State of the economy

Day or so ago, a news post came by Facebook about some Scottish Banker that was stating the end is nigh, and sell off your stocks and get out of the market.

I figure most of the smart investors dont need to be told this, and have diversified portfolios, and the balance of stock players/investors is simply an exercise in darwinism.

But how far away are we from 2008, if the markets have some sort of major correction. Those Toxic portfolios should have been quarantined by now, correct and countries are going to trust other countries for credit to flow.

I don’t hold any stock anyways, but on the off chance that this guy is not just a chicken little, and economies and jobs might be a bit more at risk, do we at least know that the banks have their shit together this time around.

Relevant link

The end is nigh

Declan

The author of my investment newsletter is blaming current (and possibly future) market corrections on FANG stocks, particularly Amazon and Netflix, which are trading at impossible levels. These four stocks comprise the heart of the S&P 500; when they have a bad day, nearly everybody has a bad day. Remains to be seen if this is going to be a long-term downtrend.

My thoughts precisely. Virtually no-one knows whether or not the global/American economy is about to take a massive downturn. This is the sort of thing only a minority of financial eggheads can predict remotely well. Much of the economic & financial outlook is based upon confidence. Future confidence is almost impossible to accurately predict.

It’s worth pointing out some “experts” have predicted doom for the past 6 or 7 years. It’s my opinion that many of these experts are not entirely wrong, but that it’s impossible to predict “the when”.

I don’t think he is a Chicken Little. He (and I) may be proven wrong but I also believe the world-wide economic indicators look really bleak. The Chinese economy has some very serious systemic issues that cannot be fixed in the short or medium term, Europe isn’t doing that great and, while cheap oil is great for consumers, becoming too cheap introduces world-wide economic and political problems of its own.

What I believe he is saying (and I know I am saying) is that the potential upside in the market is currently vastly outweighed by the potential downside. I sold all my stock funds in my 401K months ago because I was much less interested in making a few percent this year than I am worried about losing 30% or more during a serious correction or recession. We are already in official correction territory at over 10% loss so I am glad I made that decision early.

There is also no sign that this is just a statistical blip either. Everything that is causing it right now will either stay the same or get worse for the foreseeable future. It would only take a couple more of relatively minor international events to trigger a true wide-scale panic with massive losses. China is the real threat because they still don’t know how to run a large-scale economy and it is so big that any more faltering on their part will have truly global implications. The U.S. is the economic star of the economic powers today and that is damning with faint praise.

I dont want to impunge on the man or his reputation, just that so far he is the only one to have actually come out in the general public, as opposed to the word on the street in the investing circles, that something may be seriously wrong.

One of the things that I have heard mention regarding China is that people no longer have faith in the govt, that the jeune ecole of the sino economics world wanted to simply let the market correct itself, with no help from the state, while most folks were expecting the round of hero projects to begin. The possiblity of a financial long march is freaking a number of my coworkers out, who have family back in China.

What would be better at this point, the brake pedal or the gas pedal , as a maybe corrective reaction to a global correction.

Declan

Since WWII, the average length of time between recessions has been just under five years. The longest time on record was ten years. It has been about 6.5 years so far on this one.

Bolding mine. That’s why I’m out of the market as well. Everything that’s worrisome is fairly long term and seems likely to either continue, get worse, or pop. I’m really no expert, but I think we’re one major event away from a panic. My missus runs the operations and loan dept of a bank, and is a little worried about 2007 similarities in the mortgage biz. ARMs are back, car loans are longer than they’ve ever been, and she says people are extending themselves way too much (in her opinion). She sees a lot of people’s finance info, and says even the rich are living paycheck to paycheck.

So we’ve decided to sit it out for awhile, and watch what happens. I doubt we’ll miss out on much growth for the year or so.

On edit: I’ve seen several stories about the decrease in shipping this month, with one article claiming there were actually no cargo ships enroute at all in the Atlantic last week (only for a day or so). Is this really true? Or is this normal following the Christmas holidays?

No, it’s not true. Snopes says that claim was because someone didn’t understand how to read the relevant map.

By the way, you also mention being out of the market, apparently because you’re nervous about the economy. I think that’s a bad idea, as it’s really hard to predict such things, and even if the economy goes south, it can then recover very quickly. Perhaps even too fast for you to catch it on the upswing. And the very fact that adjustable rate mortgages are back isn’t necessarily a cause for concern; they can be a legitimate option for a borrower under the right circumstances. The problems in 2008 were due to widespread fraud on the part of the banks.

A lot of index fund investors don’t really understand what happens when the market gets really lopsided, as it did before the first internet shares meltdown in 1999/2000 and is now with the FANGs.

Namely that all index funds, and funds that track index funds, or even funds that don’t track index funds but still need to compete with them for investment (i.e. all of them) end up grossly overweighted in the darlings du jour.

And when one of the darlings’ stock price stubs a toe for reasons legit or irrational, the downward force on the funds is amplified to an insane degree. The same thing that bid Apple up 500% in a few years forces it down the same fall (i.e. to 20% of current value) in a much shorter timespan.

It’s almost like we’ve designed the system to be as unstable to the downside as humanly possible.

My opinion? I’ve always been much more skilful at earning than at investing. It’s too important and complicated for an amateur like me to handle well enough. But FWIW, the guy that does handle my stuff has us still mostly in the market, but has one finger hovering over the sell trigger all day every day.