Monday, May 24, 2010

A Historical Perspective

So, just how great was The Great Recession? Take a look at this table from Independent Strategy Group (in billions of dollars):

My father is a World War II veteran, who landed on Omaha Beach in France. It was the defining experience of his life, which he re-lives every day of his life. Yet, separating the economics from emotions, which is admittedly difficult, that event was only twice as significant as The Great Recession, as a percentage of GDP. If you add the virtually simultaneous War on Terror to the economic cost of The Great Recession, then World War II was only 19% worse than what we have recently experienced.

Complicating matters, while we entered WWII and the War on Terror with a small budget surplus, we entered the War on Terror with a huge existing national debt. We’re now in a deep hole and will need another post-WWII recovery to get out of it. Greece is a lesson for us.

So, how great was The Great Recession? You figure it out!

Thursday, May 20, 2010

The Myth of a Level Playing Field

Nobody likes to think the odds are stacked against them unfairly. As long as man is either greedy or simply competitive, people will look for an advantage, fair or unfair. Newspapers routinely report on businessmen being indicted for one reason or another. No business is untouched, from developers, realtors, lenders, or even lawyers. As a result, we have learned to be careful who we do business with, but we continue to do business, knowing the crooks represent only that small portion of the business world that unfortunately gets so much media attention.

On May 6th, the stock market experienced a “flash crash”, which means it suddenly dropped precipitously before recovering. Two weeks later, we’re still trying to figure out why this happened, although it is pretty clear that it had something to do with computer routing, not any stealth attack or market manipulation. In addition, there has been much discussion since then about “high-frequency trading” and “black pools” or other sinister sounding things. So, is the stock market rigged by the smart insiders to rip off the average small investor?

Absolutely, there are smart traders who exploit any advantage to make money! There have always been people in the market like that. This is nothing new. Nonetheless, great fortunes have been made in the stock market and will continue to be made. Countless retirements are secured by the stock market.

Warren Buffett has always said he knows where the market will be in 10 years – up—but has no idea where it will be tomorrow. If you have a short-term focus, you will have many sleepless nights. But, I don’t think Warren Buffett has any trouble sleeping at night.

After the huge bull run following the March 9th low of last year, the market was already due for a correction of 10% or so. Markets do that! While it is unfortunate that our bear market correction happens to coincide with the European crisis, this too shall pass.

Last year’s bear market was due to problems in the United States. This year’s is due to problems in Europe. Who knows, maybe next year’s correction will be due to problems in Asia. All I know is that there will be another correction of some sort next year, because markets do that. Before then, markets will be up, because markets also do that.

Thursday, May 6, 2010

A Day for the History Books!

What a ride! At one point this afternoon, the Dow was down almost a thousand points. The plunge was sudden, dramatic and scary. Such a price plunge could not be attributed to the fear of Greek contagion, nor the uncertainty of the national election in England and a regional election in Germany this Sunday. At this point, it looks like a trading error of massive proportions, attributable to the entirely computerized trading system we have today. We recovered from a loss of 998 to a “mere” loss of 347 within two hours.

I have cautioned many times this year that we are subject to a heart attack, which would come thru the financial system. Today, it happened and financial stocks got killed. Now, you know why I have not bought hardly any financial stocks this year, despite their nice earlier run-up.

Despite surviving today’s heart attack, we may yet have another. If Trichet of the ECB does not indicate quantitative easing soon, there could easily be another. We’ve long sold our bank stocks, and I’m still not buying any more any time soon.