Yesterday, we promised to tell you more about our L-shaped non-recovery. It’s already lasted 5 years since subprime cracked up… It could last another 5…10…20…or even 100 years.
Okay, 100 is probably an exaggeration, but who knows?
“An About-Face for Investors,” says The Wall Street Journal.
As predicted in this space, the “Facebook debacle turns high hopes into potentially mood-souring skepticism.”
“Retreat from the stock market continues,” reports The New York Times:
“I’m just extremely skeptical about the ability of a retail purchaser to be able to play on a level field in the market,” said [Alex] Tsesis, who is 45 and lives in Chicago. “I’m just trying to get out of stocks.”
Investors had a chance to think over the long weekend. When the markets opened on Tuesday morning, they were ready to act. The Dow rose 125 points. Gold dropped $20. They dumped Facebook.
But it hardly matters. Up one day. Down the next. Who cares? The big trend is what matters. And the big trend now, we believe, is down. Down for stocks. Down for the economy.
When this happens, it can last a very long time. For evidence, we give you exhibit #1 – Japan!
Yesterday, the Financial Times reported that a thousand yen invested in stocks in 1985, “even including dividends and inflation… has made exactly nothing.”
Colleague Justice Litle elaborates:
“Stocks for the long run” is a mantra of conventional investors everywhere. It is also the name of a book by Wharton finance professor (and babbling permabull) Jeremy Siegel.
Whenever the market outlook grows cloudy, or even downright bleak, we are urged to remember: It’s the long run that counts.
And yet, how’s this for “long run:” A yen-denominated investment in Japanese stocks, made in 1985, has been dead money for 27 years.
Japan’s dead presidents have gone nowhere…and made nothing for investors. They have been dead…dead…dead…for an entire generation.
“If it can happen to Japanese stocks,” asks Justice, “could it happen to American ones?”
Certainly – there is no real reason why not.
America has already turned Japanese” in respect to perpetual ZIRP (zero interest rate monetary policy). Structural unemployment issues, and the utter failure of stimulus programs – so much for “shovel ready!” – resemble the Japanese experience. Like their Japanese counterparts, American policy makers have no new ideas… only tired old bad ones.
Back in the USA, investors are leaving the stock market. Mutual fund outflows continue at a rate of about $3 billion a month. The Dow is almost back to where it began the year. Trading volume is subdued.
As of last Friday, Facebook shares were down about 16% from the IPO price. They kept going down. The WSJ continues:
“Facebook’s banged-up share price and the technical snarls that bollixed up the stock’s first day of trading on the Nasdaq…have left some small investors even more glum…”
They’re probably not nearly as glum now as they will be later. The Dow is still above 12,000; stocks may not be at their peak, but they are far from their bottom. You’ll know it when you get to a real bottom. Investors are so glum you have to hide their guns. That’s when you get P/E ratios of 5 and dividend yields of 5%. That’s when you get bargains. Someday, unless this really is a new era, they will be real bargains. This day they are not.
The WSJ is wrong…or perhaps premature. Investors have not done an about face. Not yet. They’ve wheeled around a few degrees from their comfortable bullish trajectory of a few months ago. But they will have to keep turning in order to change course by a full 180 degrees. Then, watch out below!
What could make investors spin further against stocks? Two things:
First, Europe could blow up much worse than people expect. The eurozone has been on the brink of disaster for so long, most people think it will stay on the brink forever…as if there were an invisible barrier that keeps them from going over the edge.
We are connoisseurs of disaster here at Markets and Money. Not that we like them; we just appreciate them. They clear away a lot of dead wood. And, yes, dead presidents. People invest badly. They spend unwisely. All is well ’til the disaster hits. Then, the dead presidents disappear.
One thing we’ve noticed is that disasters seem to take longer than you expect to start…and then they move faster than you anticipated. Remember the dot.com blow-up? You could see it coming for years. Then, when it happened…it blew up fast. Poof…hundreds of billions in dead presidents…gone!
So too the collapse of the housing industry – particularly those ‘low-docs, cash back, subprime mortgages’ – was visible long before it happened. We waited. We waited. And we waited some more. And then, when the catastrophe began, things happened so fast we couldn’t keep up with them.
The breakdown in Europe could happen fast too.
“I don’t know about you,” said a hedge fund manager we talked to last weekend, “but if I were in Greece, I’d be looking for a way to get my money out of the country. There’s a very good chance the Greeks will convert euro deposits to drachma. They will probably close the banks. The Greeks will probably riot and burn banks…if not bankers.
“So, what would you do if you were in Spain…or Italy? Wouldn’t you be trying to read the handwriting on the wall too? And wouldn’t you want to get your money out too?
“Of course you would. That’s why the Swiss are talking about imposing negative interest rates, to try to discourage other Europeans from exchanging their euros from Swiss francs.
“You don’t have to look very far ahead to see what would happen. Just wait ’til people start lining up in front of the banks to get their money out. If you were in Athens and you saw people lining up to get their money out of the banks…wouldn’t you get in line too? Most people would. And the banks don’t have enough money to honor all those depositors’ claims. So the banks have to go broke…and the whole thing falls down hard.”
According to the news media, everyone is making plans for when Greece says auf wiedersehen to the euro. But even an “orderly” exit of Greece from the euro is estimated to cost $1 trillion. And there isn’t enough money in all the banks in Euroland to pay for a disorderly exit.
Which is one reason we’re keeping our “Crash Alert” flag flying.
The other major reason for guarding against a crash is this: all the world’s major economies are approaching recession.
Old friend Marc Faber says he expects a global recession either in the last quarter of this year or early in 2013. Asked about the odds, Faber put them at “100%.”
One hundred percent does not sound like odds to us. It sounds like certainty. We doubt anything in economics is that sure. But let’s say the odds of a ‘synchronized worldwide recession’ are only 50%. That still puts a lot of empty space between today’s stock prices and a recession-inspired bottom. We wouldn’t want to be standing in that space, lest the market crash down upon our heads.
You know, dear reader, that it is futile to make predications, especially about the future, as Yogi Berra would say. But heck, we’ll take a guess. The euro zone won’t fall apart…at least, not completely. The Germans will give way. It won’t be pretty. No ‘elegant solution’ will be found. Instead, an awkward, ugly…even grotesque…combination of concessions, compromise, and craven corruption will keep the European project together.
In fact, it will be more together than ever. Francois Hollande and Angela Merkel will find a way to preserve the union. Most likely, the Europeans will learn from the US. They will write a huge cheque to member states to cover…or partially cover…the debts of the past.
The union will be responsible for the debts of, say, Greece or Ireland. It will be a scheme vaguely reminiscent of the Brady Bonds, or Alexander Hamilton’s takeover of state debt after the American Revolution, with new debt backed by the EU…of extremely long duration (long enough to allow inflation to cut down the real value of the bonds.)
The debts of the future, on the other hand, will be the responsibility of member states (lenders beware!). Everyone can save face. Lenders (banks) will get their money (more or less). Borrowers can avoid disorderly defaults and bankruptcy (more or less). And Germany and France can hold onto their beloved European Union (more or less) …and still not be on the hook for Greek behavior going forward.
But as to the second danger – that of a global recession and bear market – investors won’t be so lucky. The odds may not be 100%, but they are high enough so that a wise investor will take cover.
Beware the disappearance of dead presidents in a crash. Then, beware again: the dead presidents could stay dead for a long, long time.
for Markets and Money
From the Archives…
Investing in Gold as World Economies Falter
2012-05-25 – Eric Fry
A Hard Dose of Medicine for the Greek Economy
2012-05-24 – Greg Canavan
Why Sooner or Later in Europe Someone Will Have to Pay
2012-05-23 – Dan Denning
To the Class of 2012
2012-05-22 – Bill Bonner
The Early Stages of a European Bank Run
2012-04-21 – Dan Denning