Monday, February 21, 2011

From Birinyi to Schiller to Gundlach - What Guru To Follow Makes a Difference

Robert Shiller sees a 13% total return for stocks.....for the decade, so the S & P ending around 1430.

Laszlo Birinyi sees the S & P at 2854 by.......2013.

Jeffrey Gundlach in Barrons this weekend says the S & P 500 is going to 500....this year.

So which is it? One guru (who has consistently been right, Shiller) see the S & P 500 at half what another sees it at, another sees the S & P 500 down 840 points THIS YEAR or next. Only one of these guys can be right (technically two as the market could go to 500 then 1430 or 2854....or vice versa).

What guru you follow makes a big difference in what returns you earn or how much money you lose. Predicting the future is not so simple, I'm throwing in more with Shiller, but admit anything can happen in this market (up or down).

Scott Dauenhauer CFP, MSFP, AIF

Friday, February 18, 2011

Is the United States Just Like Greece? A Guru Gets It Wrong

Many years ago I read Fooled By Randomness, by Nassim Taleb - it was an instant classic in my library. I was excited when his next book Black Swan came out, it too was amazing. Both books seemed to predict in some way the financial crisis that eventually unfolded in 2008. If you haven't read either of these books it is my suggestion you pick them up and read and re-read them.

Needless to say, I'm a fan of Taleb. Yet Taleb has made some comments recently that can only be explained as mainstream and wrong - two things that he is rarely accused of.

At a forum in which he spoke recently he commented that "The United States is just like Greece, only without the International Monetary Fund (IMF) to enforce discipline". He goes on to say "The only happy thing that can happen in the U.S. is a bond riot".

Pretty much every mainstream economist, political commentator and politician (from left, right and center) has at some point expressed a similar refrain about the U.S. being Greece.

The reference is to the massive debt problem facing Greece and the dramatic events that led up to massive government (read Euro/IMF) intervention last year.

With the United States National Debt approaching $14 trillion, the comparison would seem to make sense on some level - but the fact is that it is wrong. The U.S. is not Greece and is not like Greece.

The big flaw in Taleb's arguement is a misunderstanding of the monetary system under which each country operates. Greece is a member of the European Union and borrows in Euro's, a currency in which it has no control and little influence. Greece must acquire Euro's by selling something in order to pay their debts, they can't print the Euro. The United States on the other hand issues debt in their own non-convertible currency, they are the monopoly issuer and can print dollars. The U.S. cannot default (ok, they could, but it would be a political decision, not a revenue constraint) as they owe dollars of which they control the printing press.

A more apt, but still not a good comparison would be California and Greece. California spends and borrows in dollars, the state must receive tax revenue or issue debt in dollars. California cannot print dollars, thus they are revenue constrained and could default (note: States cannot currently go bankrupt, nor do I believe that any states this point).

The common belief is that the Federal Reserve is "printing money" via their Quantitative Easing programs, this is not true - they are changing the duration of government liabilities - essentially engaging in Open Market Operations. It is the Federal Government (Both Houses of Congress and the Presidency) that actually print money (out of thin air) when they deficit spend.

When one of the greatest thinkers in the financial markets doesn't understand the global monetary systems, it makes one wonder what hope there is for our financial systems.

Please note I am not saying Taleb is not smart, I think he is a genius, but he has this wrong - as do most mainstream economists.

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, February 15, 2011

Is MERS dying? NY Judge declares MERS Biz model "Not supported by law"

Why this story is not frontpage news I'll never know, but this ruling could be another nail in the coffin for the Mortgage recordkeeping system known as MERS. Given what is at stake there are a lot of panicked executives in MERS land and they likely work for the Too Big Too Fail banks.

The market had zero reaction because it knows that the financial system is allowed to carry worthless mortgages at next to 100% of value on their balance sheets, so no real risk to capital exists (this is there thinking).

Another step in the MERS journey is complete, what will be next?

Scott Dauenhauer CFP, MSFP, AIF

Wednesday, February 09, 2011

Monday, February 07, 2011

Lack of Imagination or Too Much Imagination?

The continued full steam ahead bull market in stocks has caught many (including myself) by surprise. Its not that I didn't believe this meteoric rise couldn't happen, just that I thought perhaps the market had learned something from a decade of multiple 50% crashes and bubbles.

At these market levels stocks are priced for perfection and any hiccup could present a large downside. Currently, the market pendulum has swung to an "Imagination" of future, ongoing prosperity for all and has forgotten what happen just a few short year ago. But is this a good thing? For those who invest in stocks I think you must have a different "Imagination" - what can go wrong and what are the downside consequences.

There are so many things that can go wrong and there is no or little Margin of Safety left in the market. Just a few things:

Terrorist attack
Oil disruption
Internet attack that cripples communications as we currently know them
American Austerity
Steve Jobs take another leave of absence (wait, that happened! Please come back Steve, get better).

My point is not that you shouldn't invest when bad things can happen - bad things can and DO always happen (too use a way overused term - Black Swans). The threat of bad and unexpected events shouldn't keep one from investing in stocks, however when you do decide to invest there needs to be a margin built into your purchase that accounts for the possibility of bad things happening (an expectation if you will). That way, you know you still have value in your purchase when/if things do go bad and you won't have to panic sell (thus feeding the beast).

For example, when Reagan took office unemployment was sky high, inflation was rampant, the economy was just in big trouble. Yet stocks were trading at only 8 times prior cyclically-adjusted earning. The market suffered from a lack of "Imagination" as to what could go right. But those people who invested in stocks had a huge margin of safety - things didn't have to go very right for them to receive a reasonable return on stocks. This is not the case today - in an economy that is much more difficult than 1980/81 we have stocks bid up to levels that were only seen prior to major stock market tops. The stock market suffers from a lack of imagination of what could go wrong and has priced in perfection and almost zero Margin of Safety.

History has taught us that these exuberant times can continue and for much longer than any of us ever imagine (NASDAQ, Housing, etc).

There is little margin for error, very little imagination and we should be cautious at this juncture.

Scott Dauenhauer CFP, MSFP, AIF