Tuesday, January 03, 2006
The Middle View
Everyone thinks they're view is the middle view. It doesn't really matter how bearish they are. Barry Ritholtz didn't take too kindly to being labeled a perma-bear. But on his blog The Big Picture in the post 1966-1982 Trading Range Barry says, "If we are in fact in a long, post-Bull trading range -- see our 100-year Dow chart -- then this is year ~5 of what could be a 10-15 year secular Bear market." If that isn't a perm-bearish viewpoint then what is? How right Barry has been in the past, or how willing he has to switch from bullish to bearish, is quite irrelevant. To say that the next 5-10 years will be bearish means that stocks will be worth less after that time, not flat, but down, implying that one would be better off being short stocks for the next five years or so. Personally, I think it's an irresponsible and reckless viewpoint to share. But that's just my opinion.
Barry suggests I not confuse trading with investing. Readers, if you get just one thing from this blog understand that investing IS trading! Investing is nothing more than trading over a longer time horizon. If you buy a stock and hold it for a really long time and the company slowly goes bankrupt and you lose most of your investment, then you you've made a bad investment, or in other words you were an indefinitely and near-permanently lousy trader. If, on the other hand, you saw the writing on the wall after five years and got the heck out, then even if you lost some money you made a good trade in bailing out. When you pick your mix of mutual funds in your 401k plan, that's trading. Have you not noticed how much more heavily the mutual fund companies have been pushing international funds on you over the past couple of years? Have you not noticed a ramp up in international fund offerings? That is nothing more than market timing. When those international funds start to under perform domestic funds, and they will, suddenly no one will think it’s a good idea to have 25% of their retirement money overseas any more.
Does anyone want to bet that the markets will be lower in 5-10 years than they are today? I think not. Somehow I think that very few perma-bears actually are willing to act on their beliefs. They gives these long-term negative projections, but they tell us not to confuse trading with investing and proceed to be net long over the next X years.
I'm not even saying put your money where your mouth is. I don't believe that having a lot of money is a prerequisite to having an opinion. But what I am saying is that is it's hard to imagine anyone in their right mind acting on such a view either with their own money or their clients. Who's going to put their retirement savings on the short side for the next seven years? Would anybody really do that? Then why say such things if you really don't believe it? The perma-bear view suddenly seems quite ridiculous when you think of it in these terms.
There's a very good reason why the secular bear view will be wrong. Self-funded retirement plans such as 401k plans, as opposed to company managed pension plans, will keep growing as a percentage of the entire markets capitalization. That's people putting $50, $100, even $1000 a month into the markets, and not a penny of it goes to the short side. That gives the markets an even greater long-term upward bias than it has had in the past. We've seen tsunami-sized volatility over the past ten years with stocks becoming severely overpriced then falling back hard, but despite that the major indices have more than doubled in that time.
Realistically, though I despise all the hype over international investments that's gotten quite a few average Joes I know into investments they know absolutely zippo about, this same bias is likely to pull the international funds higher too. More generally speaking that will be good for the world's markets in the long run, and it's another reason to be long-term bullish on the U.S. exchanges as they increase their international roles in the growing world's markets.
Frequent contibutor Tom (aka T) says that his view is the middle view and that I'm a consummate bull. I suppose that's true. Mostly though my views are the product other peoples analytically flawed views. To the extent that they may be more bullish than bearish is coincidental. I do not try to find data to prove my beliefs, rather I find the faults in other peoples' views and hopefully what I'm left with is something that approximates the truth. For me it's a process of elimination.
That's how I approach the markets. People say ridiculous things and I take the other side. Barry's flawed logic in thinking that the markets will be lower five to ten years from now is just one more reason to be bullish. I think in terms of checklist of positives and negatives. If I here a logical reason to be bearish I'll put that on the list too. But it's not enough to convince me for someone to just say look at how the markets haven't been able to break out, or look at the size of the deficits, or our debt is out of control. The problem is that they never provide a plausible explanation for what any of these things mean. I have looked at these things closer than most people and what I have learned is that bearish view of these things is an isolated one that provides no relative perspective.
When you look at these things as a percentage of GDP and compare them to the rest of the major countries in the world, as I have in Climbing the wall of worry… that drew zero responses from readers (which I take as a form of denial of the truth, as it seems most people would prefer to have something to worry about), suddenly none of the usual bearish predictors seem nearly as bad. In fact the U.S. is quite better off financially overall than the competition, which makes sense and adds up, as it explains why we keep continuing be a economic world leader to the Oracle of Omaha's chagrin.
The only significant economic number in which the U.S. lands low on the list compared to other top countries is the trade deficit and, not intending to explain it away, I suspect that our calculations methods have become too antiquated to capture an accurate picture of the true nature of our trade, which is rapidly growing increasingly complex via globalization. I suspect, for example, that global companies headquartered in the U.S. have found a myriad of ways to make their books as convoluted as possible in order to pay as little in taxes as possible. The net result is an underreporting of income derived by global companies both producing and selling goods overseas operating in the lax and bribery based regulatory environments found in many foreign countries.
That's not to suggest that we aren't sending more of our money overseas. We most definitely are, but the numbers just don't add up. By all accounts we shouldn't have more money to send overseas, but we continuously do. We keep getting more money because many our global companies keep hiring more U.S. employees and paying them more, and the domestic companies that support those companies hire more people and pay them more. Some companies export jobs, but yet there's an overall net gain because the more business those companies do overseas the more jobs are needed here to manage and support large complex global businesses. Those profits make their way back here, most accounted for, some funneled through complicated channels probably goes unaccounted for.
Look at AIG, for example, it sent reinsurance business to loosely affiliated Bermuda reinsurers, which didn't have the reserves to make good on the reinsurance contracts. The reinsurers bought the business from AIG. Those reinsurance contracts lowered the reserve requirements of AIG here in the U.S., which meant that AIG had more money to invest. That in turn meant that AIG experienced greater growth do the compounding over time of its cheating ways. Over time, that combined with its illicit relationship with the leading insurance broker in the world, was in part enough of an edge to enable AIG to become the largest insurance company in the world. It's not an exact example of how global companies might be impacting trade figures, but it's a good example of how companies take advantage the lax regulatory environments found in other countries beyond the reach of the U.S. AIG was one of the first companies in Bermuda. The company had direct hand in molding the offshore haven into what it has become. And to be realistic everyone in the industry not completely naïve knows that there's no absolutely no reason for any company to have a presence there other than to convolute their businesses in some way or another.
I try to recognize that most people think their view is the middle view. This is similar to the way that many people think they are handsomer or smarter than they actually are, and no one wants to think they look like their dogs. What perma-bear thinks that's what he is? They just think they are right. The Oracle of Omaha thinks shorted the dollar to the tune of billions and said we'd all be sharecroppers to the rest of the world. Buffett doesn't see himself as a doomsayer or perma-bear. He just thinks he's right. Who knows who will be right. I can only say with certainty that George Soros had it right with his theory of reflexivity, which in this case implies that if everyone thinks bearishly and acts bearishly then the result will be a bear market, and vice versa. That is why I do not care much for the perma-bear message, or nonsense about 5-10 year secular bear markets, whatever you want to call that view.
posted at 1:26 PM
