Posts filed under “UnGuru”
Lately, I have been hearing a lot of market top/crash calls. These have been going on pretty much the entire rally off of the lows (recall the disastrous Hindenburg Omen). The most recent comes from respected fund manager John Hussman, who while having a bearish bend, has an actual methodology.
I am no stranger to making market calls, even if I think forecasts are pure folly. The Cult of the Bear series was an exercise in valuation and psychology, and I was surprised at the focus on the number (Dow 6800) while everything else was ignored. Even though that target was eventually proven right, the key to investment success is in the timing of your moves. (Note the cardinal rule of forecasting: Give a date or a level, but never both at once).
Which brings us back to the current environment. Broad indices are up over 100% since the March 2009 lows; economic indicators are mixed, with data improvements offset by a series of setbacks. These issues need to be contextualized against the massive liquidity wave from the Fed and other central banks.
What’s an investor to do?
My suggestion is to not guess as to where the market tops out, but rather, wait and watch the road signs. The market will give you lots of indicators that it is starting to stumble, than lose its balance, ultimately pratfalling. Even 1987 has a 14% drop in advance of the Black Monday 23% crash. In 2007-09, we received plenty of warnings before the market reached its 666 lows — down 57%.
Therein lay the rub. Recessions start not from lows, but from tops. NBER defines a recession “start at the peak of a business cycle and end at the trough.” Recall that in 2007, markets peaked less than two months before the recession began.
Hence, if you are an investor, you should not be thinking about when to jump out, and move to all cash/bonds position. Instead, you should be looking for a variety of signs that suggest it is time to lower your equity exposure as a function of rising risk relative to potential gains.
Indeed, the action most people engage is called market timing — jumping in and out based on expectations of an imminent crash or rally. Instead, I would suggest they would be better off eschewing market timing and instead focusing on risk management. This is a process by which the investor raises or lowers their equity exposure based on factors other than expected short term market returns. This means your goal is not catching tops and bottoms, but generating good returns on a risk adjusted basis.
At some point in the future, I hope to detail what these elements are. It is mostly mechanical, based on elements of trend, valuation, market internals, and economic factors. Until then, stop guessing what the markets will do, and start watching closely what they are actually doing.
The PermaBear to English Translation Guide (October 15th, 2010)
Interesting Exchange with a friend who lives Near Tim Geithner in Westchester: M: Saw him twice today here in Larchmont. His family must have moved back already. Probably a while ago. Barry: Never sold the house, did he? M: Doesn’t look like it. I’d bet the family has been living here for a year. They’ll…Read More
Bruce Krasting: I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it.
When you stick your neck out and make prognostications about the future, sometimes you’re going to be wrong. I’m certainly no exception. But when it comes to really big misses, I think Meredith Whitney’s call for a monster blow-out of the Municipal Bond market is on top of the list.
Meredith is a smart lady. That being the case, it’s worth looking into why she was so wrong. A report this weekend from the Bond Buyer provides a partial answer:
A 32% ($138B) YoY decline is a very big relative change. The drop in long-term financing was not offset by increases in short-term debt; that category fell by 7.4% ($5B).
The drop in total borrowings is almost exclusively a result of the 46% ($129B) in the “New Money” category. The drop in New Money debt issuance is a consequence of hundreds of cities and states collectively saying:
We’re in a pinch on revenues. Let’s not spend any money we don’t have to for the time being. We’re going to have put off the construction of the new (Sewer plant, overpass, water treatment facility, school, whatever). The last thing we want to do is go to the Muni market and borrow any more.
As a result of many individual decisions to defer infrastructure projects, the Munis have kicked the can down road. They have eliminated the current and future expenses related to these projects. With that, they have stabilized the trajectory of their debt growth and improved short-term cash liquidity (by having less ST debt). In the process, they have created a shortage of muni bonds (relative to expectations) in the market.
Thus, all may appear well in muni land. A successful re-balancing has taken place, for the time being. If the munis can continue to push off infrastructure projects, they will not suffer the fate that Ms. Whitney feared they might.
I said that the munis had “kicked the can down the road”. In this case, it’s quite a different form of can kicking. When the Federal government raises the debt ceiling, we all say, “They kicked the can”. But the munis are doing (pretty much) the exact opposite, so Can Kicking would appear to be an improper/unfair description of what is happening with Munis. I think it’s still valid, deferring infrastructure investments is another form of kicking.
Like most Kicking efforts, it will end badly sooner or later. I’m looking at a potential example as I write. One of NYC’s reservoirs is about a half mile away. A $60mm NYC/NYS funded construction plan was shelved a month ago. Could this become one of those examples where Kicking goes badly? Consider this daisy-chain.
The Croton Reservoir is part of a chain of reservoirs that provide water for NYC. It’s large (22 miles), but it’s small in comparisons to the big man-made lakes further upstate. Croton is important because it connects directly to those upstate reservoirs via an underground tunnel. That tunnel goes north, and then west. It is 1,000 feet deep where it meets the Hudson River.
A bit of physics. The upstate reservoirs are 1,000 feet above the sea and the tunnel is 1,000 below. The tunnel is (was) large enough to drive a truck through so the water pressure at the lowest part of the tunnel is enormous. What might you expect from a 75 year old tunnel under that much pressure? A leak? Sure.
This is one hell of a leak. As much as 35 million gallons a day was the estimate seven years ago. There is evidence that rate has since accelerated. That comes to 13 billion gallons a year, which is sufficient for 250,000 average Americans. Think Orlando, Madison, Winston-Salem or Reno. Each of these cities uses about as much water as NYC is leaking. In China, this much water would meet the needs of 1.7mm people, In Bangladesh it would be sufficient for 3mm. It’s enough to fill 650,000 in-ground swimming pools. That’s a leak.
It gets worse. The leak was first detected in 1988. Therefore something like 15 million swimming pools worth of drinkable water have been pissed into the ocean. It’s so bad that areas on either side of the tunnel have sinkholes. People have been forced to move. Properties have been condemned. And the sinkholes keep getting bigger.
There are already dozens of lawsuits on this. They are after the State and the City who own and maintain the reservoirs. The judges have all sided against the City and State, and there have been promises to fix the damn leak for years. A few years ago, a formal plan was put together.
This is no small engineering matter. A new tunnel will be built that connects the old tunnel before and after the break. Once completed, the old tunnel will be cemented closed. The diversion tunnel will be ½ mile long. Recall that this is 1,000 below sea level, any construction/mining this deep is both difficult and dangerous (the bends). Those normal risks are, however, trumped by risks that the nearby existing tunnel breaches during construction of the diversion tunnel. The water pressure in the tunnel is sufficient to crush a submarine. Read More
This is an interesting discussion about media bias in two halves:
The first half is an interesting if bizarre discussion with Tim Groseclose, a UCLA economics professor (and conservative Hoover Fellow alum). Based on Groseclose’s own data, he reveals that media bias is actual at most rather modest — and then despite his own data, takes a wild turn into wingnut politics. Its simply bizarre.
The second half is an interview with NYT Editorial page editor, is even more fascinating.
Yesterday, I went into some detail as to why a few people got the NFP data so (disingenuously) wrong. Then Invictus pointed me to this Economic Populist post, titled, Getting It Wrong on the BLS Employment Report. It came out late on Friday, hence why it may have been overlooked. The long term chart via…Read More
SilverOz is an MPA specializing in local economic development and have worked in local economic development for a mid-sized midwestern county for over 10 years. He has personally worked on/managed projects that have totaled over $500 million in direct investment into the county. ~~~ So today following an otherwise pretty darn good jobs report, we…Read More
With this post, we officially move Meredith Whitney into the Unguru camp. You can blame the headline on me; the rest is by David and Janet. -BR ~~~ Janet Tavakoli Gets 5 Stars! December 30, 2011 A year ago, Muniland faced a Rubicon as Meredith Whitney’s words caused a wholesale slaughter in the tax-free and…Read More
I am please to report that calling out the Big Lie has now gone fully mainstream. Recall last month, I had two Big Lie columns in the Washington Post: • What caused the financial crisis? The Big Lie goes viral. • Examining the big lie: How the facts of the economic crisis stack up The…Read More