Life During Wartime:
LOST DECADE in STOCKS
What’s to Be Done?
Back in town picking up life’s pieces, attention turns to ye olde Retirement Account. What’s to be Done?
To begin: some perspective as to what we’ve gone through so far this century:
That’s the tech-heavy NASDAQ Comp index.
Let’s see if the S&P 500 — more diversified than the NAS — looks much different … Hm.
It’s interesting to pin the major geopolitical events. 9/11/2001. 3/19/2003. Katrina, late August 2005. Obama’s election.
A. The New American Century: Blame it on the Banks
The greater recovery seen in S&P — compared to the Nas — from nadir early 2003 to Halloween 2007, and then the greater fall, are due in part to the rise of big banks and other financial giants, which took advantage of Alan Greenspan’s extremely low interest-rate regime (tonic for the Tech Crash and 9/11, or so it seemed) to mint money in the early years of this decade.
That is: Those profits and the correlate stock price gains meant the Financials came to comprise a much larger chunk of the S&P 500.
Here are the Financials themselves (the BKX index of banks):
It’s interesting to note that the Financials began to roll over in 2007 a few months before the S&P. It’s a useful old saw: As go the Piggies (the banks), so goes the poke. Perhaps it will be some help trying to ascertain when its safe to go back in the water.
Along those lines, here’s the past three years of a major Financial ETF (the XLF):
And here’s the past year:
Does it look like the Piggies are done going down? Reasonable people disagree. The declining volume (vertical bars along bottom) during the current run-up is not encouraging. And there’s been some news this week suggesting autumn downturn. But more on that later.
B. Blame it on the Invisible Hand of Bush-Cheney
Note the slow steady rise in stocks that began — like the Iraq war — in March 2003. This was the beginning of the recovery from the double whammy of the tech crash of 2000 and the 9/11 attacks.
We now know what many traders suspected and declared during this oddly steady recovery: That it was held so steadily in place by a Bush-Cheney Treasury trading outfit, conducting focused raids on the S&P E-Mini futures contracts, in order to support the Iraq war.
This frequent covert intervention — visible typically in the last hour on days when it was clear (by experienced lights) that the markets should turn down and enter a phase of correction — was driving professional traders crazy for years: The Market That Will Not Go Down.
Articles were written, complaints with regulators filed, investigations initiated. One thread was traced to a Chicago brokerage account … Finally, the dam burst when the Housing bubble popped, triggering what Jim Cramer accurately identified in August 2007 as “Armageddon in fixed income.”
THUS: One should note that it was not only Chairman Greenspan’s super-low interest rates that helped create the asset and credit bubbles that now pain us, but also prolonged, unprecedented politicized intervention in the stock market — in support of a war that, by all measures of international custom and law pre-existing Bush-Cheney, was indefensible.
C. Blame it on the Free Marketeers
Also note that the fall of the Financials in early 2007 was not rooted merely in worries about US housing — but a pending accounting regulation — Financial Accounting Statement 157 — which came fully in effect at Nov 2007 but was already being implemented by institutions roughly a year in advance.
FAS 157 suddenly required banks et al. to “mark” arcane structured finance instruments on their books at “market prices” — even when no market worthy of the name for such things had ever existed or been intended to exist.
The first shock here was HSBC, the big British bank, in Feb 2007, reporting something like $20 billion (if memory serves) in structured finance writedowns (paper losses).
This marked the peak in the XLF (see chart above), and touched off a mini crash in the broader markets, which the latter managed to shake off until the Bear Stearns failures in June — and even thereafter, for a while, rallying to the all-time highs in October ….
Then FAS 157 came fully into effect, in November, and the stuff hit the fan.
It’s one of the worst ideological regulatory moves in finance history. The last gasp of Reaganite Free Market fever. But hardly ever noted as such in the mainstream financial media.
D. Blame it on the Robots
1. Personal Computers, too, caused the Tech and Financial Bubbles
The great Tech Stocks bubble that began to collapse in March 2000 (see first chart) was, of course, an effect of the Personal Computer revolution.
But it’s less commonly noted that the Financial Stocks bubble of the present decade was also caused by personal computers — on the desks of bankers, analysts and finance lawyers in New York, London, Frankfurt, Honk Kong and Tokyo.
That is: Without personal computers, spreadsheets and the like, the explosion of securitized debt and complex swaps at the core of the current crisis would not have achieved critical mass needed to melt down the global finance system.
That is: These high-tech deals could not, without Excel, have been conceived, structured and managed across time. Securitization as we know it was born with the Wang office networks of the late 1980s.
2. Personal Computers turned Stocks into Trading Vehicles
Finally, note that personal computers are responsible for the explosion of professional traders worldwide, who each day overwhelm the volume of “investment” activity in markets by many multiples.
Stocks and commodity contracts are now trading vehicles, primarily. And traders don’t Buy and Hold. Their busy-bee activity makes the old notion of putting Blue Chip stock certificates in a safety deposit box a dangerous strategy.
SO THEN: One may largely explain, and perhaps to some extent excuse, our Lost Decade — its bubbles and busted long-term charts — as all but inevitable side effects of radical technological progress. The semiconductor & software revolution came at a price. We are living thru an epic battle in the war of Man and Machine and it’s not clear Man is winning.
Perhaps we’ll know in fifteen years or so, when most retirees will be people who got killed in the stock market between Reagan’s Pension Reform and Obama’s inauguration …. Statistics on poverty, homelessness and suicide among the elderly will clue us in thru the rear view mirror.
None of which would have surprised Karl Marx, who concluded that technology, on balance, was more trouble than its worth for the human race.
E. Blame it on Reaganite “Pension Reform”
Another Bubbly megatrend, evinced in this S&P 500 chart going back to 1970 …
… was ignited by the so-called Pension Reform of … 1987, was it? Which replaced conventional Defined-Benefit pensions with the Defined-Contribution plans — the 401(k) revolution.
This radical policy, which passed thru the Congress with hardly a public notice let alone debate, not only took Uncle Sam’s big corporations off the hook for the well being of the working class — an essential first step (like the AT&T breakup) toward Globalization — but also suddenly threw a lot of money at the stock markets. As seen in the volcanic eruptions of the S&P chart above.
That is: Before Pension Reform, pensions were managed professionally, and the investments that funded them were long- and medium-term bonds, by and large.
But with the advent of self-managed 401(k) and their ilk … People who didn’t know better, encouraged by Fed regulations written by lobbyists for the securities biz, had their Contributions taken from their weekly paychecks and wired to the stock markets.
And lordie, lordie, have they been reamed: The S&P today is roughly where it was in 1997. And that’s AFTER the big run-up (percentage-wise) we’ve had since last Thanksgiving — and with the near certainty of more stormy weather ahead before the current crisis may be thought to have established an Urgrund not an Abgrund in the stock markets. A True Bottom, not a False Bottom.
I recall Jim Rogers, a self styled maverick investor type, being asked circa 2001 if the worst of the Tech Crash was over and it was time to get back into stocks.
He smiled sadly and said, lordie, lordie, no. This ain’t no Mud Club or CBGBs … “This was a death in the family. It’s going to take a long time to get over this.”
Mr Rogers was right. And none of the major indices have YET gotten over it. (See the ten-year charts above: all well below the day the New American Century dawned. )
And of course, since the Tech Crash we’ve had several other deaths in the family. The Suburban got crushed by a garbage truck out on Highway 61.
F. Stabilities of an Entirely New Kind
Looking at a bit more than a Lost Decade, then, one might wonder if stocks — as long-term investments — will ever be the same as they were before Pension Reform and Personal Computers. I think (tiresome habit) of Walter Benjamin between the wars in Weimar Berlin:
Among stock phrases that lay bare the stupidity and cowardice of the way of life of the German bourgeois, the locution referring to impending disaster — ‘Things can’t go on like this’ — is noteworthy.
The helpless fixation on notions of security and property deriving from past decades keeps the average citizen from perceiving the remarkable stabilities of an entirely new kind that underlie the present situation.
Because the relative stability of the prewar years possessed him of benefits, he feels compelled to regard any dispossession as unstable.
But stable conditions need by no means be pleasant conditions, and even before the war there were strata for whom stabilized conditions amounted to stablized wretchedness.
To decline is no less stable, no more surprising, than to rise. …The assumption that things cannot go on like this will one day find itself apprised of the fact that for the suffering of individuals as of communities there is only one limit beyond which things cannot go: annihilation.
Written in 1928. (Walter wasn’t wrong — just early.)
We certainly were conditioned, in the postwar decades of the late century, to regard Hard Times as unstable and fleeting, and prosperity routine.
But then the last Liberty Tree died, in Annapolis, in 1999. And Bush-Cheney were installed. And the postwar order was, quite consciously, set aflame.
Most pundits opine as if finance were a realm of science, and economics governed by natural law. Tis a Dismal Pseudo Science, to be sure — political to its core.
And as for those (legion) currently Calling the Bottom in stocks and singing Happy Days Are Here Again, why they seem to me vile fools.
(But let it clearly be said, contrary to the old saw, that trading fools can make a bundle when the stars align. Smart fools know when to take their money and run.)
(I traded at two (small) professional houses in the 90s, one at 30 Broad just steps from the NYSE. Lots of muscleheads …)
G. So What’s to Be Done with my freakin’ retirement account?
The world since the advent of Bush-Cheney has undergone shocks that may only be compared to the world wars, and the correlate economic dislocations (ahem), in their character and quantities, are unprecedented.
If some hiding remains advisable, where to hide?
And — almost as important — when?
Here’s ten years worth of GOX — an index of gold mining companies for the most part:
And here’s ten years of an Oil index — the OIX:
Note that both the GOX and OIX are well above their January 2000 levels — in sharp contrast to the NASDAQ, Dow Industrials, S&P 500, Financials et al.
But to qualify these, let’s bring the Dollar into the picture — with the DXY — which measures the US Dollar against six (if memory serves) other major currencies. The Euro, Brit Pound, Swiss Francs, Japan’s Yen, Australian Dollar …
Gold and oil often trade inversely to the dollar — since if the dollar sinks against other currencies gold and oil, each priced in dollars, get more expensive as a matter of exchange, aside from whatever notions of intrinsic value may be at play.
Here, for example, the past 20 months of the Dollar (DXY) — against performance of the GOX (blue line) and OIX (brownish line):
One can see the little uptick in the DXY was matched by rather sharp downturns in gold and oil.
The Dollar chart paints a big current question. Dollar Bulls everywhere at the moment are stomping and singing that the Dollar is thru going down, and is about to reassert itself as the globe’s master.
If that were so, one might hesitate about jumping into gold and oil (and other metals and commodities, for that matter) right now.
What to do, what to do …
My retirement account three weeks ago recovered the high it had attained in early 2007, before the collapse of the two Bear Stearns mortgage-bond funds in June.
I achieved this recovery with funds focused on China, Gold, Energy and, to a lesser extent, Technology.
I sold all that Tech this past May — and thus missed the big NASD run up since.
The old saw — Sell in May and go away … til November — failed here, as they will when all the charts have been so thoroughly busted and abused. For now, all the usual seasonality notions remain suspect until confirmed in the rear view mirror, when of course it’s too late to make hay.
I sold about half my Energy in July.
And sold about half the China in early Aug, near the peak (so far), on advice from the woman who heads a decent china fund (AACFX) that profit taking was indicated for the short term. (If a fund manager says that about her baby — run!)
Here’s a China ETF (the FXI ):
The basic notions behind this recent selling were simply that:
– we’ve had a big steep ride up in the past ten months, and what goes up so steeply usually corrects.
– we are still far from out of the woods economically.
E.g., 2009 was milder than 2008 and 2007 for Adjustable Mortgages coming due for reset — but in 2010 they will spike again. (See the chart at the very end of this article, above Mr Potato Head.) This may crush current optimism about a Housing recovery.
I think the big run up since Thanksgiving was in part Obama euphoria. In part simply the big banks stepping back from the brink of dissolution. And in part just a big Dead Cat Bounce after the trouncing all sectors took since Halloween 2007. I think we’ve had a death in the family.
Nevertheless, there are a lot of people and fund managers with cash on the sidelines who have watched the big run up this year with increasing panic — failing to participate. Those people may now be loading their guns to buy on the current Dips.
So it’s not at all clear yet what the next month, three months and six months may look like.
Of the cash raised by recent sales, I’ve put a little more into gold, however. (Or, rather, a gold biz fund: FGLDX). So I guess I DON’T think the dollar is ready to reassert its old primacy. The chinese are increasingly unhappy and the Euro chart looks more promising to my half-cocked eye …
One thought out there is that the dollar’s recent, less than gangbustin’, rise, will peter out now that we’ve heard from the central banks of England and Japan and — tomorrow — will hear from Uncle Sam’s Fed Reserve. This view expects the dollar downtrend, after the recent correction, to continue.
But Mostly: For now I’m not ready to risk much of my hard-won recovery. Waiting and seeing. In mourning.
ed says:
For a vision of the Doomsday Scenario, check out the four charts in this piece by a respected fund manager.
September 21st, 2009 at 9:07 pm
ed says:
Well, gold has done well since the main post above. The dollar did indeed sink to the 76 level on the DXY. Dollar bulls are now roaring that it’s Up up up from here.
72 on the DXY still looks like unfinished business, however.
September 21st, 2009 at 9:20 pm
ed says:
A follow up here.
Sold half the gold holding, day before the FOMC meeting, sensing that the dollar will tip up from its sorely depressed state as a result of slight changes to the Fedspeak.
Had been looking for a reason to go to some cash because the gold chart was starting to look weak and toppy, and the dollar’s descent too depressed not to correct a bit with the somewhat positive local transient economic news of past weeks.
No long or medium term vision at work here. Just reacting to extreme charts and the local news.
Best guess: a year from now the current optimism will be gone and we’ll be clearly mired in deflationary mud. Hope I’m wrong.
September 23rd, 2009 at 11:05 am