Dow flat. Gold flat. Everything flat in preparation for Thanksgiving.
“Thanksgiving is probably the most important American holiday,” we explained to our Australian visitor.
“People travel to be with their families. Everybody looks forward to it. You don’t have to decorate. There’s no music associated with it. No religious doctrines. There’s no pressure to shop for presents… and no worry that you might not get the right thing. It’s just a great feast day.”
“But wait,” a friend counters. “It’s a deeply religious day. We can’t have Thanksgiving without thanking someone. We thank God for our blessings.”
Everybody’s got an opinion.
Investing is one of the few things – maybe the only thing – at which you get better as you get older. Young men know. Old men doubt.
As you get older, if you keep your wits about you, you realize that you don’t know anything. That helps in investing. You realize it would have helped a lot in raising a family, too. But it’s too late for that.
Asked what the world would be like in five years time, at the Kilkenomics economics festival in Ireland a few weeks ago, we replied: “No idea.”
We only recall that because we saw the quotation in Simon Kuper’s column in the Financial Times. No doubt, it will become our epitaph.
“Bill Bonner: I have no idea.”
Even as to that we’re not quite sure. We have a lot of ideas. But they are merely speculations. As to knowing what the future will bring, we do not. And we become less sure of it with each passing year.
That is why being wrong is more beneficial than being right. When you are right, you cultivate the delusion that you know something. When you are wrong the air goes out… the windbag flattens… and you see yourself for the idiot you really are.
Do What’s Working
We bring this up because our friend and hedge fund manager Hugh Hendry has capitulated. Wrong about a stock market crash (he had plenty of company… yours truly included), Hugh has decided that if he can’t beat ‘em, he’ll join ‘em.
He can’t bear to look at himself in a mirror, he says. But at least he’s not losing any more money… For now.
Dennis Gartman uses this as an investment model: “Do what is working,” he says. “When it stops working, stop doing it.”
But how do you know if it is really working? And how do you know when it has stopped? Stocks go up. You get on board. Then they go down…
Do you get off?
No, you wait to see. They go down more. So, you get off. Then stocks go up again. Now, you have to buy back in at higher prices.
Next time they go down, you hold your ground more firmly. They go down more… and still, you stick with them.
“They’ll go up soon,” you say to yourself. But they go down again. Now, what do you do? You could get out… but they’ll probably go back up like they did the last time. So you sit tight… and this time they drop big.
Oh, my! Now you’re down 10%… “Don’t take the loss,” you hear a voice telling you. “Stick with it. You may have to wait… but stocks always come back.” So you stick with it. And stocks lose another 10%. Now you can’t afford to take the loss. Now, you’re stuck.
But hey – stocks come back. They always do.
Stocks for the Long Run?
That’s what Japanese shareholders told themselves in 1990. They’re still waiting. The Nikkei 225 stood at 39,000 at the top of the Japanese stock market bubble. Now, it’s 15,000. That’s a 50% loss of capital over a 23-year period.
Who knew? Nobody.
Stocks for the Long Run was a famous book by Wharton School professor of finance Jeremy Siegel. Now, Siegel says US stocks are not expensive. US stocks, he says, are “extremely normal,” whatever that means.
But that doesn’t mean they can’t become “normally extreme,” whatever that means.
The Dow peaked at over 16,000 last week. This week, the Nasdaq rose above 4,000.
How come the US markets are going up, while those in Japan couldn’t go anywhere?
Maybe it’s QE. Japan was more cautious on that front (until recently). It turned its banks into zombies, just like the US and Europe. But it was unable to get its stock market back on its feet.
Still, Japan could be the tsunami of the future. US stocks could go down… and then stay down, just like their Japanese counterparts.
Nobody knows anything
And what about QE. Does it work? Or not?
Oh, darn… there’s that two-handed economist again! On one hand, QE does make credit cheaper, which should… in theory… increase lending. On the other hand, there are powerful deleveraging, contractionary forces that seem to cause liquidity to coagulate immediately. Money velocity falls. Demand slumps. Prices stagnate.
Result? Sluggish growth. Low inflation.
Tokyo, in other words!
Nobody knows anything.
Have a nice Thanksgiving.
Regards,
Bill
Market Insight:
Here Come Mom & Pop!
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Bill is right: Nobody knows what the future holds.
But there are some things we do know about past human behavior. Like the fact that the public buys most at the top and least at the bottom.
This from Bloomberg caught my eye last week:
Investors are pouring more money into stock mutual funds in the US than they have in 13 years, attracted by a market near record highs and stung by bond losses that would deepen if interest rates keep rising.
Stock funds won $172 billion in the year’s first 10 months, the largest amount since they got $272 billion in all of 2000, according to Morningstar Inc. estimates. Even with most of the cash going to international funds, domestic equity deposits are the highest since 2004.
Make of it what you will…
But here’s what I told members of Bill’s family wealth investment advisory, Bonner & Partners Family Office, this morning.
Here’s a truism of investing: The future is uncertain. To cope with uncertainty, human beings look for familiar patterns. And we assume that future patterns will look like past patterns. We are pattern-spotting machines.
What we are less adept at – because it’s hard and requires independent thought (which is by definition rare) – is considering the reasons why a pattern is occurring and the probability of it recurring.
The pattern investors are recognizing right now is an obvious one: Stock prices are rising!
But the reason for rising prices is less obvious. After all, most valuation metrics that have a history of predicting future returns suggest that buying US stocks now will disappoint over the long run.
Take the S&P 500’s price-revenue ratio. On this measure, valuations are well above any point prior to the dot-com bubble. Or take the ratio of non-financial capitalization of US stocks to nominal GDP. On this measure, investors are now valuing the US stock market higher than its 2007 peak. In fact, it’s approaching extreme valuation levels last seen in 2000. (Hat tip to John Hussman for this data.)
By all means join the momentum crowd… and extrapolate past price rises into the distant future. But realize that there’s little as dangerous to long-term financial health as doing so.
