Everyone is on bubble watch nowadays, me included, as central banks flood their respective countries with mountains of money. While the US has done a ton of printing of dollars it is often overlooked that the Chinese have also printed a ton of Yuan as well. While there are definite differences in the economies of the US and China, we could argue those difference all day long, the one thing we could all agree on is that China a lot of flaws in its system. I would counter by saying their flaws are probably pretty severe, but no worse than the US.
Regardless, I have been reading a lot about the bubble in China, especially in their real estate prices. I do not doubt that as property values have gone parabolic in the country, some areas make the peak price increases in the US look like pathetic in comparison, but is it the same bubble that the US had? The answer is, no one really knows for sure because the data is spotty at best. My guess is that the price bubble is probably worse than the US, but I am willing to bet that mortgage fraud, home equity loans, securitization and the host of other issues that basically collapsed the world economy are not the same, at all.
So, at the end of the day, we will see a price collapse in China which will lead banks to have losses on their books, but it will end there. It will likely be as bad as the early 1990’s in the US banking system compared to the 2008 collapse that the US had and it will more than likely not spread globally like the US credit collapse did. However, it is problematic for the world to have the second, it surely has beat out Japan by now, largest economy approach a huge bubble so early in its quest for world domination, especially when it is the manufacturing center of the world.
If the bubble pops, which it will, it will take capital to fix which means that money will not be loaned out to manufacturers. When that happens the cost of capital will increase driving up prices which means your trip to Walmart will not be as cheap as it once was, especially if Washington forces the Chinese to strengthen its Yuan as well. That will be a problem for us and the rest of the world as China led the world out of the recession, if you believe it is actually over that is, so if China contracts it will lead the world right back into a recession, or make the one we are in even worse.
It is just interesting that Americans always assume that everyone acts like they do and spend all of their money. The Chinese are fanatical savers and it is highly unlikely that they would leverage their home, i.e. home equity loans or lines of credit, to buy junk they simply do not need like Americans do. I remember when Lay’s potato chips were trying to make headway into China and one women interviewed said why would I spend that kind of money on that when the same money can buy me potatoes for a month? That is their mentality and they do not spend what we do not have and pay for it later like what we do, that is what I admire about their culture. This is why if or when the bubble pops it will be a major problem, but nothing like what we saw here or in Europe.
With that in mind I am not crazy about investing in China because I believe that the bubble will pop and it will slow their growth down dramatically. Depending how the government handles the issue it could be a nonevent or a huge problem with, believe it or not, political instability. Plus, so much money has flowed into China through BRIC’s it is kind of crazy to keep money there right now. I am way more interested in India and Russia than China and Brazil, but all emerging markets have me a bit nervous because when everyone agrees that is where you should be, well, you know, do the opposite. Regardless, I believe the bubble will pop, but before the China bubble pops the US equity bubble will pop first.
I was a bit desperate tonight for entertainment before the ball drops and happened to tune into Mad Money, I am sure Cramer is please as I single handedly increased his ratings from 1 to 2. Regardless, tonight I realized why I stopped watching this guy. He has no sense of decency, memory or humility whatsoever. In fact, all he does is revise his picks, his history and track record all the time. I will post videos to prove it in a little bit.
Tonight he was talking about retirement, which is a joke since he ignored what I rightfully pointed out is the most important thing in retirement planning, the sequence of returns, oh well, why let the facts, oh forget it. Anyhow, here is what you need to remember about good old Jim, he invested in the greatest bull market ever, yes he was a hell of a fund manager, but regardless it was also the greatest bull market ever, and he rarely held positions for very long. If you doubt this then go read Trading with the Enemy which was written by a guy who worked for Jim, apparently Jim is not a nice guy, go figure.
My point is Jim knows nothing about retirement planning because it is a totally different ballgame than trading stocks. It involves a complex range of skills sets and knowledge that not just any person has, sorry, but it’s true. This does not mean I am not a guru and I am not claiming this, but I do consult in this area and speak with experts all the time so I have a good grasp on the topic. Anyhow, tonight Jim claims that he “loves” index funds, but does he really?
It is true he used to tell people to invest in these funds until they built up $10K to trade stocks. However, earlier this year he got rather upset at a guest on CNBC, I am searching for the video, where he went off on the guy saying that anyone who invested and held, i.e. buy and hold investing in index type funds, were losers, literally, because they got killed over the last 12 years. At that time the markets were at historic lows so we were at levels not seen in over a decade. At that time he advocated being active in your account and moving money, which has always been my belief as I believe that passive and active management performance is cyclical. I guess he changed his mind since the market recovered though because now you should own index funds and then add stocks after awhile.
This man must confuse the hell out of his viewers. I mean, one day he is telling you to buy dividend stocks, then buy internet stocks, wait, now buy Best Buy before the earnings and the next day he is saying never buy a stock before the quarterly earnings and now he is saying that your core holdings should be index funds? If you are confused, so am I, but that is what the man said, so don’t blame me. The kicker is his disclaimer is that he is merely trying to entertain you, but here is what I just cannot figure out. If he is entertaining us and we really should not take him seriously, you should never take an entertainer seriously in my book, then why is he dispensing buy and sell recommendations on stocks?
Worse yet, why is the advice he’s giving one night in direct conflict with the advice he has given the night before? Honestly, I am not trying to give him a hard time, but I have a real problem with people revising their history, especially when it is on TV and it is easily searchable. If a broker or a financial advisor acted like that or dispensed advise like that FINRA would slap them so hard it would not be funny, but not commentators, even though the history of what they said is recorded. It is just unreal that this type of behavior can continue and no one says anything about it. I don’t care if the advice is bad, hell Suze Orman says lose your house before you even think about tapping your IRA for an emergency, yeah, that makes sense, everyone gives bad advice, but don’t cover it up.
There have been several actions taken by both China and the US this year against each other both claiming dumping charges. The irony is that all the accusations are probably true given the fact that China does subsidize its industries rather substantially which allows them to bury overpriced US products. However, China’s accusations about US dumping of auto parts and cars is also true given that GM and Chrysler is also heavily subsidized by the US government as well, that is now undeniable and an embarrassment to all US citizens.
I realize that the US won the ITC, International Trade Commission, ruling today, but do you really believe that ruling was impartial? Considering the US provides a large portion of the funding for such organizations it would be doubtful that we would lose any case brought before them. I would compare this to the arbitration clause in your credit card application which was so blatantly slanted to the creditor that Congress basically was going to strip it of its powers before the industry ‘voluntarily’ got rid of that clause from its agreements. It stands to reason that when one party basically funds an organization to arbitrate disagreements between that party and third parties there is no objectivity, at all.
Regardless, how many actions is this now between the US and China? It started with tires, moved on to chicken, cars, seamless pipes and now steel grates. All of this while the US is trying to force China to strengthen its currency, which China would be nuts to do I might add. All of these actions smell of protectionism which will not be good for the average American in 2010. While the Fed wants to create inflation I think Obama misunderstood what type of inflation they were talking about, wage inflation not just price inflation. At this rate, and for the first time ever, the US consumer could be facing the same or lower wages with rising prices because this administration is picking fights with our largest supplier of goods.
The irony is that the media actually says that foreign nations actually love us now because of Obama. That may be true in Europe, but I could care less about Europe because the last time I checked we did not get the vast majority of our cheap everyday goods from Europe, we get them from China. Frankly, we are ticking China off by demanding that they do things they do not want to do and we are in no position to demand anything at this stage of the game. Especially since China is almost, if not already, the number 2 economy in the world with the largest population in the world. Did I mention they also hold a lot of US dollars as well?
Telling China, not asking them, to strengthen their currency is also protectionism whether you want to believe it or not. By asking them to make their currency stronger you are telling them to raise their prices on their goods which, in turn, makes products at Walmart more expensive. The goal, of course, is fruitless, but Obama figures that if Chinese goods are more expensive then you and I will opt to by a US made good instead. This is not a new idea and has been tried many times before, it never works, and it may trigger some pretty bad things to happen, but hey who cares about history and facts when we have perpetual bailouts going.
I have no idea how China will react to this politically, I am not a politician, here is what I do know. If we buy less Chinese goods that means our trade deficit legitimately gets smaller, a good thing right? Wrong. With some $5T in treasury debt to roll and issue this year we need countries like China to run trade surpluses so they are forced to buy our paper. If they are not running those trade surpluses then they will not have to buy our paper, they could if they wanted to, but they would not have to. That is the biggest reason in the world to not play games with them right now since our ‘recovery’ is shaky at best. If they do not buy our debt that means QE will continue and then we are in really big trouble because technically monetization of a countries debt is the final straw before it defaults, that is a historical fact not an opinion.
I am not sure if the current administration understands that or not, but somehow I doubt it. I believe they think that this forced ‘buy American products’ policy will work, but protectionism was what really kicked started the Depression, combined with bank failures, which we already have a ton of I might add. Maybe this is some type of payback to organized labor or something, who knows, but I see other troubling signs of protectionism as well. Japan is doing a cash for clunkers program that American car makers do not qualify for.
Now, US lawmakers made the rules and most c4c sales went to Japanese car makers and why not they make one heck of a car and the companies are solvent. The Japanese program is slanted towards only Japanese automakers, again, why not they make great cars and the companies are solvent, but now some representatives are upset about this. What are they going to do about it, I do not know, but they could do something dumb like put a tariff on Japanese cars or something, which I hear is being discussed, that is protectionism.
Protectionism and trade wars are bad, bad, news for everyone, but especially for the US consumer. Our government knows not what they do and they continue to do ridiculous things which make life increasingly more difficult for the everyday American, but let the people who messed up the economy off the hook, completely. If they do more to increase this blossoming trade war or initiate more protectionism legislation you have to act and tell them to stop. I want America to succeed, but on its own merits, not through legislation that punishes free trade.
GMAC is apparently close to yet another $3.5B in additional aid from the government. This is on top of the original $12B the firm already received the first go around. Of course, the government will insist that this ‘investment’ will be profitable just like CIT, GM, Chrysler and anyone who invested with Bernie Madoff. This news comes on the heels of the Freddie and Fannie announcement that the government will backstop all, not just the original $400B, of the GSE’s losses which could be trillions at the end of the day.
Of course in the case of Freddie and Fannie the top executives will continue to receive millions in compensation because it takes talent to lose billions, it must because Brewster, of Brewster’s Millions, could barely do it if you remember. I find it hard to believe that anyone could possible argue that these bailouts are not permanent or will end at any point in the future. I think this latest blast of reality from the state owned automaker and mortgage issuer is proof enough that these bailouts will continue indefinitely.
The irony is that we are seeing all of these bailouts or ‘additional investments’ in the face of the greatest economic recovery that never was. Let’s face it, when the fantasy 3.5% GDP was whittled down to 2.8% you could live with that because that meant there was still private sector activity, but now that the official 3Q09 GDP figure is 2.2% that means there was no private sector activity at all. That was also with cash for clunkers and the housing tax credit in full force as well. Of course last week’s housing numbers showed us what the housing numbers will look like without government help, in a single word awful, but imagine when mortgage rates are at 6%. Regardless, if things were rosy then I find it hard to believe that GMAC would need more money.
Oh, I forgot, Citi and the rest of the banks are paying back TARP, sure, that means that banks are doing fantastic. Did you read the beginning of the story, the bailouts are permanent and these banks know 2 things, 1) the government will never let them fail; and 2) TARP is not going anywhere. Not only that, but these banks also carry massive guarantees on their portfolios and FDIC issued debt so the repayment of TARP, I am stealing this from Whitney Tilson, is the greatest scam ever. Basically the banks now can pay themselves whatever they want, they have guarantees on the crap on their books, implied guarantees, can issue guaranteed debt (in some cases), now they pay far less for many of those privileges and the government lost 90% of its leverage – nice job guys.
The payback of TARP does not mean banks are healthy it simply means the banks can go to the market and get other suckers to buy their debt to get Uncle Sam off their back. I did not think it was very hard to figure out, but apparently it was because the media and investors are swallowing this stuff hook line and sinker. The proof is in the pudding and bank stocks have done nothing since August and, frankly, the only good one is JP Morgan and who really knows what is on their offshore books or what they are really on the hook for through Bear? To think there will not be a need for another TARP bailout in the near future is crazy, banks would not be holding all this cash if; 1) the economy was really recovering; and 2) they were really as healthy as they want us to believe.
I may have been wrong about a correction this fall, I admit that, but there is no way that the continuous flow of bailouts can be framed as a good thing. Oh, if you are happy about Freddie and Fannie executives paying themselves millions, I would suggest calling your representatives and letting them know how you feel, especially if your in Barney Frank’s district because he really doesn’t care about you.
What no one wants to talk about, ever, in terms of retirement planning is the sequence of returns and the impact on retirement planning. I am bringing this up now as we wrap up the worst 10 year period ever in the S&P 500 we have ever had. In fact, technically, this is the only official 10 year period of time the S&P 500 has ever been negative. I say officially because the 10 year period is subject to interpretation, but regardless we are looking at a period of time wrapped by 2 of the worst periods ever to invest in the equity markets. In other words this decade had the mother of dumbbell negative returns ever.
What the impact of this 10 year period has had on retirees will be felt for the next couple of decades. Essentially, many retirees or pre-retirees have been wiped out or will have to drastically alter their lifestyles in order to make their money last. While I could easily blast the likes of Scott Burns, Suze Orman and a million other drive by financial advisor writers for dispensing horrible advice that they likely did not even follow themselves, I will not. They simply told people what they believed to be true because they used flawed logic and ridiculous assumptions that normal financial advisors would have dismissed as idiocy, not that they are innocent either, but they were the targets of these writers inept ridicule for long enough.
The simple fact is this, everything has a cycle whether we are talking about the Earth, the moon or the markets they all of a cycle. When we look at market returns sometimes the cycle shows an unmanaged index does substantially better than managed money while at other times managed money does better than the unmanaged index. Over the past 15 years we saw the unmanaged index do better than managed money, but will that trend continue? Unlikely. That cycle has run its course from my point of view, sure there will be stand out sectors, but that is it. If you go back in time to the 1970’s it is fair to say that this theory of mine pans out and managed accounts did better than the unmanaged indexes, but you know me, let’s not let the facts get in the way of what they pawn off as the truth.
The beginning of this decade should have been the warning sign for those following the advice of the financial rags who themselves have never ran money or witnessed what it is really like to lose someone money. Instead they blast brokers for making money and tell you to buy an index fund because over the long-term “nothing outperforms the S&P 500,” how’s that working out for you? Simply put, they did not know their history and they over simplified a very complex thing, your retirement planning. Retirement planning is complicated and deeply personal and no one, I really mean this by the way, should ever take their retirement planning advice from the TV or newspaper.
With hindsight on my side, unfortunately, it is now clear that these people did not know what they were talking about. Not only that, but their intentions are now out for everyone to see. One person mentioned already, who always advocated Vanguard index funds, opened an RIA firm and will gladly manage your money for a small fee, even though he said brokers were crooks before, unless he is the broker I guess. The other person sells binders for $50 or $100 that you can buy at Staples for $10 or $20, but since they are branded with their logo or some other nonsense they are worth more, I am still trying to figure out why that is. Either way, to their legions of devoted followers their betrayal means nothing or they will continue to mindlessly follow them, which is astounding to me, even though they destroyed their wealth. Here is what I mean.
The sequence of returns is the timing of returns, either good or bad, and the impact on your portfolio. This is the most important aspect of investing and the biggest ‘Black Swan’ there is because it is out of your control. This is why asset allocation is so important when you are talking about your serious retirement money. I have a larger portion of play money that I speculate with, but you better believe that my real money, my retirement money, is not in some E-Trade account with my finger on the buy/sell button all day long. I have a plan with my real money and I do tinker with it occasionally, but only when I feel the need to be more conservative or more aggressive, but it is professionally managed, not by me, to keep my emotions out of the game. However, the sequence of returns is always ignored by most gurus I read or listen to and it will devastate you if you are not careful.
If you invest and instantly lose 10% for the first couple of years it takes you a very long time to regain those losses or exceptionally high returns for a few years. It is even worse if you are taking income from your portfolio which is the case for many retirees, unfortunately. I am going to concentrate on those taking income from their portfolios in this example, just 5% income I might add, because many Boomers retired either in 2000 or in the last few years, either way you will get the point. I am not even going to show you the double whammy of the dumbbell negative returns because that is so depressing it is not even funny. In fact, this will be and is such a serious problem I am not sure what can be done about it because literally millions of Boomers are in serious trouble now.
Here we see someone who decides to retire and rolls over his 401K and listens to a buy and hold indexing guru. They decide to invest into a generic fund and let it all ride thinking that 5% withdrawals should suit them just fine, since he is told the market averages 10% over the long-term, another farce I might add. Unfortunately for this investor he got suckered into a bad time to invest and the market fell 10% for the first 2 years he owned his fund, but no problem writes the financial guru, just hold on and everything will be fine, really? Well, you tell me if everything looks fine to you.
Exhibit 1-1
Keep in mind, I am not showing any other negative returns, not even a negative 1%, and I am showing +8% returns for every other year in this illustration. I am also showing a straight 5% withdrawal rate, not ever a little more for the grand kids, to pay the taxes or medical bills, just 5%. This person runs out of money in about 20 years with 2 negative years right off the bat and they did not even look that bad, 10% market declines are, well, normal right? That is just one illustration of the sequence of returns and how they can impact the investor, not imagine if I put in the 2008 50% decline in there, there would not be anything left. I also ran this with 6% withdrawals, but the only difference is it gets uglier faster.
There is nothing you or I can do about the sequence of returns, but I have never seen something so important ignored before. While we are wrapping up the worst decade on record for stocks don’t you think we should talk about this stuff a little bit, especially since Boomers are about to retire in droves, well they were at least. Frankly, those bond funds everyone is slamming right now, do you know why they are so popular, not that I agree with it I might add, but they are so popular because they have positive returns on the 5 and 10 year benchmarks. Look at equity portfolios, most funds look horrible, except some managed funds I might add, but in comparison investors are saying, well sure this fund only did 5%, but it is better than the -3% I did over 10 years, so buy it.
I may sound bitter, but this is serious stuff that people just take so lightly and it drives me nuts. CNBC is now all about entertainment, not about serious news anymore which is a shame. The personal financial gurus are all about selling their latest book rather than helping people do real things, but maybe it is the peoples fault when you have to have a segment called can I afford this. People, if you have no money in the bank, in debt up to your eyes, make $50K a year, then no you cannot afford a $700K house, it is common sense. However, even though they are getting calls like this it does not justify giving out poor advice, ignoring history, not understanding the sequence of returns, the basics of asset allocation, vilifying brokers, picking on products – yes folks a variable annuity turned out to be the best product in the world to buy in 2000, and simply recommending index funds because they are index funds – a monkey could do that.
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