RETIRE.FUND: Great Depression

Showing posts with label Great Depression. Show all posts

Friday, March 7, 2014

The Death of Long Term Thinking

A "Tongue in Cheek" article by Motley Fool Analyst and contributor, Morgan Housel

Long-Term Thinking: 1800-2013
By Morgan Housel

Long-Term Thinking died last year. His last true friend, Vanguard founder Jack Bogle, was at his side. He was 213 years old.

Long-Term Thinking lived an illustrious life that began at the start of the Industrial Revolution, when for the first time, people could think about more than their next meal. But poor incentives and the rise of 24/7 media chipped away at his health. The final blow came when a trader on CNBC warned that a 10% market pullback -- which has occurred on average every 11 months over the last century -- could be "devastating" for investors. "That's it," Long-Term Thinking whispered from his hospital bed. "There's no more room for me here." He died shortly thereafter as Bloomberg published its daily tally of how much the net worth of the world's billionaires had changed in the previous 24 hours.

Long-Term Thinking endured the Great Depression, world wars, and spiking interest rates in the 1980s. But the last five years proved too much, as he fought for relevance with cable news, Twitter, and derivatives. He was hospitalized in May 2010 after pundits lost their collective minds over a "flash crash" that made a few stock prices freeze up for 17 minutes. "Computers froze for 17 minutes and they literally think American industry vanished," Long-Term Thinking told his psychiatrist. "These people are insane."

Fifty years ago, the average stock was held for more than eight years, according to LPL Financial. By 2010, the average stock was owned for five days. Fifteen years ago, S&P 500 companies spent more than 40% of available cash flow on capital investments. That fell to just over 25% by 2007, with the difference going mostly to share buybacks, likely to boost option-based compensation. "Our culture has an endemic problem of short-term thinking," Long-Term said in his final speech in November. "Years have become months, months have become days, days have become milliseconds, and milliseconds have become careers. However much you think you're winning in the short run, you're losing in the long run."

Long-Term frequently blamed media. Louis Rukeyser's Wall Street Week went off the air the same year Mad Money, Jim Cramer's daily investment show, debuted. The number of important financial events hasn't changed since Rukeyser could cover a whole week's news in an hour -- just the amount of drivel, gossip, nonsense, and hyperbole. It was too much for Long-Term Thinking to handle. Once the bastion of rational thought, he became the laughingstock of the financial world, repeatedly teased for his indifference to candlestick charts and the 50-day moving average.

Some mourned his passing. Peter Burton, a hedge fund manager from Greenwich, Conn., said, "It's sad to see him go. Everyone in my field knows he was right. With our own money, we think years out in the future. But with clients' money, I have three months to be correct, or I'm out of a job." Shaking his head, he continued: "The dirtiest secret in finance is that few of us are incentivized to do what's right. Your pension fund, your 401(k), and your kids' college funds probably have a time horizon measured in decades. But you pay me based on how I perform against my peers every 90 days. It's such a joke."

In lieu of flowers, his family asks that you turn off CNBC and stop checking your brokerage account.

Thursday, January 28, 2010

HAYEK VS KEYNES - Economics 101

Image by Renegade98 via Flickr

Economic theory comes in many forms and with many faces of great (or goofy, depending on your own theory) economists attached. However, no matter what economic theory you conform to, you are bound to cross the wide path of the two greatest economists of the 20th century, Austrian Friedrich Von Hayek and John Maynard Keynes.

In the most basic sense, Keynesian economic theory is reflected greatly in the current morass in the markets as it's practitioners pump more and more liquidity into an already over liquid system. There is, however, just as strong an opposing view on economics and that is from those who are disciples (so to speak) of Friedrich Hayek.

Here is a great YouTube video, done as a rap, produced brilliantly by John Papola and Russ Roberts, which presents both sides, that of Keynes the "interventionist" and Hayek the "free market" maven. Yes, it is simplistic, but the message is strong, and it should send chills through new and old investors alike.

My personal sense is that the worst is yet to come, and may be here as soon as summer 2010.

In any event, it is not only entertaining but highly educational for the uninitiated. No matter where you stand, you will like this video. Enjoy!

Friday, August 28, 2009

The Commercial Real Estate Market is headed over a cliff and it will drag another industry over with it!

Image by Thomas Hawk via Flickr

If you think that the housing crisis in the United States is over, you're not paying attention. The inventory of unsold houses is over 1.5 million. Over 40% of home owners will be "under water" by 2011 (meaning their mortgage will be more than the value of their home)

If you think investing in Commercial Real Estate in the form of a REIT (Real Estate Investment Trust) is still a good investment, once again, you are not paying attention. This is the market that could and, most likely will, spark a stock market crash in 2010 (Maybe sooner). Here's why!

Commercial buildings, office buildings, Malls and the like, are the lifeblood of the REIT market. Even before the advent of REITs, investing in commercial real estate brought investors and speculators fortunes. Mostly those investors were already rich or well to do because the average retail investor could not afford to be in this market. REIT's changed all that as they began to trade on the markets much like stocks. During the great depression, a number of distraught investors actually jumped from the same buildings they had invested in. Hopefully that won't happen next year, at least, not to you.

If you are invested in a REIT or similar commercial real estate company, there are some things you need to understand, and you need that information now, before things start to unravel even more than they did earlier this year. Yes, I know that, many pundits are very bullish on this market but as Warren Buffett has put it, "you pay a high price for a cheery consensus".

Now, don't take just my word, or anyone's word for it. Look around you! The last time you went to a mall, how many stores were closed, or closing? Indeed, how many malls are still surviving? Over 200 malls in the United States were abandoned this year alone. Now think back to the last few times you went into an office tower in your city for an appointment. Did you notice a number of empty offices or companies vacating the premises? As these properties financing comes due, where are they going to find new financing?

The banks have had a good run this summer. I know. I just sold much of my bank stock today. (when you have a good run you should not fall in love with the stock you own, even if it is a bank with strong earnings. In this case, TD). Banks, particularly those in the U.S., would be the "second" domino to fall if the commercial real estate crashes. It could even be a "death blow" for some banks as their exposure is over $2 Trillion dollars to the sector which could lose as much as $1 Trillion in value.

REITs trying to re-finance properties this fall and early next year, will run into a wall. No one will want to lend them the billions required to re-finance their operations, especially banks that have been propped up by government bailouts. This does not include the 80 banks that have failed this year, or the 200-500 expected to fail in the next 12 months. Yes, that many, and those are the conservative estimates. Some analysts believe the number is closer to 1,000. Even after all that has happened over the last 18 months, the banks are still holding their cash close. However, if your REIT has solid management, is flush with cash and is keeping their powder dry waiting for the downturn, you might wish to hold on to your shares. Only the strong will feast on the many carcasses that will be strewn across the landscape.

Trust has left this market place. It will leave behind it's offspring, pain and loss!

Update: Sept 10th 2009 from New York Times.
Corus Bancshares - First domino to fall.

Tuesday, June 16, 2009

Putting a little gold in your mattress might be comfortable, or at least comforting, but Tech will shine brighter this year!

Image by kimberlyfaye via Flickr

It was not uncommon for my father, who would have been 83 this year, to walk around on a weekday with $10,000 cash in his pocket. He was not a wealthy man, but ran a small business with approx. 20 employees. However he had the mentality of many others of his, the "greatest" generation, when it came to a healthy skepticism of the dependability of banks. The attitude came honestly as many of that generation had suffered through the great depression, and had lost all their savings when banks went bankrupt.

A good friend told me a story about a favorite aunt who always carried a satchel or briefcase, everywhere she went, all the time. When she died, her family was going to throw out that old satchel as they saw it as an eyesore. Before that was done, someone opened it and discovered it was stuffed with cash! Over $100,000 cash!

The same friend also told me that, when her Grandmother died, (the two elderly ladies were sisters), the family were going to throw out her old mattress when someone laid down for a minute and thought how uncomfortable it was. On further examination, they found it was absolutely stuffed with cash.

Now, we all know that this is not a recommended method of savings because of the dangers of robbery, loss, theft, fire etc. But these veterans of the Great Depression did what they thought was necessary to secure some of their future, rightly or wrongly. As I said, they just did not trust the banks.

Why did they lose their trust in the banks? Well, for the most part, many of those banks were under capitalized and when there was a run on the banks, they collapsed under the weight of so many people trying to retrieve their life savings.

Is that starting to sound somewhat familiar? Here in Canada the 5 major banks are well capitalized and in no danger of such an event. They wisely, for the most part, stayed clear of many of the toxic, derivative assets, that U.S. banks so greedily pursued. This was made clear after the downturn when our top two banks, TD Bank and RBC advanced into the top six banks in the world based on capitalization. They had been (I stand to be correct here) approx. 9th and 20th in the world before the downturn.

If you are reading between the lines, you have no doubt already come to the conclusion that many top banks in the United States were cut down tremendously, some to the brink of life support. The same goes for banks in Britain Germany, Spain (and throughout the Euro zone). Throughout this Spring, we heard bold financial results from many U.S. banks which far exceeded analysts expectations. However, can these numbers be trusted? If you take the numbers from these banks, leave out the Trillions in toxic Derivatives they still hold, add in the billions infused by the U.S. Government, then of course, the numbers will look great.

Once the Government largess is gone, and the Derivatives have to enter into the calculation (and these huge losses will have to be shown at some point) does anyone really think things have gotten better? Many banks in the U.S. and Europe are on life support, and will be for years. Our grandfathers didn't entirely trust the U.S. banking system, (or the stock market for that matter) and for good reason. Now it is our turn to make that determination.

Our problem is, What, exactly, do we stuff into our satchels or mattresses (or home safe). If you use U.S. dollars, you can count on a 20% to 40% drop in your assets over the next 3-4 years, and that's after losing what you have already lost. What holds value in these rocky times? Opinions vary on this, but I cannot help but think that Once the dollar continues it's slide (this weeks renewed strength is only temporary) that the stock market will benefit. It has too! And the part of the market that will benefit most?

1. New Technology companies with a worldwide market and/or valuable intellectual property ( patents ).

2. Generic drug companies (remember the Obama promise of health care reform)

3. Commodities that are valued/traded in U.S. dollars such as

4. Gold and other precious metals (silver is under valued)

5. Oil is traded in U.S. dollars!

6. Natural gas is currently undervalued and will be used extensively for the coming fuel cell revolution in power generation.

No, you cannot put these stores of value in a satchel or in a mattress, but you can spread them throughout your portfolio, either as individual investments or through the purchase of targeted mutual funds. If you're really nervous, a little Gold in the home safe won't hurt, and may give you some piece of mind.

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