i'm back

sorry for the hiatus, but tax time intervened, and there was a mountain of k-1's and 1099's to attend to. i hope now to be more regular, except when traveling.

thanks for the encouraging comments, it makes me feel like the effort is worth it. the feeling i'm getting is that everyone wants me to cut to the chase and tell them what to do! i'm torn here, because i'm not sure that's really what i want to do. my real purpose in writing was to educate, to try to bring some light to the world of investing, trying to look at it from some unique and unusual angles, say some of the things that are not being said by the talking heads. also, i am not a "registered investment advisor" and thus cannot presume to give actual individual investment advice. furthermore, if i'm wrong, i don't want people getting pissed off at me. people have a way of remembering that the good decisions were their own idea, and the bad ones they got from somebody else; present company excepted of course! and of course i do have some ideas about what to do, so there's that, too...

for now, let me say that if you read me saying that something is in a bubble, then by definition i think it is overpriced, that it is one of the trains (ie. investments; see "we're all gamblers") that has gotten ahead of itself, and is due to move backward, perhaps a lot backward, relative to the other trains. therefore, it is something which i think you should SELL, jump out of, onto another train. maybe even sell short if you like to gamble. (if you don't know what that is, that's ok, because in that case you shouldn't do it, anyway.) at present, i believe that stocks, real estate, and high yield bonds are in a bubble that is just beginning to collapse. some of the other trains, like gold, commodities, and money are more complicated, and i hope to write more about them in the future.

in addition to the nice comments, some good questions were posed by steven newcomb and by someone named suntrinsic. so rather than ramble on, i'm going to try to present my opinion about these questions.

Suntrinsic said...
Hi Jim! What's your take on these often-heard opinions? (1) Since its inception, the U.S. stock market has had some spectacular ups and downs, but its overall trajectory has always been up. Therefore, a prudent, well-chosen and -diversified mix of equities, bonds, and cash--and a willingness to stay invested over the long haul--is the best hedge against inflation and against such alleged facts as that even returns of U.S. Treasury bonds rise and fall over time. (2) Huge stock-market crashes and long economic depressions are less likely to happen in the "developed" world than in, say, the late 1920s and 30s, because of how alertly the economy is now managed. (3) Money is a social construct, a mutual agreement on a standard medium of exchange. In some cultures and at some times, value has been tied to gold, in others to cowrie shells. The fact that it is now plastic, or stipulated by the World Bank or whatever, does not perhaps mean it is any less real or stable than it has always been.I'm really interested in hearing all points of view on these matters. Thanks for blogging! I want to read Prechter, for instance.

ok, in order: (1) YES! i believe this, (the first part, about stocks, not necessarily the "mix"). a couple of weeks ago, i started writing a post which was to be a summary of what each of the major "trains" was and what i thought of them as an investment vehicle in general. (it was too boring to post). regarding stocks, i point out that they represent the one investment where you own a piece of something that is (hopefully) growing and increasing in and of itself, an actual business. the others pretty much just sit there, perhaps earning interest or rents, and you hope they somehow become scarce and that people will want to pay more for them at some point. but that's in the "long haul." remember that stocks lost over 90% of their value between 1929 and 1933, and that it took over 20 years for you just to get back to where you started if you invested in 1929. ouch. my premise is that there are indicators and measures which you can use to see if an investment is overvalued, and when that is the case, you have to jump off. you might not live long enough to benefit from the long haul. also, many companies went bankrupt in the 30's, so if you happened to own the wrong ones, you never got even.

(2)i believe just the opposite. all of the central bank interventions, financial innovations, and so on have only conspired to create a much more unstable environment. there are so many layers of financial products, each some sort of derivative of the layer below, it's like one of those cheerleader pyramids 20 persons high. insiders now refer to these products collectively as "financial instruments of mass destruction." when the pyramid collapses, it will be much worse than a simple collapse of the underlying financial instruments (mostly mortgages and corporate loans) would have been, and no amount of "management" will save the day. when bear stearns collapsed recently, everyone complained about the "bailout." but the stockholders, whose stock was worth $150 not that long ago ended up with ten bucks, a 93% loss in short period of time. how long will it take for them to get back to where they were?

(3) great observation, and the crux of what i plan to examine carefully, because it's very complicated. i do believe that money, when not tied to something concrete, such as gold or cowrie shells, has the potential to be debased, as in the famous inflation of postwar germany, the italian lire, or myriad south american countries over the years. however, these were examples of currency inflation, where the government simply printed huge amounts of money and put that money into circulation by spending it for its own purposes. our current expansion of the money supply is primarily caused by an explosion of debt. its the old economics 101 lesson (where the banking system creates money by lending it to people who then deposit it in accounts where the bank can lend it out again, and so on) on steroids. all those financial instruments mentioned in the previous paragraph increase the flow of money. the question is: what happens when the pyramid starts to collapse? one school of thought is that the fed will try to stop the collapse by somehow flooding the system with money, causing great inflation. the other school says that the collapse will be deflationary (meaning that money will become worth more) because money disappears in the collapse in the same way that it is created in the bubble, and the fed will not be able to do anything to stop it. i belong to this latter camp. lets look at the clearest example i can find for this, the bear stearns collapse and bailout. people are saying, oh this is inflationary, the fed put up all these guarantees and kept the whole thing from collapsing, that's just more money in the system. what i see is the evaporation of an enormous amount of wealth. all those stockholders have a lot less "money" than they used to (actually, they don't have less money, but they have less wealth, less that they can convert to money and spend), and many jobs were lost, also. the net effect is very deflationary, despite the fed's inflationary attempt to prop things up. look at the mortgage fiasco. people are losing their homes and investment properties, that wealth is going up in smoke. and they're not the only ones to suffer. the ones who issued or bought those mortgages (like bear stearns!) are going broke, too. all sorts of bailout ideas have been kicked around, but even if some of them were to be implemented, they would merely reduce the degree of deflation, not create inflation.

Steven Newcomb says: OK, you got my attention. At a moment when the forward/backward/relative motion of the trains is less predictable than at any time in my almost 60 years of life, I need all the help I can get. I see lots of things I want to take my money *out* of, but not too many that I want to be *in*. I want to get out of U.S. dollars, for example, but I should have thought of that earlier than now, and Euros are looking pretty expensive.

this brings up a number of thoughts, steven. first of all, we have to fess up to the fact that there are not just eight or ten possible investments, there are a jillion. there aren't just "stocks," there's each and every stock traded on all the stock exchanges in the world, and one or two of these can be going up while all the others are going down, and vice versa. and so on for each of the other trains. in the case of money, there are US dollars, and then all the other currencies such as the euro, the yen, the swiss franc, and so on. so even if you've made the decision to keep a part of your investments in "money," you have the option to choose from all these different kinds of money. you rightly point out that the euro train has pulled out smartly ahead of the dollar train, meaning that you wish you'd gotten onto it back when it was behind (which was the case not so many years ago). i like to look at things as much as possible from the point of view of what i figure their fundamental value to be, and then see if the price of that thing is in line. if so, i figure the train is right where it should be. if the price is too high, i figure the train has gotten ahead of itself and it might be time to jump off. if the price is too low, we want to jump on. so how do we figure this "fundamental value?" well for a stock, it has to do with the profits and dividends, and one's analysis of the future prospects for the particular business. for currencies, i think the "hamburger test" is a good one. what does a hamburger cost in a particular country, compared to all the others? or a suit of clothes or a cup of coffee in a restaurant, or some other common item. if the cost is high, then that currency might be considered to be overvalued, and thus due to correct at some point. right now, it's very expensive for an american to travel in europe, and the europeans are all flocking to take their vacations here in the US because it's so cheap. this tells me that the euro is overvalued relative to the dollar, so i wouldn't be investing my money there at this point. that is not to say that the euro will not continue to go up in relation to the dollar, but i feel that in the long run it will probaby come back down.

thanks, everybody, more later.