*** Over the weekend, Britain announced that it would nationalize Northern Rock – a major mortgage lender. The Rock got itself into a hard place when it speculated on subprime mortgages; it’s been rolling downhill since last September, while the Chancellor of the Exchequer, Alistair “Sisyphus” Darling, tries to hold it back. Finally, the government has given up on private rescue attempts. Apparently, the private buyers were unreasonable; they wanted to protect themselves and even make money on the deal. London decided instead to drop the Rock on taxpayers’ heads. “It’s the right thing to do,” said Mr. Darling.
Meanwhile, from the 50 states, the Democrats’ own darling, Barack Obama, promises voters that he will deal with economic matters in a level-headed, pragmatic way. He apparently had no economic program of his own, so he took Ms. Clinton’s. Too bad he didn’t ask Ron Paul; our old friend probably would have generously provided him with a good one. As it turned out, he had the Clintons accusing him of plagiarism. And what he got wasn’t worth stealing. As near as we can tell, it is effectively the same combination of wishful thinking and delusion as Mr. Darling’s. He intends to raise taxes, reform health care, “protect American jobs,” and so forth.
Nobody wants to talk about the real solution to the credit crunch/slowdown. Actually, there are two ‘solutions.’ One is knock ol’ Humpty off the wall… increase rates, tighten up the money supply, have a real recession, and get it over with. No one is going to do that. The other solution is inflation.
The beauty of inflation is that it moves the losses from the people who deserve them onto people who don’t know what’s happening. Banks, speculators, and asset owners, generally, are bailed out. Their losses are socialized – hoisted, via inflation, onto the backs of savers, taxpayers and workers. Wages fall. Prices rise. Standards of living go down. But few people understand why. The people grumble and complain… but what can they do? Vote?
“The first panacea for a mismanaged economy is inflation,” wrote Hemingway. “The second is war. Both bring a temporary prosperity. Both bring permanent ruin.”
Choose your poison. Obama is an inflation man. McCain seems to favor war, too.
*** Meanwhile, nobody knows anything. As soon as you think you know something, along come new facts to prove you don’t.
One thing we were pretty sure about was that you couldn’t make any money by following trends. As soon as you caught on to the trend, we reasoned, it was probably ready to reverse. You’d always be getting on board the wrong train, going in the wrong direction, at the wrong time.
“You can be a contrarian; or you can be a victim,” as our old friend, Rick Rule, puts it.
But what’s this? The Financial Times tells us there’s a new train schedule. A couple of professors at the London Business School decided to test trend following as an investment approach. They imagined that each month, going back to 1900, an investor had simply bought the 20 stocks that had performed the best over the last 12 months – drawing only on the 100 largest stocks on the market. Said investor would have made a compounded annual rate of return of more than 15%, they concluded, compared to a rate of return for the market as a whole of less than 10%.
Well, what if they’d done the opposite, we contrarians want to know. What if they’d taken the 20 worst performers instead of the best? Turns out, they anticipated our question. They found that the worst performers only produced a compound annual rate of return of 4.5%, barely a third of the winning formula.
for Markets and Money