Drinking the Kool Aid?

This week’s Barron’s magazine is pretty much mono-thematic: stocks are cheap, time to buy.  I hope they are right this time, but I’m not drinking this Kool Aid just yet.


More on Market Valuations and P/Es

Here’s an interesting post on the P/E ratio method of valuing the market over the past 100 years.  Using the Schiller method, the S&P is trading at an 11.85 P/E.  That’s well below the long term average 16, so the markets are oversold, but still above the level were markets bottomed in major downturns in the past.

So, if you have a long-term perspective, you could buy and have a reasonable expectation of coming out ahead in the long run.  But there could still be some decent downside in the meantime.

Another post from the same site shows that, on an inflation-adjusted basis, the DOW is the same today as it was in 1966.  Flat for 43 years.  “Stocks for the long run, indeed.”


You’ve seen the report that the unemployment rate is now officially 8.1%, the worst since 1983.  You may not have heard that the rate of job losses is the highest since 1949 and appears to be accelerating.  CalculatedRisk has a good chart showing how the current recession compares with prior ones since WWII.

The WSJ’s Real Time Economics blog reports that the U-6, the broader measure of unemployment (it counts people who have stopped looking as well), is now at 14.8%.  Think of it as 1 out of 7 Americans out of work.  Some economists believe that this measure will get to 20%, 1 out of 5, before this recession is over.  Ouch. Peak unemployment in the Great Depression was around 25%.

“Errors of Undue Pessimism”

In at least parts of the investor class there is certainly a brewing crisis of confidence with Obama’s economic policies.  I believe it’s too soon to pass judgment, but the cries of alarm are on the right (“socialism!”) and left (“nationalize the banks now!”).

Getting back to my favorite topic of behavioral economics / investing, here’s a relevant post via Economist’s View.  An excerpt:

However, Keynes can be our savior only to a very partial extent, and there is a need to look beyond him in understanding the present crisis. One economist whose current relevance has been far less recognized is Keynes’s rival Arthur Cecil Pigou… Pigou was much more concerned than Keynes with economic psychology and the ways it could influence business cycles and sharpen and harden an economic recession that could take us toward a depression (as indeed we are seeing now). Pigou attributed economic fluctuations partly to “psychological causes”…

It is hard to ignore the fact that today, in addition to the Keynesian effects of mutually reinforced decline, we are strongly in the presence of “errors of…undue pessimism.” Pigou focused particularly on the need to unfreeze the credit market when the economy is in the grip of excessive pessimism… One of the problems that the Obama administration has to deal with is that the real crisis … has become many times magnified by a psychological collapse. …

Emerging Debate in Financial Planning

As I have stated elsewhere, I believe that we are in a long-term bear market.  Most of us started investing in the greatest bull market of all time, the period from 1982 to 2000.  Most investors adhere to principles that were developed during that time.

Concepts like asset allocation, diversification, indexing, mean regression, etc., existed prior to the great bull but they became commonly accepted, even canonized during that period.  What we are seeing now, however, is that these concepts largely fail during bear markets.

During bears most asset classes become highly correlated, eliminating the benefits of diversification.  It is now clear that there are very real limits to traditional asset allocation during periods of high correlation.

This article is representative of new commentary that is beginning to emerge.  The bottom line from these authors is that “advisors should focus more on hedging than diversifying”.  This certainly assaults the current orthodoxy of my profession.

Something Interesting Did Not Happened Today

As the markets took another bath today on no news of note, something very interesting did not happen.  I did not get a single call from a client.  Not one.  This is the first time in a long time on such a big down day.  A sign of capitulation in the retail investor market?

And here’s my favorite quote of the day: “the markets are the most oversold they’ve ever been until tomorrow”.

More Off Topic Commentary

The changes of note that I saw today are more political than financial.  I mentioned the recent exchange with my conservative friend in Chicago.  It seems this was part of a much large narrative.  Here’s The Big Picture’s take on those who are trying to pin our current mess on Obama.  Here’s Reich’s spin.  And here is John Stuart’s spin on the idiots at CNBC.

Note: I have equal disdain for both major political parties as well as all the idiots on the financial news networks.  The financial pundits are as criminal with their unintelligent and misleading commentary as the heads of the Wall Street have been in their stewardship of our common financial system.