In Search of the Perfect Investment

For six years the Fed Reserve has been printing and pumping money into the economy. The program is called Quantitative Easing. Allegedly, it as meant to end in October, 2014. That’s now.

Several people, including Jim Rogers (see below), have argued that when it ended, it would end badly  — with a huge downdraft in the stockmarket.

Stock prices on average have fallen 8% since September’s high. But some have dropped by 40% and 50%. Devastating. They’re still falling.

Cramer claimed last night that all this wouldn’t end until a bunch of issues got resolved:

The scariest issue is Ebola. Two nurses have now come down with it — the second one we heard about last night.

Everyone and their uncle is freaked. No one wants to travel, to get on a plane, etc. To get sick and have to go to a hospital….

Here’s my take:

My “reasoned” take is to stay calm, dump out of stocks which hit my 10% stop loss Rule, and live to see another day.

Some of us believe we’re being played for suckers. Over 60% of the trading in stocks is now from and by hedge funds. Many of them have a huge advantage: they have fore-knowledge of order flow — what you and I are selling or buying. It’s hugely unfair. They sell ahead of when we sell, and buy ahead of when we buy. Washington is doing nothing about it.

But it clearly accounted for what happened yesterday — a huge 460 point drop in the Dow, and then a rally which ended the day with a “small” drop of only 173.

I’m not sanguine.

Fortunately Wall Street is ready to help us. Here’s a report that came out three weeks ago. Comforting?

You can read the entire report. Click GlobalPandemics

Futures Magazine interviewed Jim Rogers in their latest issue:

Here’s the beginning adn some excerpts:

 Futures Magazine: The current bull market, which some people view as a creation of central bank policy, has been going on for more than six years without a serious correction. Is one due?

Jim Rogers: [There is] a worldwide ocean of artificial liquidity; the ocean is getting bigger all of the time. It’s the first time in recorded history that all the major central banks have been printing money. The Japanese said they would print unlimited amounts of money, Europeans said we will do whatever it takes, the English say ‘“let us in too,” the Americans—you know what they are doing. [The Fed] says it is cutting back on its purchases but in the meantime the money printing continues. The people who are getting this money are having a wonderful time; and their friends are having a wonderful time, unfortunately it is artificial and it has got to end someday. I don’t know when “some-day” is, I’m terrible at market timing in the best of times [let alone] when [we are seeing something] that never happened in world history. When it ends it is going to be a nightmare for everyone concerned except the people that get it right. Most of us will not get it right. We have had economic setbacks in America every four to six years; we are going to have them again. The one in 2008 was worse than the one in 2002 because the debt was so much higher. The debt has gone up a staggering amount since 2008. The next time it is going to be worse. I hope we all survive it. If we somehow survive the next one, then for the one after that: I doubt if anyone could survive because the debt will be so high.

FM: Normally a bull market lasts about as long as the post credit crisis boom, but no one would mistake the last six years as an economic boom. Can a downturn hit right when we begin seeing a strong recovery?

JR: The people in Washington, the academics say [a stronger recovery] is coming. Let’s say they are right, it still doesn’t preclude somewhere along the line an economic setback—and when it does hit, it is going to be staggering because the situation is so much worse.

FM: You had been very critical of the performance of Ben Bernanke and the Federal Reserve. Playing the devil’s advocate one could say the Fed averted a disaster or delayed it, and now we have to see if the Fed can safely unwind from this extraordinary accommodation.

JR: They would say “yes” and their apologists would say “yes, they saved the world.” My response to that is go back to the early 1990s, the Japanese did the same thing. They refused to let people fail and the Japanese had a lost decade, and a second lost decade; even today the Japanese stock market is still down 70% from where it was 24 years ago. Yes, the Japanese central bank saved them in 1990 but most people would prefer it not to have happened that way. Scandinavia had the same problem in the early 1990s. They let people fail. They had a wretched two or three years but after they got over the pain they have had a prosperous two decades in contrast to Japan. This way doesn’t work.

FM: What else could the Fed have done?

JR: [They could have done] exactly what the Scandinavians did. In the early 1920s the Federal Reserve raised interest rates. Washington balanced the budget. We had a horrible year or two but then we had the greatest economic decade in American history in the1920s. It ended badly because of excesses. You bite the bullet, you take the pain. The way the system is supposed to work is people get into trouble, they make mistakes, somebody comes along, reorganizes, and they start over from a stronger base. What the West has done is we have gone in and taken the assets away from the competent people, given them to the incompetent people and said to the incompetent people, “now you compete with the competent people with their money.” It is absurd economics, it is absurd morality. It’s insane. Central bankers will tell you it is great. They say don’t worry we are going to withdraw from this slowly and gradually. In 2008 when they were contemplating this, [FOMC] minutes showed that they didn’t know what they were doing but they didn’t know any other choice. …You asked how it is going to end, it is going to end badly. Like Japan, if we are lucky. When the next problem comes, because it is going to come, it is going to be a nightmare…..

FM: We (and much of the world) have been in a zero interest rate environment for six years. What will be the impact?

JR: A lot of people are being ruined. Anybody who saved and invested for the future is being destroyed because they are earning nothing on their savings. Any pension plans, endowments, etc., are suffering because they invest for the futures and are finding that their situation has gotten worse. We are doing this at the expense of people who save and invest. We are doing it to bail out the people who borrowed huge amounts of money. The consequences are already being felt. History shows that when you destroy your savings and investing class, it leads to gigantic social problems down the road. More and more people are unhappy in the U.S. and the world, the mood is not great, at least when I am there. We know something is wrong; we may not know it is because the savings and investing class is being destroyed or that the endowments and insurance policies are coming under duress but everybody knows something is wrong. It is leading to more and more social unrest, more disillusionment and it is going to get worse. Turn on any TV, open any newspaper. It is getting worse.

FM: It has been six years since the credit markets imploded. Analysts point to a period of anger that generally occurs seven years after such an event. Is that what we are seeing?

JR: Of course that is what is happening. One reason it is happening is because there is inflation in the world despite what the BLS says. You have so much social unrest in much of the world because food prices are going higher . If you are a lady who goes to the shop every day you know that the price of sugar is going up or wheat or bread. A lot of these people are finding they cannot survive the cost of living. In America we don’t have inflation but in the rest of the world they do and you are seeing more and more social unrest. People who are fat and contented don’t really care whether the Christians or the Jews or the Muslims are saying X,Y or Z; they are too busy having fun and making money but when things go wrong they look for someone to blame. Right now things are going wrong in many parts of the world even though the Dow Jones is at an all-time high. …

FM: Would a market correction of 10% to 20% be bad?

JR: No. We haven’t had even a 10% correction for three years. Normally the market has a 10% correction every year or two and it is good. It certainly wouldn’t be a bad thing. A bear market wouldn’t be a bad thing. There is a lot of complacency. A lot of exuberance that usually leads to a misallocation of resources. I do know that those guys in Washington don’t have the courage of their convictions. Second, they have no knowledge or experience so when things start going wrong they will panic, and all they know how to do is print more money and that is what they will do in their panic.

FM: Should they have done nothing in 2008?

JR: Yeah. Just like Scandinavia in the early 1990s; America in the 1920s. Competent people reorganize the assets and start over from a sounder base. We have propped up the incompetents. It is horrible economics. I’m not suggesting this would have been fun but instead of having a lost decade or two when the day of reckoning comes—the Fed’s balance sheet has quadrupled in six years—it will be a gigantic mess. Had they let [the banks] fail, it would have cleaned out the system and we would be on a big roll by now.

You can read the entire interview here.

Finally, some good news. From this week’s New Yorker:

Harry Newton, who’s read and listened to every logical and illogical explanation as to what’s happening. I was up to 4:00 AM reading.
Suffice, the world has turned on a dime. It’s the end of another business cycle. Remember 2008, 2002, etc.?
Cash is now King. Remember that one?