from his job, would support through consumption activity the U.S. economy. CEOs believe otherwise (and they're richer than me, so they must know something I don't). Whose well-thought-out arguments should I read to learn that the U.S. economy will be strong BECAUSE millions of Americans have lost their jobs and therefore their power to consume?

In all seriousness, if I can accept the market timing advice of a silent screen comedian, I can accept the market timing advice of a MOO wizard. And in candour, prior to reading this I expanded my exposure to international mutual funds and contemplated selling my stocks -- I'm overweighted in large-caps -- but keeping my mutual funds, because they're in my retirement accounts.
20th-Feb-2004 10:35 pm (UTC) - Re:
Whose well-thought-out arguments should I read to learn that the U.S. economy will be strong BECAUSE millions of Americans have lost their jobs and therefore their power to consume?
I think, for the conventional "wisdom", you can pick pretty much any major bank or brokerage website, and somewhere in there will be their "Market Outlook". Tuning in CNBC for 10 minutes will probably also do the trick. Generally, it's some variation on "cheap labor and higher productivity [i.e., same number of workers producing more stuff 'cause they work longer hours without having to be paid more] leads to rising corporate profits mumble mumble good".

What's actually odd, is that my views on this are actually more coming from the conservative nutcase end of the spectrum. The language is different, of course; in particular, they certainly don't talk about Social Credit theory (which I myself have never actually heard of before today). But when they say that the economy has essentially been held up for the past few years by consumer spending, and that, given the huge levels of consumer debt burden and the increasing unemployment (despite the BLS's continued efforts to fudge the figures downward), this just can't continue, well... that does seem to be largely the same story.

I'll also readily admit to a perhaps inordinate sympathy for the contrarian points of view (i.e., the idea that market tops/bottoms tend to be marked by extremes of optimism/pessimism, that the crowds/legions-of-retail-investors are the ones most likely to get it wrong --- never mind that the professionals rely on them to be there to sell to when they themselves want to get out --- that one way to identify the final stages of a blowoff is when every last random bozo is piling in [and likewise you only get a real bottom when everybody is making the sign of the cross when you mention stocks and all of the professional advice is "STAY THE FUCK OUT" --- meaning if they're still trying to call the bottom on CNBC, you know we're not there yet).

Various bits of reading in no particular order

Note that none of these folks are actually making any kind of specific prediction as to when (or even that there is going to be a crash of some sort).
21st-Feb-2004 05:46 am (UTC) - Re:
I do read Bill Fleckenstein on occasion.

But when they say that the economy has essentially been held up for the past few years by consumer spending, and that, given the huge levels of consumer debt burden and the increasing unemployment (despite the BLS's continued efforts to fudge the figures downward), this just can't continue, well... that does seem to be largely the same story.

I've read that too, to the point where I'm starting to believe it, but I saw in one person's post on another forum that those statistics may be skewed. The January/February issue of the Atlantic Monthly was cited, so I'll have to look at that.

Here are some URLs on the Social Credit theory, and the history of the Social Credit party in British Columbia:
•<Social Credit by Major Clifford Hugh Douglas
Brief history of Social Credit politics in Canada

James Glassman was the guy who wrote Dow 36,000 and it appears to me he may be one of those "irrationally exuberant" people. The article I posted was published in 1998.
21st-Feb-2004 12:51 am (UTC) - Re:
Let's assume that Berlin began investing with $2 million at the start of 1926. By the time of the crash, he had about $5 million. Using statistics from the Standard & Poor's 500-Stock Index (a good proxy for the U.S. market as a whole) and analysis by Ibbotson Associates, the Chicago research firm, I calculate that, if Berlin had a broad-based portfolio, he would have just $1.3 million at the end of 1932, a loss of 74 percent from the peak in 1929.

But by February 1937, he had recouped all of those losses and was back to $5 million. By 1945, his portfolio was worth $7.9 million; 10 years later, $37 million.
Eeee. I'd love to know what he's basing this on; it's the first claim I've ever seen that the market had recovered by 1937. I would have thought the historical consensus was fairly clear that, while FDR made a number of necessary changes to stop the bleeding, it really took WWII to get things moving again. And it's a matter of record that the DOW didn't surpass its 1929 level until something like 1952 (I believe something similar is true of the other indices).

It gets even worse when you realize that the indices themselves are constantly being revised (hint: Microsoft was not part of the 1929 DOW), meaning that even if you owned all of the 1929 DOW stocks in the correct proportions, simply holding onto them would not get you back to where you started by 1952; a fair number of those companies just didn't survive, period.

Finally, there's the small matter that your original quote says Berlin was wiped out in 1929. I'll grant Chaplin could have gotten this wrong like he got the employment number wrong. But sometimes you don't have a choice about selling (e.g., need to pay for food or to meet margin calls). And psychologically it's just very, very difficult to hold on in a crash situation; most people end up not doing it for one reason or another (which means they end up selling at the worst possible time). Buy & hold doesn't work very well if you can't actually hold.
By his death in 1989 at the age of 101, Berlin would have seen his $2 million grow to $1.1 billion
Sure, if you can hold on and if you can afford to wait 60 years, buy and hold can wonders. For shorter periods, though, the stock market has been known to go sideways for a very long time (e.g., 1969-1982) and most people can't afford to wait that long.
21st-Feb-2004 05:04 am (UTC)
do the major brokerage houses and 401k folks even *have* a "stick this in gold and forget it for a while" fund?
21st-Feb-2004 07:24 am (UTC) - Re:
For 401k plans, you're at the mercy of whatever choices the plan administrator decides to provide ("What, you didn't want it to be All MSFT Stock? WTF is the matter with you?"). I think 401Ks can be converted into IRAs which can then be nearly anything you can do in a brokerage account --- but since I haven't actually done this myself, I don't know for sure.

As for how to buy gold in a brokerage account, I seem to have run up against this stupid comment length limit, so it'll have to be a new entry.
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