Damn, that was some good shit, Scylla.
Much love goes to you for explaining this mess.
I think I should have said “The stock market as we know it is over”. 
This “adjustment” does look like a bad one if one believes the experts on the tube. There have been some pretty shady goings on. Brokers taking advantage of none-too-sophisticated home buyers, for example.
Anyway, thanks to all for the education. I’ve learned quite a bit. Problem is, my retention is pretty low and I’m naive about investment. So I’ll stick with Vanguard, who check-out pretty good. I retire in a couple years so the timing should be alright.
Not to worry, Paul Kangas and partner would never lead me astray.
Peace,
mangeorge
That first part (both bull and bear markets) is not an accurate representation of what I said. I do not argue the second part. I state is a fact. You want I should provide more symbols? AIVSX has outperformed by 170 basis points over 75 years after all sales charges and expenses.
This is a silly argument, and frankly a waste of my time as I’ve already addressed it. Past performance does not determine future results. It is a potential indicator. By the same token you cannot determine that a given index will produce acceptable or desirable results in the future.
Again, future performance cannot be proven before the fact, so, of course, no such study attempting to do so exists. FYI, rolling 10 year periods does not mean 1940-1950, 1950-1960… It means 1940-1950, 1941-1951, 1942-1952, etc.
Really? Where’d you come up with that idea? I haven’t argued it, nor do I believe it to be true.
Well, if we’re going to take a look at AIVSX than of the 6 portfolio managers of that fund, the one with the longest tenure has 43 years, and the one with the shortest has 16 years. The fund itself has over 75 years of returns consistently and significantly outperforming its benchmark. Those 75 years have involved innumerable manager changes, yet I would challenge you to detect an effect on the portfolion from any of them.
That should pretty much dismiss that argument of yours.
It only seems that way because you are arguing from a standpoint of ignorance combined with poor assumptions. Had you actually known what you are talking about, it would doubtless seem otherwise.
I suppose its possible. Your story though is a familiar one. In my experience it will tend to follow pretty classic lines. You may not be aware of it, but you are likely outperforming because of a combination of factors. Most people who choose their own individual securities tend to outperform for a period of time before suffering a catastrophic failure. These same factors that are responsible for their outperformance entail added risk disproportionate to the outperformance. One may have 12 years of mild to decent outperformance and then in the 13th year suffer a catastrophic setback that leaves them far behind any benchmark… or wiped out.
We could talk about these factors, if you like.
I don’t think that a high risk tolerance is at all a benefit. Indeed, the most successful investors and managers that I know are ruthlessly intolerant of risk. Backbone also is a poor trait. A successful investor is willing to doubt himself, posesses a flexible mind and tends to be cautious.
This is a very poor series of assertion on a number of levels. If you are mixing up index funds, you are managing. I don’t know what you mean by “average managed funds.” I suspect there is no such thing. There is more to diversification than small cap, midcap, and large cap. You’re going to need bonds, cash, and noncorrelated assets as well. What proportion will change depending on a variety of factors. You will want an international component, and ensure Growth/Value/GARP/Relative Value are represented. You will need to devise a core satellite strategy. If you are purchasing individual securities in a portfolio that is less than a couple of million dollars than the chances are that you are poorly diversified. Many of these things will tend to hold you back and retard performance in most years. A portfolio lopsided in these regards will tend to outperform for a period of time.
There is tons of research to support this. Most of it is proprietary. One can view the proof of the pudding through the extreme outperformance of managed money versus indexing.
A strong example of this would be the Harvard endowment:
http://vpf-web.harvard.edu/budget/factbook/02-03/endow_growth_39.html
You claim that picking funds and managed vehicles that have a likelihood of outperforming is difficult. It’s not. It’s easier than a building a portfolio of your own (responsibly) I’ve provided several clear examples of long term outperformance.
What sort of audited figures do you offer as evidence of superior returns according to your methods?
Scylla, you say that I misrepresent your position when I say that you accept “that most managed funds underperform their appropriate indices in both bull and bear markets” - yet in response to “Countless studies have shown portfolios of index funds outperforming managed funds in bull and bear markets.” you replied “That’s a fact. 80% of funds underperform their respective indexes.”
I fail to see how I did anything other than accurately portray what you said.
A minority of managed funds do better than average and a minority of that minority have consistently done better than average. Yes you could, out of the universe of funds, find me some examples of individual funds that have over the years outperformed. By definition those examples would have one good ten year period followed by another one. And if you save up enough of those anecdotes you may be able to buy a bit of data … or not. I can also point to Janus Fund which had a great rolling ten return, until it didn’t, and then took quite a while to regain its stride. If say you were investing in 2000, as I was, and you used the rolling ten year return as a major criteria, as I did, you would have seriously considered putting a chunk into Janus, as I did. And if you did you would have done significantly worse than the index in the major dip that followed, as my Janus money did.
But that’s just another anecdote and even ten of them won’t buy either of us a single bit of data.
The data is not so impossible to collect, even if it would be cumbersome to do. How often over, say the past 40 years, have companies in a top quartile for each rolling ten year period been in the top quartile for the ten year period that began when the first ten year period stopped. And compare the performance in each case to appropriate index benchmarks. If historically rolling ten averages have failed to predict continued superior performance, either by staying in the top quartile or by beating appropriate index benchmarks, then your hypothesis is falsified.
Short of that sort of analysis, you are making it up, authority or not. And no, again, a dozen anecdotes does still not make for data. There have been thousands upon thousands of managed funds of various sorts. You can find a few dozen that have consistently done well and you offer that as proof that managed funds that have done well will likely continue to do well? Excuse me for being unimpressed, but again, I can also find examples of funds that did well for ten years or fifteen years or twenty that did lousy for the next ten or twenty. An example or so either way doesn’t make the case; it doesn’t “dismiss the argument”. I can see that even from my “standpoint of ignorance.” And oh yes, name calling also fails to make the case.
I can understand why you fail to understand what I mean by “backbone” and by “tolerance for risk” … my fault I am sure for not stating it more clearly. By “backbone” I merely mean having the confidence to go against the herd mentality if your analysis and reanalysis leads you to conclude that the herd is wrong. Not being contrarian merely for the sake of being contrarian, but not being afraid to be contrarian either. Many investors behave like little kids in a soccer game - chasing where the ball is but almost always finding that the ball is no longer there by the time they arrive. As players mature they understand that they can’t just go with a crowd trying to catch up to the ball - they need to position themselves where they deduce the ball is going to be. Sometimes their deductions will be wrong and sometimes right. You win or lose in investment based both on how often you are right compared to how often you are wrong and how the big the pay-off is when you are right compared to the cost when you are wrong. Without question picking your own at least feels riskier because every choice has the potential to under or out perform. Whether or not it is in reality is another story. Of course, I only have a dozen or so years of self-managing a portion of my portfolio. My rolling ten year returns may be good, but it may be, as you assume it will be, poorly predictive of my next decade. In fact I assume that the portion I self-manage is riskier despite my rolling average outperforming my funds. (Those funds being in my retirement portfolio and in the kids’ 529s. As an aside, the benefits of tax protection in those vehicles cannot be overstated. IMHO anyone failing to fully fund those vehicles as early as possible is investing foolishly indeed.)
My apologies as well for the shorthand reference to diversification. Your full fleshed articulation of broader diversification is of course correct. I however again hear you making assertions that short of evidence (not anecdotes) to back them up are just being pulled out of your ass: “Most people who choose their own individual securities tend to outperform for a period of time before suffering a catastrophic failure.”? Do you actually have data that supports that claim or is just something to be believed based on your appeal to your authority? It may be true, or not, and I am sure you believe it is, but you merely saying it is so fails to make the case.
No I am not attempting to convince individuals to invest all on their own. In truth the first priority really must be to take advantage of tax protected vehicles to save for both retirement and kids’ colleges (if applicable). A selection of index instruments and/or selected managed funds that results in an appropriately diversified for stage of life portfolio (yeah, bond funds, international exposure, etc.) which is added into consistently over the years is most suitable for those purposes.
After that some us will have some fun picking some on our own. Again, many of us would likely do as well (on average maybe better even) just putting more into an index fund or managing a collection of them. But it’s nowhere near as much fun.
Scylla, with so much money at stake and so much data to study are you seriously saying that there is no evidence for the outperformance of managed funds because the data is proprietary. Pointing to the Harvard endowment is not a cite. They invest in ways that would be impossible for ordinary Americans with resources they don’t have. Still it amounts to ‘look, I have found something else that has outperformed indexes’.
If you believe you have a system that works for outperforming an index based portfolio consistently and over a long period of time then I find it just about impossible to believe that there is no academic evidence to support that method. Thus far you have shown that you are adept at pointing to investments that have outperformed in the past, but that does not consitute evidence of future outperformance. The references to how long you have been in the business and how much you know don’t much help either. You may be arguing with people who have equivalent experience, but choose to let their argument and the evidence speak for itself.
OH Scylla just one more illustration of what I meant by “backbone” and “tolerance for risk” - I have a good friend who also was choosing some of his own stocks for a portion of his portfolio. And he loved it in a bull market and he beat the indices by a small margin … but then there was a big drop in the market. He lost less, significantly less, than the indices. But of course he still lost in that short term. He still couldn’t take it. He sold off and put it all with a professional manager.
One other comment on your claim as to the amount that is needed in order to diversify a portfolio - diversification is nice, is important, but diversify too much and all you’ve dome is roughly created an equivalent of an index fund. The consensus seems to be that a mere 20 stocks can be diversified enough. Many, including Warren Buffet believe that too much diversification can even be hurtful to a portfolio.
A couple of million dollars is not required for diversification although clearly using an intelligently selected variety of funds or index instruments as part of a core holding is an easy way to accomplish it.
A question for you: how easy/difficult is it today to find asset classes that really are noncorrelated? My outsider’s eye view is that those classes that have been touted as non-correlated have not been behaving so. Lock-step, no. But still quite well correlated. Everything seems tied together today. That is however just an impression. What has been your experience?
By index funds I meant S&P or the Dow. Investing in the funds you mentioned is betting on a market segment, which is fine. The opposite of index funds is not buying individual stocks. I can’t watch the market closely enough to even try to do that. Funds with very specific investment objectives is the way I go most of the time - except for a few cases like buying Google at $160. 
Of course you wouldn’t win all the time, you would just do enough better than the averages. Almost all stories I’ve seen of “smart” investment managers get done when their particular bias is working. Follow up after the next shift and they get screwed. It is kind of like the Tom Peters curse. Just about any company profiled by him, in “in Search of Excellence” or the follow up books, crashed, because he was profiling them at their peaks.
Not deliberately, and I apologize for being Picayune. That 80% of mutual funds fail to outperform their index over time is a fact that’s been demonstrated and that I agree with. If you say in “both” bull and bear markets that indicates you are comparing the performance of mutual funds in bull markets against their index with their performance in bear markets against their index. There is an analyst whose work suggests otherwise. His criteria was “managed money” not mutual funds, but managed money includes the class of mutual funds. What he found was that managed money underperformed in bull markets with statistical significance and outperformed in bear markets with statistical significance. If you then corrected for beta and style drift this trend was shown to be even more pronounced. We spend a lot more time in bull markets than in bear markets historically, and therefore indexes tend to outperform managed money over time.
The problem this analyst was working on was the sequence of returns problems. Stated simply, if you removed a fixed income off two pools of money both of which averaged say, 7% over a period of time, than you might have one pool that ran out of money and another pool that had doubled even after the withdrawals even though both averaged exactly 7%
This is due to the sequence of returns. If your pool of money has significant negative years early on on top of the withdrawals it is unable to recover and sustain those withdrawals. If it has strong performance early on than it is able to do so without difficulty. I.E. Start with 100k. First year’s performance is down 30%. You now have 70K. You with withdraw 5k. You know have 65k. The next year’s performance is down 25%. You know have 49k. You withdraw 5k. You now have 44k.
Even if other the next several years you’re performance reverts to the mean 7% your portfolio will run out of money because you are withdrawing more than your earning because of the poor performance in the initial years. Losses hurt you much more than gains help you. For example. If you start with a 100k and lose 50% in the first year you have to make 100% in your second year to return to your starting principle.
This analyst was proposing a methodology for achieving index level returns in bull markets yet managed money returns in bear markets.
Hence, my picayune bristling over a seemingly minor point.
No. You’re describing consecutive ten year periods. I am describing rolling ten year periods. I described the distinction earlier, and it’s an important one as the latter measures consistency of returns rather than absolute returns, the importance of which I’ve described above.
No. Not really. Janus’ relative outperformance was a function of both position and sector concentration. Stochastic analysis suggested a meltdown was inevitable.
They did not have “great rolling ten year return periods” It was not team managed, nor did it have a defined discipline, and in 1999 the manager had only been there for 5 years. With only a five year track record, it’s not subject to this type of analysis.
Actually it does show us something. It shows us that you need to be careful in analyzing investments.
I don’t know. I think it’s a meaningless analysis. I try not to look at those results, as they are deceptive. Again, You seem to be not clear on the difference between consecutive ten year periods and rolling ten year periods. Please let me clarify again. Here’s an example of consecutive ten year periods: 1910-1919,1920-1929,1930-1939,1940-1949. The time period 1910-1949 gives you four consecutive 10 year periods.
Rolling ten year periods look like this: 1910-1919,1911-1920,1912-1922… …1939-1949. That period gives you 40 rolling 10 year returns.
Since 1929, I beleive there were something like 3 rolling ten year periods in which ICA did not outperform its index (I’ll have to check Monday, it may be 5, but it’s very small) There was a total of about 75 rolling ten year periods to analyze. Assuming that we need inception plus 15 to bring us a minimum of 5 rolling time periods to analyze, than for the last 60 consecutive years this method would have succesfully predicted future outperformance.
There are many, many funds on which you can perform this analysis. To make it valid you need 15 years of tenure of management (or defined investment discipline.)
I have made no such claim. Several times I have said you cannot prove future performance. All you can do is give yourself a statistically significant likelihood of outperformance, adjusted for risk as measured by beta and standard deviation.
That you can do.
Again, you’re confusing consecutive versus rolling, and again I am not suggesting I can promise future outperformance any more than you can promise the future acceptability of an index return. What I can do is make it statistically likely that I will outperform, and that I will do so with a lower standard deviation, thus mitigating the sequence of returns risk should I need to remove funds from the portfolio.
I’m not name calling. I have 20 years of industry experience that directly bears on this topic. Comparatively speaking, you are ignorant, just as I would be comparatively ignorant talking to a Dr.
You only have 3, and only then if you’ve been adhering to a consistent discipline throughout.
I understand. Your skepticism is well-founded. I’m only a guy on the internet as far as can be demonstrated. I am claiming special expertise and access to data that I cannot share. This is not, generally speaking, a recipe that should provoke total acceptance in a reasonable person.
On the other side of the coin, if you are talking to somebody who says they are an auto mechanic, and you know a thing or two about automobiles, you might be in a position to judge whether the person you are talking to is credible and knows his stuff enough to be what he portrays himself as. Apply such judgement to me and act accordingly.
Exactly. I have probably lost whatever equity in my home that I had. I’m confident that it will come back. I still have 20 years to retirement.
People will soon be buying homes because of the great bargains to be found. The market and housing industry needed a huge wake up call.
And yes, I am for more regulation for home loans. The quasi-private market fucked up, I admit it.
If the government gives them a free pass on the loans to them I’ll be more than pissed.
That I don’t know. The data that I use is propietary. Most, if not all of the good research you have to pay to access or be in the industry (Ibbotson, Lipper Analytics, Jaywalk, Bloomberg, Morningstar, as well as the access to firm specific analysts or their output.) The terms of access specifically prohibit you from reproducing it for, or making it available to unauthorized third parties. You are double specifically warned that if you put any of it on the internet they will hunt you down and kill you (all right, I’m exagerating)
This is the norm in the industry as such product is difficult and expensive to produce and valuable for its exclusivity.
There are public sources available, and some of these that I’ve named do provide limited information for public consumption. Generally, I don’t find that stuff to helpful.
Isn’t that a good thing. You want to outperform without taking on excess risk, right? Therefore, you would think those that have done it consistently over a long time period might be pertinent or of interest, right?
I don’t understand what you’re getting at. You seem to be arguing that outperformance is unuttainalbe, or unlikely, and ask for proof otherwise. I give you examples of groups and methodologies that have consistently done so over extremely long periods of time, and you say “That’s not proof. Show me proof.” Clearly since future performance does not yet exist, I can’t produce it for you. What I can demonstrate is that based on history there is a statistically significant likelihood for future outperformance in certain cases, and strategies. How many more do you want?
Indexes are a form of management or an investment discipline. Their entire value is that they produce a statistically significant history of returns from which one may intuit a reasonable expectation of future performance. It seems disingenuous to accept the statistical significance of indexes but not that of management, especially when the distinction is nothing more than a matter of degree.
Here, You want to beat the S&P 500 in a statistically significant manner dating back to inception in 1860 something? Rebalance it to equal sector weightings, use a dogs of the dow type model, push it through an alpha surprise model, a dividend discount model, or use any other of dozens of defined criteria to improve it.
Basically any of these would have produced statistically significant outperformance over long time periods in the past.
There is tons. The dogs of the dow has significantly outperformed the dow for just about any statistically significant time period you care to look at it. There are thousands more, some simple, some complex. Some publically defined, some not.
The couple of funds I showed you are more than happy to show you how well they did. In fact it’s hard to avoid.
Yes it does.
You are misunderstanding the conventional legal disclaimer. “Past performance is no guaranty of future returns.”
If I show you a spot in Alaska where Salmon have come to spawn every year for millions of years, that is no guaranty that they will come there and spawn next year.
Most would concede that such is statistically significant evidence that it is very likely that they will in the future.
It is dismaying that you are unwilling to accept such evidence or even consider it as such since it is the only evidence that is available without a time machine.
I’m not arguing with such people. If you are a heart surgeon for example, and you’re talking with somebody else about heart surgery, you’re going to know pretty quickly whether the person you are talking to is a heart surgeon.
You don’t talk like a broker, fund manager, research analyst, hedge fund, principle, trader, or other folk in the industry. You talk like the customer of a discount firm who listens to radio programs, and reads material from planners who use discount firms as custodians or otherwise produce material for the consumption of discount firm clients.
I am not putting them down (well actually I am. I think they fucking suck. I think they are self-righteous lying pricks who only survive by preying on gullibility and impugning their betters and are only where they are because they failed miserably on the other side of the business.)
Anyway, the whole side of the business that tears down management and claims that indexing is the way to go has a huge vested interest in doing so.
It’s a logical fallacy, but I think it’s a valid argument nonetheless. The truly enormous sums of money, the foundations and endowments, the insurance companies and the banks, the extremely wealthy… these are the group that we might consider “smart money.” They have the largest vested interest in getting the highest possible return for the least risk.
Overwhelmingly these enitities use managed money.
Chuck and the index funds are going after your less-sophisticated investors.
There’s a reason for this.
FWIW, I do quite a bit of day trading, and no way do you need to be right more than 50% of the time. Some of my best weeks were when I was ‘right’ (made money) on only 40% or less of my trades - but each winning trade was much bigger on average than my average losing trade.
I personally had become increasingly skeptical of ‘diversification’ - seemed to me like a good way to dilute any positive returns. Sure, the reduced risk is nice - but I figured, if I can handle the risk management portion myself, why diversify away potential gains?
It’s why I stopped having pros manage my funds, and started doing it myself. If I feel confident in a particular trade, I can take a slightly larger position on it, knowing that if I’m wrong, I can and will bail in a hurry. I can be wrong five times in a row and make it all up and more on the one trade I get right. For the average investor, it’s the other way around. They have four or five winning ‘trades’ (or years) and then one really bad trade (year) that sets them back.
I think it’s partially in our mindset - we’re conditioned to always having to be right most of the time. Bailing on a trade feels like ‘we were wrong’ - which would be true if there was actually a rhyme or reason to the stock market. There isn’t. No one knows which way the next tick will go. There may be mass consensus agreement on a particular item - what a company’s sales will be, for example - but no one - I repeat, no one - knows what the market’s reaction will be.
You need to feel sorry for Hank Greenberg, He ran AIG for many years. He retires with 1.5 billion in stock. It now is worth 100 mill. It may be even less after the last couple days. Poor old guy had it made. He bitched at management for months offering to help them out. They did not need him. They had it under control.
Now here’s my disconnect. He could lose 90% of what’s left and still be rich. A lot of people surviving on $40k/yr now have nothing. I feel for them, not Greenburg.
He’s going to suffer? Cry me a fucking river.
mangeorge
BTW, I’ve lost nothing so far, and probably won’t. I’m doing fine, and I ain’t whining.
Scylla:
Well, I’ll grant you this: when you know your shit, you really know your shit.
I noticed in your explanation on page 1 you failed to mention anything about lack of governmental oversight. McCain and Obama both seem to think that the current “market adjustment” was the result of a deregulated financial market. What’s your take on that? Should the government have stepped in and regulated these CMOs thingies? Would other regulations have helped? Or do you see the problem as something basically beyond the scope of regulation?
There seems to be a growing consensus among the economists I read that we haven’t reached bottom yet, and that this problem is even more severe than anything we’ve seen – maybe as bad as the Great Depression. Here’s the assessment of Kevin Phillips:
What do you think?
Thanks.
I think it’s a pretty expedient thing to say. IMO, this current meltdown required a chain of circumstances to occur. Starting with the mortgage backed securities, I think it’s pretty noncontroversial to say that a lot of people ran through a lot of red lights in the origination of mortgages that should not have been issued, and these were securitized without regard for the risks that were being taken, and that this was done because there was a lot of money to be made. I don’t think anybody thought they were being evil. After all, you’re getting rich while helping people live the American dream by owning their own houses. You’re helping the economy with the housing boom, and those people with those low interest rate mortgages make money as the housing market increases. It’s a big win all around. So what if things are getting a little extreme and frayed around the edges? Things have been that way for a long while but it still keeps working.
One may know logically (if one thinks about it) that this can’t continue, but just like in 90s with the tech boom, bubbles are compelling. They make you believers. People think “sure it has to crash sometime, but not now”
Naturally there is a boom and bust phase with different industries as a part of the market cycle. As long as it doesn’t get too extreme it’s not a bad thing. This got pretty extreme.
Probably though, things would have worked themselves out. Some big financial companies would lose a lot of money (but they’d made a lot and that’s the nature of risk) some of them like countrywide would go under, housing would slow down. Some people who were unlucky or foolish would lose their homes to foreclosure. Most people and businesses would be ok. The wise man knows that when people start talking about mortgages as a “sale” rather than a “loan” a credit crunch isn’t far behind.
It was and would have been pretty severe. Strong oversight and regulation would have mitigated it to a degree. The problem with regulation is this: Good regulation is absolutely necessary. Bad regulation, or regulation for the sake of doing something is terrible, maybe worse than nothing.
There should have been some brakes applied to the predatory lending practices, maybe credit should have been tightened, but that’s hard to do when the economy is otherwise slow and having problems, and this is one of the few things powering it on. You put the brakes on origination and securitization and you may end up hurting things in other areas more. It’s a tightwalk, and I’m not sure there was a solution that let you walk the line in terms of credit tightening. If there was, I don’t know that it would be possible for anybody to walk that line. The predatory origination was too much though. That should have been stopped. I would have preferred to see it happen at the state level, as I think the various markets were different, and the demographics were different. This way there’s a better chance that the rules you put in place for the rich suburbs of New Jersey don’t end up meaning nobody in W. Virginia can get a mortgage. Then too, seperate rules for various states would have made it more difficult to for originators to go wild. They would have had to tailor there products more depending on the state, and it would also have slowed down the securitization since the mortgages would not all be standard from state to state. There was a little bit of this, a real little but not a lot.
The current meltdown of the last week or so should be viewed as a seperate issue. It’s dependant or linked to the housing crises, and, it wouldn’t exist without it, but you couldn’t have regulated it away by doing anything with mortgages. I think it helps to look at the mortgage crisis as one issue and the financial meltdown of last week as another. It may be partially fallacious to do so, but bear with me, and I’ll show you.
As I said, I think we probably gotten through the current mortgage situation without help. It was severe, but not absolutely terrible. Hurting hedge funds and short-sellers were able to exploit this weakness, and than, thanks to a change in methodology among the rating companies they were able to actually magnify or create weakness.
Regulating this problem is tough. The short sellers serve an important purpose. In most circumstances they serve to retard bubbles, and add efficiency to the pricing mechanism. They take incredible risks to make money, and nobody weeps for them when they lose. Theirs is a negative sum game with a potential for unlimited losses. You have to be sharp to be a successful short seller. There’s that. Then too, it’s tough to stop them. There are other ways they can bet on things going down, and other markets that we don’t regulate that they can attack our securities from.
The best way is to rally and squeeze them and force them to cover. How you regulate a rally, I don’t know (although we seemed to do it a couple of days ago.) Ultimately, I think there are going to need to be more regulation applied and the short sale rules are going to need altered.
FWIW, I didn’t hear anybody predicting the meltdown that occured in the last week or so. Nobody that I’m aware of guessed that the combination of circumstances would lead to the murder of relatively healthy companies by shorticide.
[quote[There seems to be a growing consensus among the economists I read that we haven’t reached bottom yet, and that this problem is even more severe than anything we’ve seen – maybe as bad as the Great Depression.[/quote]
I think there are too many variables and unknowns to say with any responsible degree of confidence. I don’t think it’s all over either. Based on the way the LIBOR swung last week, I’m deeply concerned that credit tightening aimed at new origination is going to push a lot of current mortgages into default, and may start another more severe round of housing related woes. I think the consumer is going to suffer a lot more as he gets hit with round two of a credit crunch.
I’m not worried about financialization, again cyclicality is fixing this as we speak. I’m not overly worried about the government debt as it’s carrying costs are very low and the government pays back in deflated dollars. Consumer debt may very well be a problem, the question is one of severity. Three and four I’m not worried about. I’m not sure what he means by the fifth. The sixth is a real problem, but not just now (I’m not really worried about oil because everybody else is. The problems that really kill you aren’t usually the ones your paying attention to.) The dollar needs killing. When the dollar’s strong everybody bitches about jobs going overseas and how we can’t sell our products abroad. The dollar has been too strong for a long time. It’s weakness is relative to this, cyclical, and in my opinion a very good thing for us long term.
Part of the consumer debt problem is due to the credit card companies writing the regulation for their own business. They charge usurious rates, can jack the rates up practically at will and pushed bankruptcy reform that only helped them. They have to find a way to make that fairer. People who have been running their lives on credit cards are in financial trouble too. Many had little choice.
We have to rein in the looters.
There is talk, finally. We’ll see.
The stock market has its pros and cons. Money which has to be safe must be safe.
Scylla -
Thanks for the write-up on the mortgage/CDO mess. Very interesting to hear an “insider’s” perspective.
Perhaps I’m getting the wrong vibe from you, and if so I apologize. But, you seem to be coming down harder on regular short-sellers of financial stocks than I would expect. I assume you agree with the recent push to correct the Failures to Deliver/naked shorting in financials is a good move. Though, I would argue far too late, and forcing people to make delivery on contractual obligations isn’t my idea of tough, hard-nosed work by a regulator. I don’t believe it’s something for which the SEC deserves to be patted on the back.
What is your opinion of the recent ban on legitimate shorting of financial stocks? The equity market open following that announcement was the wildest thing I’ve seen (though my experience in the industry is not nearly as extensive as yours). Stocks that usually have 30-50 cent spreads were trading with 3-5 dollar spreads. Zions Bancorp is one example of the crazy trading going on (ticker: ZION). The closing imbalances were similar in volatility. Do you think taking away liquidity, as they’ve done, was the right move? I’m glad I’m not an options market maker…
Also, if the shorts have driven these banks down to levels far below their “real” value? Why is no one buying?
In some of my earlier posts here, I tried to make it clear that I thought the real bad guys were the ratings companies, not the short sellers.
I didn’t notice unusual spreads except at the open. Are you sure you were looking while the market was open and not the premarket or after hours trading?
At 1:00 on Thursday Morgan Stanley was around 10. It closed right around 22. We were up around 400 points Friday. I consider that buying.