Hi Guys,
The controversial President’s Plunge Protection Team (the PPT) is Missing-In-Action (MIA). That’s a tongue in cheek opening since I am not a true believer in the tooth fairy.
The PPT is not an urban myth; it is a Washington myth. Its purported market action charter is an illusion. The PPT will not mount its white horse, nor will it ride to rescue our current dysfunctional equity marketplace.
Recall that the basis for the PPT legion was initiated when Ronald Reagan assembled the President’s Working Group several months after the infamous October, 1987 crash. The key players in that group are the Secretary of the Treasury and the Chairman of the Federal Reserve. The dominant characteristic of the group is that its meetings are held in tight secrecy, hence the speculation that their franchise includes indirect and direct equity market interventions. There is no evidence that this myth is grounded in hard data. It makes a great, and comforting story. It is false.
How to explain and understand yesterday’s equity market disarray that was global in scope? That’s not an easy question since its causes are multi-dimensional; it is a complex interactive problem with many root causes. Here is my quick, and incomplete answer.
My assertions (that’s all they are) are based on the Technology Adoption Life Cycle (TALC) model that was reported in 1998 book titled “The Gorilla Game”, with Geoffrey Moore as the primary author. That book established rules on how to choose winners in the high technology world. That same model has application in the entire equity marketplace.
The book states that most progress is continuous, but game changing innovations are discontinuous (like exogenous market shocks), and take time to penetrate the marketplace in totality. The TALC is divided into 5 reaction regimes: (1) Enthusiasts (true believers) (2) Visionaries (first to jump, often wrongly), (3) Pragmatists (the Herd), (4) Conservatives (the late towel throwers), and Skeptics (the real market contrarians).
The Gorilla Game argues that a chasm (a time gap) exists between when there is some small market acceptance by Visionaries and when the bulk of prospective customers (the Pragmatic and Conservative segments) are prepared to change their habits. The Herd likes the status quo and requires some special motivation. The chasm is jumped when small subsets ( a micro minority within the macro Pragmatic group) are provoked (perhaps panic and/or fear tilts the decision) into action.
The market reaction gains momentum as the basic instinct of the herd takes hold. The Gorilla Game calls this phase the Tornado, a phase that is dominated by rapid rates of change, a panicked herd, a real stampede. Dies this seem familiar?
What prompted the stampede? That’s difficult because it has many moving parts. Certainly the proximate global crisis crystallized with the Italian announcement. Within the United States, the proximate cause could be ascribed to the poor GDP growth rate that seems to be constantly revised downward, the stagnant unemployment numbers, and uncertainty over government inaction and regulations. We also had a perfect storm scenario in that the S&P 500 Index 200-day moving average was about to be penetrated in conjunction with these other real world events. So automatic technical indicator signals were penetrated and reinforced world happenings. These were all triggering events.
On a longer time scale, several disturbing patterns are evolving and make recovery more challenging.
Our acceptance of excessive debt financing needs to be controlled, both public and private. If you believe our public debt is enormous and dangerous, you should explore just how much our private debt has mushroomed. It puts great downward pressure on spending which is 70 % of the US economy.
In his 2008 book “Bad Money”, Kevin Phillips notes that our Financial industries contribution to the GDP is now larger than the percentage generated by our Industrial segment (like 20 % to 12 %). Phillips observes that our dominant and growing dependence upon financial invention does not speak well for our National’s retention of world leadership. Historically, when money matters dominated economic policies, the wealth of the nation deteriorated. The fall of great superpowers like Spain in the 16th century, like Holland n the 17th century, and like Great Britain in the 20th century can be traced to an oversized commitment to financial matters. The good news is that the United States has many more resources (especially its size and its persistent, resourceful, and innovative people) at its disposal.
In his classic book “The Rise and Fall of the Great Powers”, Paul Kennedy identifies military expenditures used at first to expand empire, and later to defend that empire, as a major component in the declining years of a superpowers lifecycle. The same players that Phillips mentioned are highlighted in Kennedy’s tome. The good news here is that the US is not an expansionary nation, and the GDP fraction that it expends on our military institutions is shrinking. My belief is that we should not necessarily diminish its size, but should reallocate its global presence.
So, what to do? As a cohort, those participating on this forum are not market timers, we are not day traders. That is clearly established since we basically own mutual funds, and were prohibited from acting during the panic. When Thursday ended, we had already absorbed a 3 % to a 5 % decrease in our equity holdings wealth. That’s gone. Might the marketplace suffer more losses? Probably a little more, since momentum persists. But will the market totally meltdown?
My answer is a loud NO.
Our real resources remain intact. We have suffered no wars, no destroyed homes or even boken windows caused by natural disasters. Our losses are more mental than real. We will recover, and we will recover smartly. Market prices are a bargain. Price to earnings ratios are attractive. Our corporate cohort has strong financial balance sheets and has money to invest. On a global basis, our relative strength is improving. Foreigners have already recognized our relative stability and are investing in government bonds.
I will stay the course. I can do this since I have plenty of reserve cash. I hope you all are in a similar position. Be brave. The PPT is MIA, but we're OK.
I prepared this posting very quickly without checking facts and without even proofreading this submittal. I hope my errors are minimal, and that the posting makes some small sense.
Best Regards.
Comments
Regards-
"Buy and Hold" investing is really - in my opinion - only for someone truly comfortable with holding something for 5-10 years - literally putting something away that you believe has that strong of a fundamental case (and this is primarily for specific stocks). Otherwise, how anyone can discuss buy and hold in a market where 70% of the market is computer-generated trading that takes place over a time-frame that is frequently less than a minute, I don't know.
I'm not selling at the moment because I do continue to believe that we face the possibility of significant inflation over the next decade and am in names that I believe could do well in that environment. However,we have serious problems and I'll be the one to say that we might not fix them or we might not fix them for years. I'll also note that we're at the point where I think any more significant policy errors could cause massive, large-scale problems.
Any which way, we've spent trillions in various stimulus programs and we're where? What did we get for that money - and now we're talking QE3? I'm baffled by any discussion about how we can recover smartly when we just had a remarkably embarrassing couple of weeks where it became quite apparent that we have a government who can't begin to work together until the 11th hour and even then we got an agreement that no one was happy with (but we're going to go further into debt.) I think to some degree the selloff this week is due to a market that is starting to wake up to the fact that the current government is incapable of handling the problems that we face and really even working together in any positive fashion.
This sort of soothsaying and excuses that we'll get out of this because we always do lets those who have to guide and provide leadership for this economy completely off the hook. We don't have to get out of this, and all of this "Europe is worse than we are" is more BS that directs attention away from our own shortcomings - but whatever makes us feel better over the short-term, right? Spending smartly would have been spending a fortune to upgrade this country's crumbling infrastructure (maybe PPP's, like they have overseas? - Public/Private Partnerships) rather than dumping into banks that should have gone under (and do not appear in great shape today even after all the money that has been thrown at the problem.)
"Failing infrastructure will cost the United States billions of dollars in lost productivity, income and trade in coming decades, according to a civil engineering report released on Wednesday that said the impact on gross domestic product could reach $2.7 trillion." http://www.reuters.com/article/2011/07/27/usa-economy-infrastructure-idUSN1E76Q0J120110727
This country was incredibly foolish for not spending on infrastructure in 2008.
"Foreigners have already recognized our relative stability and are investing in government bonds."
Those who manage to believe that the fundamentals of owning US government bonds are in any way positive are welcome to invest.
This is not against MJG, but just a general upset about the soothsaying ("Oh, it'll be okay. Why? Because it always is and always has been.") and pointing fingers and fascinated by anyone who believes that the government in its current, broken form, can provide solid and sustained leadership to solve any of the problems that we face. Additionally, the "we'll get out of this because we always have" and the pointing fingers that "such and such country is worse" makes us feel a little better in the short-term, but fixes absolutely nothing.
Hi Old Joe,
You shocked me by your quick response. Thank you.
Although the equity marketplace violated one of my technical indicators, the 200-day moving average, I have decided to stay put. I have sufficient immediate resources to easily ride out the current storm, even if it persists for awhile. I am doing nothing, but am on high alert.
This crash is the result of the European markets yelling fire. If there is a fire in Europe, and I suspect that it is real, the EU will react to contain it. In a relative way, the US economy is stronger, in a subdued manner. Our markets are confronted with several first-class issues, but we will resolve them over time. Unfortunately, equity returns will be muted for an unknowable timeframe.
Keep the faith, Old Joe, stay healthy, and have a good weekend.
Best Wishes.
Hi Scott,
Thank you for your well crafted and insightful reply.
I concur with much that you said. Although the problems are challenging, I am more optimistic about our future prospects than you are. That difference of opinion is exactly what markets are about.
I too am particularly disturbed by recent government actions and inactions. The good news part of that sorry scenario is that we get a chance to change it every two or four years.
Best Wishes.
Again, I will say once more this slow-patch in the economy underlines the fact that politicians and the public got their focus wrong recently in trying to cut the public debt too quickly. Europe started the tighter monetary policy attempt earlier than the US and they are in fact much worse shape. They made a huge policy mistake. We have a precedent in 1937 and risk making the same mistakes.
I personally think market forward looking fundamentals for corporations are very good. The majority of earnings came favorable and forward P/E is cheap even if give some benefit of doubt (discount) on the 2011 and 2012 earnings. Our banks have been hoarding cash and have much better strength than 2008. Corporate balance sheets are full off cash. Forward earnings yield is better than long term bond dividend yields so it is pro equities. On top of that commodity based price pressures have eased, oil is down. That is good for economy going forward.
I know it is extremely hard for someone to go against the grain of news and market action and take the opposite side. I personally have a rule that on a day that has more than 2% move, I take a small counter action. I've sticked to my rule.
Hi Scott,
I did finally access your Link.
The Reuters article you referenced summarized a report prepared by a Civil Engineering organization that endorsed higher spending on infrastructure projects. What a shock, civil engineers recommending a supplement to a construction budget.
Certainly their intentions are honorable, and they are most likely correct in their specialized assessments. But are their priorities correctly established on a global basis? At bottom, they are biased participants.
Engineers are great guys; I am not an unbiased observer stating that judgment since I retired after practicing in the engineering field for over 3 decades. I was an Aerospace specialist and heavily dependent upon government investments. I can never remember a single instance of any firm that employed me ever recommending a reduced government allocation in that sector of our GDP.
My last task as a consultant on a government panel was to study research efforts in the defense industry. We made numerous recommendations, almost all of which would cost money. I am sure that would surprise nobody.
Thanks again for your commentary. It added value to the posting line.
Overall, I think it's difficult to deny that the infrastructure in this country is - in many regards - dated and upgrades/updates would serve the nation well and allow it to remain competitive. It's certainly not only engineers saying as such - there are countless stories over the last several years discussing the need for improvements to infrastructure in this country (and quite a few examples of specific issues - "To get an idea of how old the nation's water pipes are, 30% of pipes in systems that deliver water to more than 100,000 people are between 40 and 80 years old, according to the EPA. About 10% of pipes in those systems are older. How much would it cost to fix? Every year, according to the EPA, the estimated price tag for repairing the nation's water infrastructure rises. The best guess at a total cost over the next 20 years has skyrocketed from about $198 billion in 1999 to the latest estimate -- $335 billion.") "At present the average lifespan of an American bridge is 42 years. As of last year, nearly one in three of the nation’s bridges was over 50 years old." One can say that the EPA, engineers and everyone else has an agenda, but in the meantime, an old water pipe (or whatever piece of infrastructure) is an old water pipe.
Additionally, public/private partnership infrastructure funds (literally investing in are available in foreign markets. Not saying that this would necessarily lead to quality infrastructure, but investing in ppp's (investing directly in hospitals, government buildings, roads, etc) seems like a growing asset class elsewhere, and offers a high-ish, inflation-indexed yield.
(And yes, you can say that it doesn't or shouldn't matter if S & P downgrades us, but it will likely matter to the market at large.)