Where we were
Over the last few weeks, it seems like there was ZERO bad news in the financial press. Even some of the more contrarian or bearish news outlets were on vacation. Even Barron’s had a sort of tame week (and they aren’t necessarily bearish). There just simply wasn’t any bad news. Lets hit new highs. The dollar reflation is going ok. Ben’s in Control. China is still pumping, oil is flowing (a little pricey, but not too too pricey for my Lincoln Navigator), a couple of wars going on…. yada yada.
But just a few weeks ago, the Bear Stearns hedge fund blowup happened. I mentioned this to Steve and he even felt compelled to blog about it. When I originally read this story on Bloomberg,I was amazed at how quickly this happened. Surely these hedge funds were on the edge for 4-6 months. Still, these big trading houses, they cover each other to the tune of Billions all the time. It is hard to grasp a billion dollars. Yet these transactions have been happening so frequently lately, they are no longer tangible to our day to day experiences. Whenever I mentioned the story to other people, they didn’t seem to think too much of it. Surely somebody has to be under some pressure for these losses?? Days later… the message was clear… ‘Everything is under control. Move along.’
Yeah, I mean, there is a lot going on that is distracting. For me its been work, the iPhone (yeah, I got one, it is super awesome, more on that later) and Ratatouille (yeah, took the boy to see it while the girls were camping, Brad Bird hits a grand slam). Steve Jobs pwns me these days. Then Harry Potter is coming out… the movie AND the final book. If you don’t think the Harry Potter book is important, wait and see what happens when it comes out. Then there is the long awaited Transformers movie. I think even the guys on Wall Street might slip out to see that. They aren’t that old. Lots o geeky stuff going on.
So. Everything is A. O. K.
Well, I almost believed it … until today.
Huh? You are either anchored or you are not. If you are imperfectly anchored, then your boat is not anchored. Here is the choice quote for those not ready to read a page full of double-speak:
Bernanke also said that as long as price expectations are well anchored, the Fed is justified in using core measures of inflation, which exclude energy and food costs.
“If inflation expectations are well anchored, changes in energy and food prices should have relatively little influence on core inflation,” Bernanke said.
Yep, food and energy (gas, ‘lectricy) inflation do not count. Do they count Have a nice day! For a lot of the economists in the room, this is old, concerning news. Still, this isn’t front page news. yet it affects everybody in this country…negatively. Ask any of the older folk if their social security payments have been moving up with ‘flation. I wonder if health care or education costs are in that measure, they have been going double digit for years as well.
Oh wait, there is more!
Possible 50 billion, no maybe 90 billion loss? Then a Zurich bank fires it’s CEO. What an interesting read. You might even sense a little panic in there. Yes you really should read that article.
Here is a choice quote about a South Florida corp:
John Devaney’s United Capital Markets Holdings Inc., which invests in subprime mortgage bonds, halted redemptions in some of its funds last week so it wouldn’t have to dump holdings. The Key Biscayne, Florida-based firm oversaw $620 million in funds on March 31.
What? A Key Biscayne Florida firm doing something funny with the money?? 🙂 My hometown has a history of exploiting the greater fool theory.
The Bloomberg guy quotes a bunch of people saying “hello, I mentioned this 9 months ago why are they noticing this now? Indeed? Conspiracy! Nah, probably this is just good old fashioned ‘don’t rock the boat… especially when you are in it’. The reality is that the market tends to not do a very good job of policing itself when there is so much money being pumped through it.
So here we are. The mortgage problem isn’t contained. The complex workings of the US and World financial markets are experiencing some reality checks. The US consumer is slowing down. The market is at all-time highs, but so are a lot of comodities that were priced in dollars. World currencies are all over the map. The analysts are all over the map. Private equity buyouts are going like gangbusters… and then going public??
What is going to happen? How does one position themselves? I’m in control of my retirement, not a pension fund… there are no pension funds for us anymore. Social security?? C’mon.
So Lets go through the list:
I don’t know what will happen to the bond market. The Fed is being very opaque. Low visibility.
I don’t know what will happened to the dollar. Appears risky. Again, Fed has the most influence here. Low visibility.
I don’t know what will happen in the stock market. There have been a lot of gains, but there has been a lot of inflation. Priced to gold or oil, the market hasn’t gone up as much as people feel it has. My take is that a few companies… very few, will weather any hiccups in great shape. There will also be a few technology stars that deliver that ’10 bagger’ Peter Lynch talks about. Lots o’ volatility ahead.
I think the real-estate and housing are toast. Salaries are not up, yet debt is WAY WAY up. The only thing that may hold up those certain hot markets up is foreign ownership.
Emerging economies. I think all of Asia will weather this in fine shape. However, their markets are super overheated right now. Not a good time to invest.
Commodities have been said to have ‘topped’. I suspect that is not the case. I think there is still room to run for certain key segments. Lots of oil, gas, rare earth elements, and steel are needed. Infrastructure needs to be built in Asia, Africa, and South America. Once the US consumer fades, these will prices settle. Hasn’t anyone noticed Mittal buying up all these steel companies worldwide?
The outstanding out-loud questions:
Most of this leads me to more confusion. Has it always been this crazy? My parents remember the bear markets that lasted for a decade. Are those extinct?
How do we accurately measure the value of the dollar?
Will there be more abrupt jolts of news and reactions in the coming months? Where is the slow adjustment or ‘soft landing’?
Is there an event that could cause liquidity to slow down in such a way that even the US government would have to comply? Why did we have double digit interest rates in the 1970’s? Why did the US government stop publishing the M3 money supply numbers?
What is the world getting from us? It is not cars. It is planes. It is routers. It is not our beef. It is iPods and Apple gear. Do these industries and others support a population of 300 million with houses that have 3 car garages?
What will the middle class look like in 5 years?
Is the era of just sink your money into ETF Indexes or Vanguard .. over? How would you have done with that strategy if it was 1928?
The Real Bottom Line
I am bullish on energy and green technology. I am also bullish on a few internet companies that own their segments. Everything else seems way to risky at this point. Somebody is going to make a lot of money on this volatility.
There is also no doubt that this bad news will fade quickly and the powers at be will get us to ‘more along, nothing to see here’.