07/08/10 Paris, France – Warning: serious thinking here…
Big rally yesterday. The Dow was up 274 points. Gold went up very slightly and still closed below $1,200.
What gives? A big change in direction? It’s probably nothing. Markets don’t go up or down all in one straight move. They play with investors like a cat with a mouse. They tempt him into bear markets and scare him away when prices are rising. They shake his courage at bottoms and addle his brains at tops.
An investor never knows for sure what the market is up to. And he’s better off not worrying about it. He should look for acceptable value and nothing more. If he finds a company he likes…if he understands the business model…if he has studied the company’s financial picture and satisfied himself that management knows what it is doing…and he can buy it at a price that gives him a fair return on his money…then, he can buy the stock. And then he shouldn’t worry if the price goes up or down.
Trying to make money by guessing the stock market’s direction, on the other hand, is likely to be a losing proposition. It only works, marginally, at the extremes. And we’re not at an extreme now. But if we had to guess, we’d say the market is headed down. But we’d rather wait and see what the market has to say for itself.
In the meantime, let’s turn to the economy where we can have more fun. In the markets, the bulls could be right. Or the bears could be right. Who knows?
But the economy seems easier to understand and predict. And economists? That is where our doubts disappear. We know most of them are wrong most of the time.
Paul Krugman rants and raves. He thinks governments are making a big mistake. They should forget about saving money and cutting deficits, he says. They can worry about that later. What they need to worry about now is a depression. Unless the feds get on the ball and spend money, we could sink into another Great Depression, he warns.
Martin Wolf at The Financial Times in London makes the same point. He mentioned ‘depression’ yesterday. The private sector is saving; without a lot of ‘demand’ courtesy of the state, he says, we run the risk of depression.
The two of them are so sure a depression would be a bad thing, it makes us wonder. Maybe a depression wouldn’t be so bad, after all.
The gist of the argument against depression is that people lose their jobs, incomes go down, companies go bankrupt and so forth. Is that all? Well, in general, people have less stuff…and less money to buy more stuff.
If that were all there was to it, it would seem like a small price to pay for the benefits of a depression. After all, a depression would wring the debt out of the economy. It would get rid of weak businesses. It would turn spendthrift households into savers. That’s got to be worth something.
The large presumption behind these worries is that, in a depression, people do not get what they want…they are disappointed. They are poor. They wear shoes with holes in them and drive old cars. They vote for Democrats and start reading Das Kapital.
Big deal.
What actually causes a depression, anyway? People choose to save rather than spend. Reduced demand causes a drop in sales…an increase in unemployment…falling prices and all the other nasty things we associate with a ‘depression.’ And yet, behind it is something people really want – savings. And behind the desire for savings are very real calculations and concerns. Without savings, people cannot retire comfortably. Without savings, they cannot withstand financial shocks and setbacks. Without savings, they may not be able to take advantage of opportunities that come their way.
In other words, there is a depression because people would rather have savings than a new car, or a new pair of shoes, or a vacation. In other words, people choose to have their cake rather than to eat it. What’s wrong with that?
Nothing. But it causes the economists’ GDP meters to tick over in a direction they don’t like…or at least in a direction they think they can do something about. The economists’ answer to this is to let the people have their savings…but to counteract the economic affect of higher savings rates with increased government spending.
It sounds so neat…so clean…so symmetrical. You might almost think it made sense, if you don’t think about it too much.
But wait. Where do the feds get any money to spend? They have to take up the savings. They take the cake! And there you have the problem right there. Resources have to come out of some other use – say, inventories, investments, whatever – and be put to use on government projects. We can safely assume that the federal projects are not the angel food, layered and frosted confections that the savers wanted to eat. Otherwise, they would have willingly paid for them themselves and there wouldn’t be a downturn in the first place. So, instead of savings and depression, the people get boondoggles and “growth.” Only it isn’t real growth. It is growth that flatters economists but leaves the rest of us hungry and disappointed. It is empty calories…measurable as “growth” on the economists’ GDP meters…but completely phony and not at all what people really wanted.
And what happened to their savings? They’ve been eaten up by the feds and their favored groups.
This whole Keynesian stimulus project is scammy from beginning to end. And in the middle too.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Agreed markets are unpredictable.
Buy and Hold the market or good companies is actually a positive sum game as money flows in from the profits of selling to customers.
Trading with other investors is alwasy a zero sum game. Some win, some lose. After commissions trading is a negative sum game. Still the good traders can win at the expense of the bad.
But buy and hold will always make money in the longer term, for every single long-term buy and hold investor. The profit comes from customers of the businesses, not other traders. You must learn this.
Readers may not understand this. Which is good, those in the know can take advantage of the uninformed.
costs can exceed gains
companies can go flat broke
first post is a joke
haikuwarrior… when you buy a portfolio of good companies or certainly the whole market index, it will definitely make money over the years.
I won’t argue that there is too much debt and too little savings.
But I don’t know how that happens…
What if every dollar that is borrowed comes from a saver? Banks have loans on the asset side of the balance sheet. Those are funded with deposits (i.e. savings) and the equity of the bank (again someone’s savings).
The U.S. borrows and China saves…
If it is the case that savings equal debt. One man’s debt is the borrowed savings of another man… The don’t both debt and savings have to go up or down in tandem?
Maybe that is it, in a depression debt will go down and jobs go away and savings will go down too. Hard to save without a job. Those without jobs will spend their savings.
Someone will post that I am wrong, maybe so. The point is that all this stuff is complicated. I don’t claim to have a full grasp of what causes depressions. People are still arguing over the causes of the last great depression.
Haiku-
To continue the point, which of these companies do you think is the next to go broke?
Eli Lilly, Exxon Mobil, Coca-Cola, Kraft, or AT&T?
If I am thirty years out from retirement do you think it would be a losing proposition to buy these and reinvest the dividends?
I would be happy to hear a better idea for my savings.
Cheers.
If the stock market crashed, what would happen to Eli Lilly, Exxon Mobile, Coca-Cola, Kraft, AT&T?
Sorry, there are no perfect, can’t-lose investments.
The stock market DID crash the last couple of years. You can look at what these companies did. They barely budged and the dividends kept rolling. Earnings as steady as can be. If you were a long term investor you wouldn’t even have noticed the crash.
Did I imply it was perfect? I am just asking for something better. You aren’t helping Leopauld. Next you will be telling me I can’t eat gold….
Cheers.
“The profit comes from customers of the businesses, not other traders. You must learn this.”
Unless that business pays a dividend the only way one makes money is out of the pocket of another “investor” or if the business chooses to buy back its shares (there is no obligation for them to do this).
In many cases a sizable percentage of the money “made” is nothing more than inflation at work.
“Readers may not understand this. Which is good, those in the know can take advantage of the uninformed.”
This appears to be unintentionally funny.
“What if every dollar that is borrowed comes from a saver?”
That is how it should work. But it doesn’t.
Fractional reserve banking and the money multiplier effect is explained all over the internet. But how it actually works is even worse than that.
In theory banks are limited in their lending by reserves. In practice they are not. Overnight sweeps from checking to savings accounts can be used to reduce reserve requirements. Banks can borrow reserves from banks that have excess reserves. But if those excess reserves don’t exist the Fed Funds rate rises and the Open Market Desk of the NY Fed will act to inject new reserves to lower the rate. Instead of reserves limiting lending the Fed effectively supplies whatever reserves are necessary to back lending that has already taken place. The money for that is created out of thin air.
What ultimately limits bank lending is capital. During good times when all bank assets, including garbage, are valued at par there is little limit to lending orgies. Once it blows up things change considerably. Even though banks now have “excess” reserves they are unwilling to lend because either they are capital-impaired or they can’t find a credit-worthy borrower.