One of my mantras in my investing career has been “Somehow we all muddle by”. In other words, the millions of people in the financial markets usually (but not always) make markets repair themselves, recover, and eventually reach new highs. This last week has been a classic example: last week the chairman of the Federal Reserve boosted stock markets in 30 seconds by hinting that interest rates might not continue to rise. Yesterday President Trump indicated a cessation of the trade war with China, sending markets rocketing. Lesson: the tiniest hint of whatever investors are seeking can change financial markets in a blink. This is why I don’t trade options. https://www.washingtonpost.com/world/asia_pacific/after-trump-summit-no-mention-in-china-of-90-day-deadline-or-trade-concessions/2018/12/03/1e9cc71e-f6dd-11e8-863a-8972120646e0_story.html?utm_term=.2a3d3af9edab
Wonderful wonderful news! “In the world today, about one person escapes extreme poverty every second; but five people a second are entering the middle class. The rich are growing too, but at a far smaller rate (1 person every 2 seconds).” There is much yet to accomplish but the system is working.https://www.brookings.edu/blog/future-development/2018/09/27/a-global-tipping-point-half-the-world-is-now-middle-class-or-wealthier/
Yes,Asian stock markets are being damaged by the nascent trade wars. At some point they are going to be bargains. My thought is that due to Asian growth and American confusion, the 21st Century is possibly going to be the Asian Century. That may happen with lots of volatility and angst. With that in mind, we’re already buying more, in small amounts and diversified. Our expectation in these high risk venues is to outperform the U.S.’s S&P 500 in the long run ten year time frame. https://www.bloomberg.com/news/articles/2018-09-12/asian-stocks-are-caught-in-the-longest-sell-off-in-16-years?cmpid=BBD091218_MKT&utm_medium=email&utm_source=newsletter&utm_term=180912&utm_campaign=markets
Here’s an insightful study by Oppenheimer concerning the differences between India and China as investment venues. While emerging markets represent some of the fastest growing economies in the world, they also contain a lot of political risk, currency risk, and financial opacity. Often we can’t clearly see what is really happening! That means we can’t always recognize true bargains, so we can’t make well-supported decisions. Nevertheless, over the long term, carefully-targeted emerging market investments have a real probabilty of doing quite well. With that in mind, our emerging market holdings are diversified, analysis-driven, cautious, and small, as well as placed with experienced managers.
My last entry on January 30th, 2018, suggested that US stock markets were potentially overvalued. Apparently others agreed with that assessment, because early in February, in the face of rising interest rates, American stock markets dropped (almost) 10%. At that point I was guessing…a perfect word for it…that the financial markets would continue to decline to more reasonable levels. However, I chose to do no trading because I wasn’t confident.
Good choice. This week, U.S. stock markets strongly reversed, producing one of the best weeks in years. I suppose that had I been courageous we could have bought the dip, but I was too conservative for that.
Meanwhile international markets fell more, and have recovered less.
With the prospect of rising interest rates in mind, I perceive that the possibility of a downturn more wrenching than what we have experienced is still quite possible. Where we were before somewhat vulnerable, we are now substantially more vulnerable. My guess is that this week’s recovery is driven by FOMO, Fear Of Missing Out, not from any rational expectation.
Meanwhile I’m watching the bond market, and interest rates finally seem to be stirring, moving up. That’s a real, genuine game changer, potentially negatively, for many reasons.
Bottom line: for the time being, I’m maintaining our current asset allocations. But I’m targeting potential bargains, and I’m watching the horizon. Something profound may be happening. Frankly probably not, because most warnings don’t actually materialize into anything real. But what if…? Read more here.
The more missiles North Korea shoots over Japan without blowing anything up, the more investors think the Federal Reserve is likely to be cautious about raising rates, and thus the more they invest in stock markets.
Absurd but there’s a logic to it.
As someone said earlier this morning as a joke, perhaps the North Korean dictator has a brokerage account or a hedge fund, and he’s doing his part to boost profits. We are only ten or twenty missiles away from Dow 30,000.
We should also consider the consequences if he’s not joking, merely insane. Read some reality here.
As last night’s 8.2 magnitude earthquake in Mexico illustrates, risk happens fast. We are now conditioned to three beliefs: things will continue as they are today indefinitely, the Federal Reserve will always save us, and we’ll be able to dodge out of the way.
Nine years ago today, that wasn’t the case. One of the largest investment banks, Lehman Brothers, was allowed to go bankrupt and default on its bonds. The stock market fell 25% in one month. The decision to let Lehman Brothers sink beneath the waves was a political choice, based on traditional attitudes towards free capital markets, and one lesson we all learned was that some corporations are “too big to fail.” The global political aftermath of the Lehman Brothers debacle was so painful that it’s doubtful it would happen again.
But the choice to rescue any and all carries risks as well, doesn’t it? We risk rescuing businesses which OUGHT TO FAIL and we reduce the efficiency and effectiveness of the global economy as a result.
It’s worth remembering also that almost nobody was able to dodge out of the way of the Lehman default. Our asset allocations going into the chaos determined our overall performance. As Mark Hulbert and Doug Kass have written, risk happens fast, too fast to dodge out of the way. Diversification has a price, but it also has a benefit.
Read more here.
We send our prayers to those damaged by the earthquake and by Hurricanes Harvey and Irma. It’s a busy world out there.
I’m reposting this here from the Heisenberg Report. According to this study, essentially everyone thinks the stock markets will finish higher in one year.
Such a high level of optimism is some kind of record.
My guess is that we got here because EVERYONE expects the central banks to intervene forever. Having painted themselves into this particular social expectation corner, it’s going to be interesting to see what the central banks do next.
Way back in the days of free markets, we were taught that extremes of market consensus are danger zones, and that “the consensus is often wrong”. But as I wrote on August 1st, traditional diversification has been proven unnecessary for so many years that investors could be forgiven for it’s just gonna stay like this forever.
My plan is to stay diversified and keep searching for bargains.
Legendary investor Jim Rodgers has often been right, and often been wrong, about the future of U.S. financial markets. He’s completely bullish on the future of Asia, and in fact now lives officially in Singapore.
Now he’s calling for the worst stock market crash in our lifetime. Read more here.
He may be right. Or not.
It’s worth noting that when the stock markets first began flashing indications of overvaluation, they were at about half their current levels. Had we gone to cash in 2013 as the statistics suggested, we would have missed out on at least 1 of every 4 dollars in our diversified portfolios.
Why didn’t the financial markets crash after 2013? The unexpected happened: the Fed and other central banks of the world intervened to support financial markets.
I have my own emotional reservations about that: when governments intervene in markets as the mood strikes them, then markets become unquantifiable. But the money which has been made is quite real.
So now Jim Rogers says that the biggest stock market crash in our lifetime is imminent, he may be right. Stock markets ARE very overvalued, and have been for years. My response for all of us has been to stay very diversified and be a bit cautious. The result has been that our investment returns haven’t beaten the stock markets, but we’ve at least participated while remaining realistic about genuine dangers out there.
I also remember that the Financial Panic of 2008 was followed by a market boom.
Genuinely, we don’t know what will happen. Let’s also keep in mind that we want to buy low, and sell high, and we want to persist. Investing is a marathon, not a sprint.
One of my fascinations is how to pass on wealth between generations. It amazes me how people can succeed magnificently at wealth transfers, and can even prepare the following generations for wealth which they themselves never enjoyed. Or sometimes they can blow things to shreds. Life is a lot harder than we would like to realize, and providing for future generations in terms of education and actual wealth is a profound blessing. There’s a lot to learn from the European and Asian families who have managed this successfully for centuries. Read here what billionaires do.