Not much action in the markets last Friday – except that the price of gold fell sharply. Still above US$800…and still a good buy, in our opinion.
And commentators are still wondering what this stock market is doing. Up, down…up, down – where is it going? We don’t know. But it still looks to us as though there is much greater risk on the downside than there is the hope of reward skyward. Recession looks inevitable. Earnings are falling. Where’s the upside?
Even Alan Greenspan now says the US economy is “getting close to stall speed”. How would he know? He must have read it in the paper.
Most likely, stocks have begun to turn down. The tide has turned. That great wash of liquidity that buoyed up all asset prices – from apartments in London to soybeans to trash art – is ebbing. We saw it first at the very margins – the low, tidal subprime flats that began to dry out in the summer. Now, we’re beginning to see it in deeper sectors of the economy.
But wait, we know what you are thinking, dear reader. What about all this new liquidity the central banks are putting into the system? Won’t it turn things around? Won’t it reverse the tides? Won’t it prevent a recession?”
Yes, the central bankers are working overtime. They’ve launched a concerted, coordinated effort to make sure the banks have money. As the Financial Times put it, Ben Bernanke has gotten out his helicopter (referring to a remark he made before he became Fed chief, in which he said he’d drop money from helicopters if that was what it took to prevent a Japan-style slump).
As we said yesterday, central bankers may be able to kill a boom. But they can’t necessarily revive one that is determined to die. Occasionally, they run into the problem economists describe as ‘pushing on a string.’ They make money available to banks. But the banks aren’t able to get the cash to the people who really need it. Remember those poor people who can’t buy heating fuel? Well, between a rich Wall Street banker and a poor person in Detroit are a whole legion of intermediaries – not a one of whom wants to lose money. Who wants to lend money to someone who may not pay it back? They’ve tried that; it didn’t work. Who wants to lend to a lender who lends money to people who can’t back it back? Ditto. And who wants to invest in debt based on a loan to a lender who lends to lenders who lend to thousands of people who can’t pay it back? Been there; done that too. That’s when the string starts to bend. The feds push more money ‘into the system,’ but the system doesn’t want it.
Is that what is happening? Is that what will happen? We can’t tell you that. But we can tell you that it does happen from time to time. It did happen in Japan recently. And it’s bound to happen here, sooner or later. That, of course, is when Ben Bernanke really does start looking around for a helicopter.
“I think the market will be rough for a while here,” says Capital & Crisis’ Chris Mayer.
“There are more write-downs from banks coming, more credit troubles and more weak earnings reports from financial stocks. Then there is the spillover effect, as housing and mortgage troubles extend to other areas. Lots of bad news, and where the market will go is anybody’s guess.
“Instead of guessing which way the market might go, I think it’s better to focus on things you can control. So you have to make the decision to be in or out of the market. Then you have to decide how much you want at risk in the market. I can’t tell you how much you should invest, because that decision will be different for everybody.
“If you decide to stay in, you have to be willing to put up with some short-term pain. At Capital & Crisis, we own some nice assets in our portfolio, and over the long-term, we should do very well. I expect we’ll have some big winners. But that doesn’t mean that between now and then there won’t be some nasty patches.
“Investing is a long-term game. The best investors hold onto their stocks. And their winners come to dominate their portfolios.”
Markets and Money