I have decided to change the format of my original blog to include articles of opinion on current economic and social problems facing us in this 21st century. If there are any readers, I will have to warn them that this current site is not organized around that concept now and I will try to clean up unrelated posts and comments going forward to enhance readibility. In the meantime, bear with me.
I am a fan of fellow blogger Roger Nusbaum who writes a lively investment website and a recent comment from Roger compelled me to comment onm his recent comment of turmoil in the financial markets. His blog link is: http://randomroger.blogspot.com/
I am a fan of Roger and he does a good service for a lot of us. But there is one thing he says which I see repeated endlessly everywhere in books, blogs and bobbleheads everywhere. Simply put it's the cyclicality assumptions built in to all of the models. Commonly you see the 10 to 11% returns touted by investment advisers, the so called average return from US markets, going back 50 or 100 years or whatever. And Roger points out that we are now going on 10 years of 0 returns in the S&P.Hmmm. ,that might hurt the averages a bit. Recompute. Now take those 0 returns and add in real purchasing power, inflation etc and you are looking at real substantial negative returns for the last 10 years. Using returns from a short period of human history as the expected returns going forward is nonsensical blathering. The last 100 or 150 years of US and world industrial economic history was unique and will not likely be repeated. Nearly free fossil energy was the economic underpinning of this industrial revolution and the party is over. Of course there will be bouncebacks and recoveries and mays to make dough going forward but the factors that gave you 11% returns for the last 50 to 75 years will not be repeated for the next 75. Roger is a smart guy and he may see 11% returns but it's my firm contention that the S&P will not. I also manage money for a few people and putting most of their money in Swiss francs and gold and some energy stocks a
year ago hasn't made them any money but it has kept them from the 30% losses that most of the rest of us have experienced including myself by staying in equities. There is nowhere to hide if we are in a deflationary bear market. Whether this deflationary recession turns into an inflationary depression or recession is unclear. But the factors causing this destruction of our banking and insurance systems, the unwinding of leverage and the proliferation of toxic securities, CDS's. CDO's and other carcinogenic derivatives are not going away any time soon and speculating whether we are now at a bottom at 1095 on the S&P or any other number is a waste of time IMO.If you read books of the great depression you find comments identical to today like: don't panic, stay the course etc. The people who held on using that advice didn't lose 30%, they lost 90% top to bottom in the great D.If you lose 90%, you aren't coming back. If you have lost 30%, it will take you about 4 years to recover your losses if you can meet historical average returns. What if your return is 5%,1%? My final point is that most financial advisers don't look at the big picture issues of the economic and financial system. If the way we finance governmental expenditures is based on debt and credit and it is unsustainable, I think it is no stretch to say that our financial and economic system and our currency is in grave peril. There are so many converging predicaments and incurred obligations that calling it a Black Swan event understates the gravity. There is no way this debt will ever be paid off, that these obligations will ever be met. This is a Black Swan event with a whole flock of swans. Roger, I hope you keep hard at it but I hope you and your readers try to examine your underlying assumptions from time to time and at least consider the possibility that cyclicality assumptions about stock performance nay not work if the economic paradigm is changing. I would encourage any interested students of this subject to turn off CNBC and start reading worldwide sources of fact and opinion. Der Spiegel carried a recent long article on this american crisis which was well crafted and stunning. The link: