Stock Market Prediction
We’ve seen the stock market hit its high for the year already. I’m predicting that last week’s 9,424 on August 12 will be the high for all of 2009.
Stocks vs. Bonds
Think about this:
The federal government wants stock prices to remain low in order to attract investors to treasury bonds.
The federal budget deficit is running at record levels. In order to finance the deficit, the federal government issues treasury bonds. If no one bought treasury bonds, the government would not be able to finance their deficit without having the federal reserve purchase treasuries directly through money it “prints” from nothing. In order to avoid that obviously inflationary measure, the government needs to attract investors into purchasing treasury securities.
If returns on stocks are flat or negative, or if recent history has proven that the stock market is subject to potentially large losses, investors will naturally turn to the safety of bonds. The income from treasuries is seen as one of the safest investments there is. Even if demand for treasuries increases to the point where 3 month treasuries are only yielding 0.01% (as they were in December 2008), that was still seen as a better investment than stocks at the time.
In this respect, the federal government competes with private companies for funding (through private and foreign investment) and has every incentive to make their financial product seem as attractive as possible.
Hoping the stock market will come back response
Big Money Tony made a comment to my post titled “Hoping the stock market will come back” which I felt deserved a full post as a response:
BMT, I have two points to make regarding your comment:
First is that you seem to think that the only investment choices available are stocks, real estate, and savings accounts. If you look outside of “traditional investment vehicles” as you put it, you’ll find a wealth of Exchange Traded Funds (ETFs) available to the average investor that allow people like you and me to take advantage of both the long and short side of a range of investments simply by buying shares of the ETF through a brokerage account. For example, you could invest in commodities such as gold and oil by purchasing shares of GLD and USO, respectively. If you think that the long term treasury bond market bubble is about to burst, you could buy shares of TBT, whose price is meant to track “twice the inverse of the … U.S. Treasury index” which means that it goes up when bond prices go down. (Full disclosure: while I am not a broker or investment advisor, I do own shares in the above mentioned ETFs).
The second point relates to the bigger picture of “the thing I can not get over is that if you eliminate stock market climbing as wealth building, there is not much left to build wealth on.” This takes me back to my original point about waiting for the market to come back: you and I are not going to get rich off of our investments. It became the American dream in the late 1990s to be able to live off your investments, and I don’t doubt that some people are fortunate enough to do so, but it just isn’t realistic for the vast majority of us. Your statement of “what’s left is lottery or plain hard work in a small business” is correct. There is no get rich quick investment out there.
My investment focus has shifted from “wealth building” to wealth preservation. I see wealth building through investing as no longer being realistic and am more concerned with simply preserving what I currently have. While it may seem easy to preserve wealth simply by putting your money in a savings account, I don’t see it as being that easy. The U.S. dollar is NOT a store of value, as its value is continually being eroded by central bank quantitative easing and spiraling national debt. Which is why the purpose of investing your money in assets (whether they be stocks, real estate, or gold) is simply to preserve wealth rather than to build wealth.
Hoping the stock market will “come back”
I posted the following as a comment on Big Money Tony’s blog as a response to his hope that the stock market will “come back”:
I’ve come to realize that what we saw from 1997 through 2000 will never happen again in our lifetime. Look at Japan: the Nikkei finished 1989 around 37,000. It’s below 10,000 now. That’s almost 20 years later and it’s down 72%. OK, so you and I don’t invest in Japanese stocks, but how about tech stocks? The Nasdaq topped 5,000 in the beginning of 2000. It’s below 1,900 right now. That’s down 62% in nine and a half years. I’m tired of hearing that stocks are a long term investment. How long does long term have to be? I citied two examples of broad indexes with terrible returns over the past 9 and 20 years. People have been waiting for those markets to “come back” for years and years.
I’m now convinced that the only way these markets will return to their previous lofty values is not through the appreciation of the aggregate growth and value of the companies that make up the market, but rather through a depreciation of the currencies that we measure the worth of these companies. Think about it this way: if there are currently 10 trillion dollars in existence and Microsoft sells for $22 a share, what would a share of Microsoft stock sell for if the money supply doubled to 20 trillion dollars? If all other factors were equal, Microsoft would sell for $44 a share. Has Microsoft captured more market share or been more productive or efficient? In my example, they have not but yet the price of the stock would still go up.
The above scenario is exactly what the powers that be in the government and the federal reserve hope will happen, that simply through money supply growth we will all perceive that we will be richer through higher asset prices (such as stocks and housing prices) when in fact they are just creating inflation which is paid by all of us in the form of a hidden tax.
Bank Stress Tests
Here’s what I don’t understand about the recent bank “stress tests” performed by the Federal Reserve: if the Fed believes that banks need to have more capital, why doesn’t the Fed simply raise the reserve requirement? Wikipedia defines the reserve requirement as “the minimum reserves each bank must hold to customer deposits and notes. …As of 2006 the required reserve ratio in the United States was 10%.” This means that for every $100 a bank receives in deposits, it can lend out $90 of that deposit. The Federal Reserve sets the reserve requirement for banks in the Unites States, so if the Fed feels banks don’t have enough reserves on hand to meet future needs, just raise the reserve requirement.
In reality, I do understand the political reasons why the Fed does not raise the reserve requirement (raising the reserve requirement causes a contraction of the money supply), but somehow the current thinking at the Fed these days seems to want banks to have their cake and eat it to. They want to have the economy have as much money supply growth as possible (through historically low interest rates and keeping the reserve requirement stable) but still wants banks to have more excess reserves. You can’t have it both ways.
Seeking Alpha article: Will the Fed’s Overkill Succeed?
Last year I discovered Seeking Alpha, a website devoted to investment analysis and opinion. It has become my most frequently visited source for financial information. The information on Seeking Alpha is not your typical CNBC-type rah-rah stock market cheerleading, nor does it always praise government intervention the way almost all other mainstream media outlets do. Seeking Alpha offers a wide range of opinions and open mindedness in their content.
A recent article titled Will the Fed’s Overkill Succeed provides a good summary of the current state of the economy and where we are headed. The article dares to “illuminate the true culprits of this deepening global economic crisis – the Central Banks.” Despite the length of the article, it is well worth reading if you really want to understand current economic events. As one comment states, the article is a “good summary of everything I’ve been spousing [sic] for some time now.”
Ben Bernanke’s speech to the Council on Foreign Relations
A recent article found on Bloomberg.com titled Bernanke Urges Rules Overhaul to Stem Risk Build-Ups has many subtle points which I felt the need to comment upon after first reading the article. After beginning to write all of my comments related to this article, I soon realized that there was simply too much to comment upon and explain, so I decided to limit my comments to just two points and have tried to keep them brief without writing what could have been extensive background materials to the article.
The first sentence of the article reads:
Federal Reserve Chairman Ben S. Bernanke urged a sweeping overhaul of U.S. financial regulations in an effort to smooth out the boom-and-bust cycles in financial markets.
Isn’t it ironic that the head of the body responsible for exacerbating boom-and-bust cycles is calling for efforts to smooth out those cycles? Obviously Bernanke’s recommended overhaul does not include eliminating the Federal Reserve itself. See my review of The Creature from Jekyll Island for the details about why the Federal Reserve should be abolished.
The second comment comes from the second paragraph of the article, which cites “remarks prepared (by Bernanke) for an address to the Council on Foreign Relations.” The Council on Foreign Relations, also known as the CFR, is described by Wikipedia as a “foreign policy membership organization” whose “mission is promoting understanding of foreign policy and the United States’ role in the world.” That sounds benign enough, right? Did a little deeper into what the CFR is and you will find the reality is that not only is the CFR “the most powerful private organization to influence United States foreign policy” (again according to Wikipedia), but also the goal of the CFR is establish collectivism through a single world government led by a ruling elite. That ruling elite is the members of the CFR themselves.
Why is the Chairman of the Federal Reserve giving a speech to the Council on Foreign Relations unless the goals of each group are similar? Each are instruments of collectivism, which leads to totalitarianism.
Why I’m done reading The Motley Fool
I got caught up in the euphoria of investing in the stock market in the late 1990s just like everyone else. One of the best sources of information for investment advice at the time was The Motley Fool website. I was a regular reader of the Rule Breakers and Rule Makers articles, and found great strategies discussed in their forums/message boards, specifically those involved with mechanical investing.
Over the past decade the amount of content I have read on The Motley Fool has diminished, but I still continued to occasionally come back to the site for news and investment advice even after I found their blind faith in the U.S. stock market no longer the best strategy for my money. That blind faith was recently illustrated in an article titled The Ultimate Safe Haven Investment.
As I would have guessed, the ultimate safe haven investment spoken about in the article is gold. The first half of the article makes the case for gold increasing in price in the near future. The author even states that “I believe conditions look very favorable for gold to outperform the U.S. stock market in 2009 and over the next three to five years.” But the very next sentence says that “investing in gold isn’t without its challenges” and states that the challenge is how to value gold. The remainder of the article then asserts that because gold produces no income, it can’t be valued using cash flow methods. Therefore the article suggests that you should invest in “gold standard” stocks from defensive industries such as Pfizer, Merck and Philip Morris.
Talk about a bait and switch. This article lured me into reading it with the prospect of reading more about gold but instead turned out to be beating the same tired drum of investing in large cap U.S. stocks. Merck lost about 50% of its value in the past 12 months. How can that be seen as a safe haven? The only true “gold standard” investment is gold itself.
Book review: Meltdown by Thomas E. Woods Jr.
Meltdown, released in January 2009 by Thomas E. Woods Jr., is subtitled “A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.” If that isn’t enough to hint you at the author’s views, the top of the book proudly pronounces “Foreword by Ron Paul” and the back of the book contains nothing but an excerpt from the aforementioned forward with the words “Ron Paul” being the largest on the page. The dedication of the book is to Murray Rothbard and Ron Paul, “who told the truth.”
I must admit that the people marketing this book did their job well because I ended up noticing this book at the bookstore due to all of the things mentioned above despite the growing number of new releases about the current state of the economy. Meltdown stood out because none of those other books have a foreword by Ron Paul.
The inside front jacket of the book starts by asking the question “Is Capitalism the Culprit?” The obvious answer is: of course not. The book covers an expected range of topics, including how we got into this mess, with chapter titles of “How Government Created the Housing Bubble,” “The Great Wall Street Bailout,” and “How Government Causes the Boom-Bust Business Cycle.” One particularly insightful passage in a section titled “The folly of public-works stimulus” rings true regarding the recent economic stimulus package passed by Congress:
Government … has no non-arbitrary way of knowing how much of something to produce… Private firms use a profit-and-loss test to gauge how well they are meeting consumer needs. If they make profits, the market has ratified their production decisions… If the post losses, that means they have squandered resources that could have been more effectively employed on behalf of consumer welfare elsewhere in the economy. Government has no such feedback mechanism, since it acquires its resources not through voluntary means, as in the private sector, but through seizure from the citizens, and no one can choose to buy or not to buy what the government produces with those resources. The purpose of production on the market is to satisfy real consumer demand; politically motivated and economically arbitrary diversions of resources do absolutely nothing to set the economy on a long-run path of accomplishing that. So these projects squander wealth at a time of falling living standards and a need for the greatest possible efficiency with existing resources.
If you are already familiar with the details of many of Ron Paul’s economic views or the Austrian School of Economics and the writings of Ludwig con Mises and Murray Rothbard, then Meltdown is helpful in applying that ideology to the current state of economic affairs. If you are not familiar with any of the above, Meltdown provides valuable insight into the true reasons behind the current economic crises. Those reasons have nothing to do with the failure of the free markets and everything to do with government intervention and manipulation of the money supply by the central bank (federal reserve).
Rating: 9 out of 10.
Recession-Plagued Nation Demands New Bubble To Invest In
This story in the Onion is too good to pass up: Recession-Plagued Nation Demands New Bubble To Invest In
Some highlights:
A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.
Congress is currently considering an emergency economic-stimulus measure, tentatively called the Bubble Act, which would order the Federal Reserve to begin encouraging massive private investment in some fantastical financial scheme in order to get the nation’s false economy back on track.
“Every American family deserves a false sense of security,” said Chris Reppto, a risk analyst for Citigroup in New York. “Once we have a bubble to provide a fragile foundation, we can begin building pyramid scheme on top of pyramid scheme, and before we know it, the financial situation will return to normal.”
“America needs another bubble,” said Chicago investor Bob Taiken. “At this point, bubbles are the only thing keeping us afloat.”
This article was published on July 14, 2008. The Bubble Act must not have had much support in Congress because instead of trying to encourage private investment, Congress is now trying to use public funds to support the bubble.
From inside a rock, out comes a monkey 