Posts filed under “Asset Allocation”
Yesterday, I mentioned that 2 things that led to the chart above: 1) Too many people are looking for a correction for one to occur; 2) Bearish sentiment rises after selling has already occurred.
With that as our backdrop, consider what it means in terms of long term swings in equity exposure by Mom & Pop investors. The deviation from the mean of AAII Equity Asset Allocation is how we track this. As an indicator it, works best when it reaches those extremes of way too much equity or way too little.
Rule of thumb: When investors deviate by 15% +/- above or below mean.
As an example, take a look at 1988, 1990, 2002 and 2009 examples of equity exposure was at or near multi-year lows. Not coincidentally, sentiment had become excessively bearish then also. In 1998-2000, it had become excessively bullish. (Obviously, this is not to be used as a precise timing tool).
Note that the present reading shows investors barely above the long term mean. This hardly suggests equity speculation has reached frothy levels which in the past were associated with investor being up to their necks in equities (or that Mila Kunis has quit acting to being a new hedge fund).
This indicator does not suggest a major top is in place, nor does it imply that a 2007 like highs have occurred.
The usual caveats — small sample set, investor reliant sentiment, imprecise, etc. — apply.
click for larger chart I am putting the finishing touches on a presentation for tonight in Winnipeg and working in the chart above. It comes from Albert Edwards, the London-based global strategist at Société Générale. “I am starting to think the move by institutions away from equities has gone too far” he writes….Read More
> My Sunday Washington Post Business Section column is out. This morning, we look at Ritholtz’s rules of investing (part II). Here’s an excerpt from the column: “This week, we’re going to pick up with my rules for investing. These rules come from 20 years of experience – or 20 years of learning from my…Read More
Category: Asset Allocation
click for larger chart Source: Federal Reserve Given yesterday’s Bonds beat Stocks discussion, I thought this chart might be worth reviewing. Its from the most recent Federal Reserve Flow of Funds Accounts of the United States (Q1 2012). My thesis continues to be that the death of equity type attitudes are cyclical; When there is widespread…Read More
One of the biggest problems caused by the Contemporary Art market boom of the last 13 years is the ways in which it has confused the world about how the art market works and what determines value. The issue isn’t trivial. The art market is generally believed to have $50-60 billion dollars a year in…Read More
> European governments are preparing to borrow at least $43 billion this week, reflecting deterioration in the sovereign debt story. This loan/bailout is pressuring markets around the world; the MSCI World Index lost half a percent, and US Futures, especially SPX futes, are showing modest pressure. Bloomberg reports that the Stoxx Europe 600 Index fell…Read More
Edward Harrison here. This is an updated version of a post I wrote about two-and-a-half months ago over at Credit Writedowns. When I wrote it, I had been looking for bullish data points as counterfactuals to my bearish long-term outlook. I found some, but not nearly enough.
Early this year, I wrote a post “We are in depression”, which called the ongoing downturn a depression with a small ‘d.’ I was optimistic that policymakers could engineer a fake recovery predicated on stimulus and asset price reflation – and this was bullish for financial shares if not the broader stock market. But, we are witnessing temporary salves for a deeper structural problem.
So my goal was to find data which disproved my original thesis. But, I came away more convinced that we are in a tenuous cyclical upturn. This post will discuss why we are in a depression, not a recession and what this means about likely future economic and investing paths. I pull together a number of threads from previous posts, so it is pretty long. I have shortened it in order to pull all of the ideas into one post. So, please read the linked posts for background as I left out a lot of the detail in order to create this narrative.
Let’s start here then with the crux of the issue: debt.
Deep recession rooted in structural issues
Back in my first post at Credit Writedowns in March 2008, I said that the U.S. was already in a recession, the only question being how deep and how long. The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.
I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the 1970s lost decade trauma in the U.S. and the U.K.. The 70s was a low growth, high inflation ride that generated poor market returns. The U.K. became the sick man of Europe and labor strife brought the economy to its knees. For the U.S., we saw the resignation of an American President and the humiliation of the Iran Hostage Crisis.
In essence, after the inflationary outcome that many saw as an outgrowth of the Samuelson-Keynesianism of the 1960s and 1970s, the Reagan-Thatcher era of the 1990s ushered in a more ‘free-market’ orientation in macroeconomic policy. The key issue was government intervention. Policy makers following Samuelson (more so than Keynes himself) have stressed the positive effect of government intervention, pointing to the Great Depression as animus, and the New Deal, and World War II as proof. Other economists (notably Milton Friedman, and later Robert Lucas) have stressed the primacy of markets, pointing to the end of Bretton Woods, the Nixon Shock and stagflation as counterfactuals. They point to the Great Moderation and secular bull market of 1982-2000 as proof. This is a divisive and extremely political issue, in which the two sides have been labeled Freshwater and Saltwater economists (see my post “Freshwater versus saltwater circa 1988”).