Monday, January 03, 2011

Readings and Signs

I couldn't help but thinking, as I watched portions of MTV's New Year's Eve coverage which featured the cast of the Jersey Shore, that it's hard to be bullish on America.   Why?  Simple answer:  Jersey Shore Season 3 - the mere fact that it exists.  That alone is bearish. (My most faithful reader, Bones, will be very unhappy to hear me slander the Shore crew like this, but hey - I call it like I see it)

Anyway, I also tend to somehow want to infer some sort of warning signal from the fact that the 7-9 Seattle Seahawks made the NFL playoffs and will host the 11-5 defending Super Bowl Champion New Orleans Saints on Wildcard Weekend.  But hey, the Seahawks are just playing by the rules they were given - one could even make the case that the AFC West Champion Kansas City Chiefs' 2-4 division record is as much of an abomination, although that probably wouldn't be much of a case.  538blog quantifies just how bad the Seahawks are

Also troubling to me is that fact that I very much agreed with Paul Krugman today - at least on one point:

"But then again, not so much. Jobs, not G.D.P. numbers, are what matter to American families. And when you start from an unemployment rate of almost 10 percent, the arithmetic of job creation — the amount of growth you need to get back to a tolerable jobs picture — is daunting.

First of all, we have to grow around 2.5 percent a year just to keep up with rising productivity and population, and hence keep unemployment from rising. That’s why the past year and a half was technically a recovery but felt like a recession: G.D.P. was growing, but not fast enough to bring unemployment down."

I've had a related discussion with some colleagues multiple times.  My friend Ginger Ted asked me what my GDP prediction for 2011 was.  I replied, "Who cares?  It's all Government spending anyway,"  my point being that you can't value companies based on unpredictable government spending and transfer payments.  How can everything be hunky dory when we are at (un)employment levels that we basically haven't seen for 70 years?  Which leads perfectly to my next reading, the Barron's interview with GMO Strategist Ben Inker

Q: When it comes to how investors think about asset allocation, what do you think some of the common mistakes are?
A: There are a few things that people tend to get wrong. One of them is an obsession with comparing stocks to bonds. So if you are in a situation like today, where bond yields are very low, people say, "Well, that makes stocks look cheap." It doesn't make stocks cheap. It is possible for stocks and bonds to be simultaneously cheap or simultaneously expensive. So you really don't want to fall into the trap of assuming that because bonds stink, you should be in stocks.

This highlights a point that most of you have probably heard 25 times over the last 6 months, and which drives me crazy every time I hear it.  Just because bonds are unattractive doesn't mean that stocks are attractive!  Now, there's a caveat here, because most money managers aren't going to hold large cash positions (like GMO's 30% current cash position) - in fact, most pension funds and insurance companies probably can't legally hold even 1/3rd that much cash. (anyone know the exact details of their mandates?)  Which of course, is precisely the problem: they chase returns because they have to buy something,  and then when things blow up, they need to be bailed out.  Rinse, repeat.

Well, for now, the (S&P) trend is higher.  I wrote a post 13 months ago about momentum vs. mean reversion, and I am going to try again, even harder in 2011, to follow my own advice on that front.  Don't fight the Fed, don't fight the tape, don't try to call the top.  They say that stocks take the stairs up and the elevator down - watch out when that cable breaks.  I do believe that the backdrop for a rough correction is still in place, since I don't think we solved the problems that caused our crisis in the first place,  but I'm not short at the moment.



Nemo said...

Take a gander at the table of predictions from the "Bespoke Roundtable" in December. (Near the top of the article.)

Only one asset class is predicted to go down in 2011 by every single participant.

Just saying.

Kid Dynamite said...

Nemo - Yes - I was about to comment on that on someone else's blog when I saw it, but then I realized that they also all predicted that the long bond would go down in 2010... and they were right on that note... actually, they weren't really right on that - were they? I guess not...

Nemo said...

The long bond gained in value by around 25-30%, peaking in early September, then went back down to end where it started.

It is the one asset reliably despised by perma-bulls and perma-bears alike. Which means I can't help but own some.

Kid Dynamite said...

Nemo - I very much understand your logic. At the same time, if you asked me to state the one thing I'm most confident in over the next 5 years, it's that the long bond will have a higher yield in 5 years than it does today. Which is why i'm short it!

On the other hand, I'm still pretty bearish on the US - I don't think the recovery is real, despite the stock recovery. Hence, bonds need not get crushed in the next year or two.

Purewater said...

Long Bonds did quite well in 2010. The Vanguard Long-Term Investment Grade Fund (VWESX) had a 10.7% return.

getyourselfconnected said...

Holy moly! I guess I can skip what I was going to write about tonight, you said it all! Great post.

APB said...

Agree that it may still be too early to get short here, purely on the basis of how this market seems to be trading. Never the less, it begs a question of when would be a good time to get short. I agree with your assessment that recovery isn't for real, and by now the valuations are out of whack. So, if this isn't the time to get bearish, then when is?

Anonymous said...

We need people like the Jersey Shore kids.

First off, its just entertainment. Nothing different than say, football.

And there are people making dough, and employing piles of people thru popular entertainment like football and Jersey Shore.

Besides, G-d put fools on Earth so that flim-flam men could educate them. Helping them part with their money as quickly as possible.

Life rolls on. Same as it ever was.

HR Dobbs.

Transor Z said...

If you define bullish/bearish only as one's directional inclination on the major stock indices, how could you NOT be bullish? Did I miss something or didn't the Fed pretty openly admit to playing in the equity asset market a couple of months ago?

I feel about the U.S. economy the way I feel about Magic Johnson every time I see him on TV. Once-great but now looking old and bloated and I always wonder about the cocktail of AIDS drugs he has to take to stay alive.

In the more philosophical sense of "bullish/bearish" it is with some sadness that I say that I am perma-bearish on Magic Johnson.

Transor Z said...

P.S. Happy New Year, KD.

Kid Dynamite said...

Transor - yes - but isn't it like a game of hot potato? (what the Fed admitted, by the way, was to basically trying to force people to buy stocks by taking away yield options).

I'm of the view that we have structural change, a paradigm shift. So, will the Fed intervene in the markets/economy forever? Possibly... although I doubt it. Will, one day, the economy just jump start itself as a result of some sort of Krugmanian Keynseian Miracle? Again, I think not. Many think it's just a matter of time until it "heals," but I think we've just undergone a correction from all the financially engineered excesses of the past 30 years - debt driven. I think the New Normal is a real thing, and I think reality bites...

I guess I'm of the view that we're perpetuating a ponzi scheme that must fail at some point. Is it possible that it works in some areas - like the banks? Sadly, absolutely. We can pretend the banks are solvent long enough for them to earn enough money to cover the losses they will inevitably have to take. Who knows - maybe at that point they'll resume making imprudent loans, which is what it seems our economy needs to continue that Ponzi scheme onto Main Street, where overlevered borrowers can keep their dream alive!

Transor Z said...


Must be some New Year's introspection but I've been all Classical this morning, quoting Plutarch and now Plato. Remember that ultimately Plato believed the Republic requires a Noble Lie to function with social stability, a religious lie perpetuated by the Guardian class.

But Efficient Market Theory puts us beyond that evil, because even the uber-rational Appalachian dope who wins a million-dollar lottery and buys 10 gold wristwatches, five TVs, and an addition to his ramshackle house (oh yeah, and a $100k boat when the nearest body of water is 200 miles away) is weighted on a par with George Soros.

Everybody wants to vilify the financiers as a class, but they're people's sons and daughters too. Upper strata families and circles of friends have members across the professions. Goldman traders and execs are welcomed home for the holidays and even give thoughtful and generous gifts to friends and family. And supposedly enlightened socially aware professors at top schools can be complete pricks and greedy dishonest bastards to boot.

Point is just that nobody's got a corner on social evil or perpetuating self-serving social systems using opaque systems. I know you weren't saying that at all; my point is just that I think the Ponzi scheme you mentioned is a symptom of a much bigger societal problem. IMO Marx was the best critic of capitalism but we're married to it and socialism has its own Noble Lie religious orthodoxy that's prone to exploitation and abuses.

Kudos to the Founders for an amazing social design, but it's hard not to feel like America has been both diminished and morphed into something pathological on the world stage. Who are the culprits? Corporate elites? The media? Stupid consumers? Recent waves of non-English speaking and non-assimilating immigrants and a permanent racial and ethnic underclass? All of us collectively for not understanding and demanding social cohesion? Human nature? Pedophile priests? Corrupt lawyers and accountants? Stupid bureaucracy? The Left? The Right? Video games? Drugs? Porn? The Military-Industrial-Intelligence-Security Complex? Insider trading?

So many social sins and problems to enumerate, so little time...

Kid Dynamite said...

Transor - the Ponzi scheme is a political problem. No politician is ever strong enough to stop it - because doing the "right" thing means the unpopular thing with the Populace.

Transor Z said...

Well, you just set me off on a huge rant that cited Plutarch and Plato and was too large to post and is now forever lost, to everyone's great relief. Guess the New Year has me feeling contemplative. I'll just say I think the Ponzi problem is an inherent risk of capitalism and that all of this is just symptomatic of our social institutions (public and private) getting away from us.

I think a key discussion point (and hopefully thought point prior to discussion) we should all engage in this year is the nature of our republican democracy. At times I've been inspired by it and at other times horrified. But lately I just find it consistently disappointing.

What is real is that we all eat, sleep, think, feel, excrete, fuck, procreate and eventually die. We engage in certain social behaviors instinctively. Beyond that is social construct we sustain through consensus-building, propaganda and mythologizing and, failing that, police truncheons and prison.

Our efforts to understand ourselves, usually via social sciences, are themselves prone to corruption and ideological bias. The blind leading the blind. Our elites are not a fraction as smart or visionary as they are convinced they are.

So what to do?

Transor Z said...

Sorry, thought my 12:21 pm got eaten.

Kid Dynamite said...

Blogger gives an error message on long comments, yet still posts them, causing confusion for everyone. Oddly, your follow up post got caught in the SPAM filter too! I've now released it...