Mogapi Legodi: Double Dip Recession?

Mogapi Legodi: Double Dip Recession?: "Every media device or platform you turn or turn to questions are asked, which way is the stock going? Which way are bonds going? Gold? Real ..."

Mogapi Legodi: Paranoia in economia

Mogapi Legodi: Paranoia in economia: "During these times of declining revenues and stubbornly increasing costs, lot of questions are asked about confidence. Almost everyone has a..."

Double Dip Recession?

Every media device or platform you turn or turn to questions are asked, which way is the stock going? Which way are bonds going? Gold? Real estate? Where should I invest?

There is optimism that the market is going up and there are more recommendations that one should buy stocks as now is the time to buy. Out of curiosity a cat might ask: “Does that mean the market has bottomed out. But as the saying goes, it may seem cheap but it can even get cheaper. At school we were told that each cycle has different types of good investment opportunities. In secular bull markets investors should look for stocks and funds that will perform better than market averages. In bearish market I was told that one should look for absolute returns where the benchmark would be money market funds.

During this time of threatening double dip recession given the slow economic recovery one starts to doubt what was once taught at school.  One was hypnotized by the theory that house prices always appreciate – the complex mystery of the economy. My old man used to say that the world is not coming to an end; it is merely changing as it always has. And one might reasonably perceive that in that change, there would, of course be winners and loosers. Currently the economy is not doing well and the stock market is volatile as the gains earned are lesser than the losses incurred. The state of the market has everything to do with the expectation for earnings and the value investors put on those future earnings. John Mauldin clearly pointed out that bear markets (or 20 percent plus corrections) can happen in bull markets (thins 1987 or 1998), just as bull markets (think 2000, 2001, 2002, 2003). P/E ratio goes from very to quite low. And then, in period of low valuation, investors can once again put money into stocks.

I strongly hold the view that our predictions about the future depends a great deal on assumptions we use especially upon the subject of economy. The question that I ask myself more often is: “Are investors more worried about future losses than expectant of potential gains? Turning economic history pages, getting a sense of how harsh life was back then (oil shocks, Vietnam, stagflation, Watergate and so forth), I thought of visiting the joker to calm my anxiety. The market will always come back to trend and serious if not painful corrections have to take place. Overly optimistic assumptions are and still remain a continual source of misplaced future problems.

Many theories can claim to predict the economic cycles, for example Kondratieff Wave theory says the economy and the markets repeat every 56 to 60 years, with discernable periods marking the changing cycles. The deficiency with this theory is that it tells one where s/he has been and where s/he is going but does not tell with certainty when one will get there and more importantly where you are at the moment.  Apropos economic recovery, there is a lot of brouhaha on where we are and where we are tending but one thing which is very important and is painfully lacking is certainty. So fur confidence appears harmful to the investment community. Upon the possibility of facing a double dip recession, I shall resign myself to the concept of economic gravity lest I prattle. Trees don’t grow to the sky, so is the economy – it has limits. When it grows to levels where valuations are unrealistic, gravity has to take its course even it means the bubble has to blast. The market is nothing but a lean, mean reversion machine. If to revert to the mean demands a double dip recession then it would happen somehow. As for when one cannot fairly say but it can only be delayed via monetary and fiscal policy interventions which won’t solve the problem but just postpone the difficulties it brings.

It therefore, appears to me fit and proper to conclude by quoting Jeremy Grantham who said all this more than five years ago. The recovery may be “the greatest sucker rally in history, with a black hole awaiting markets in 2005…. By the end of this year, we will have battened down the hatches as tightly as we can. With any luck, 2005 and 2006 will be such a bloodbath we’ll get it all out of the way quickly…. The market loves comfort, stable growth, stable low information, strong profit margins. All these things mean revert. Things are pretty good now. There is plenty of room for all these variables to move against you. If you want to make money, you buy when things are bad.”

Paranoia in economia

During these times of declining revenues and stubbornly increasing costs, lot of questions are asked about confidence. Almost everyone has a reservation about economic recovery. Buyers are placing orders on hold due to lack of confidence in the recovery of the economy, suppliers are much concerned about their customers thus putting deliveries on hold, employers are freezing jobs and on an extreme case, retrenching. Unemployment climbs north which means that bad debts are not going south any time soon. Earnings would continue to be depressed as more provisions would have to be raised for bad debts.  Economic mishaps around the globe don’t inspire an iota of confidence and those who are overly optimistic are either trying to pacify those who are overcome by anxiety, or it is just for sycophantic motives. There is a saying that if you want to inspire confidence, give plenty of statistics but currently almost all the statistics tell one thing: “The force of economic gravity is inevitable.”

All these does not declare that the world is coming to an end, as my old man used to say: “The world is not coming to an end; it is merely changing as it always has.” And one might reasonably perceive that in that change, there would, of course be victors and losers – great inventions would emerge and some established enterprises which somehow appear grand would collapse. Currently the economy is not doing well and the stock market is volatile and the gains earned seem to be lesser than the losses incurred. Some might flash around well proven financials models and adamantly profess that one need not worry about short-term drops but should rather buy and hold for the long term. Then they fervently tell about the MPT (Market Portfolio Theory), one can reduce the volatility of the portfolio by diversifying investments in group of asset classes. In this case, asset allocation is of utmost importance for it determines the kernel of MPT, correlation. MPT strongly states that the asset classes should not correlate meaning they should not have a linear movement or close association. One might perceive them as contra asset classes, for e.g. when stock goes down, the other investment bonds or real estate might offset that downward movement in stocks.  The MPT has proved to be a successful model over time. This theory was founded by a man I truly admire, Dr. Harry M. Markowitz, who through his valuable and brilliant work in economics won a noble prize. Against all the hype behind this model, Dr. Markowitz warned that more caution should be exercised when it comes to the assumptions used. Honestly, MPT is a good model but it has been done to death. One thing that MPT demands is time, a very long time. In academia one was taught that one of the best investment strategies is to buy and hold for a long term, well I have to admit: I glorified it then but now I have to ask: “How long is the long term?” John Keynes once said that in the long run we are all dead. Even a bull can’t run over that fate, after all, life here on earth is finite. The point is, many individuals and not investors per se, have their retirement funds invested all over the stock markets and it is irrelevant whether the state impose a restriction on how much the pension fund can invest in various asset classes; the fact is that when the market goes down so is the pension fund.  No matter how protective the state can be on pensioners funds, the reality is that some pensioners would lose badly and after all those years of hard work, retirement won’t be as pleasant as expected. One might regard my utterances as nothing but a febrile twaddle. Oh well, should we then out of the economic doctors’ sedation passively assume that the cure shall be found for this paralysis and that whatever may betide, we are safe – well I refuse to assume. Does it mean that what works for fund managers (institutions with lifespan that might stretch into perpetuity) would work for individuals? Ignore short term movements because in the long run the market would pick up. But how short is the short term? What’s short to institutions could be long to individuals. The geniuses can brilliantly castigate all these but one thing remains true, the state of the market has everything to do with the expectation for earnings and the value investors put on those future earnings. If investors are more bearish about losses incurred or to be incurred more than being bullish about potential gains, then valuations have to head south – corrections.  And then, in period of low valuations where investors are surely convinced that the market is well priced, money can once again be put into stocks.

I strongly hold the view that our predictions about the future depends a great deal upon assumptions we use especially upon the subject of economy. The question that I ask myself more often is: “Are investors more worried about future losses than expectant of potential gains? Turning economic history pages, getting a sense of how harsh life was back then (oil shocks, Vietnam, stagflation, Watergate and so forth), I thought of visiting the joker to calm my anxiety. The market will always come back to trend and serious if not painful corrections have to take place. Overly optimistic assumptions are and still remain a continual source of misplaced future problems. Apropos economic recovery, there is a lot of brouhaha on where we are and where we are tending but one thing which is very important and is painfully lacking is certainty. As time goes by and things don’t change for the better, investors would surrender to the aphorism that says that an egg today is better than a chicken tomorrow. Should they then be viewed as too sentimental? Maybe not. We are in a moment where one thing that is certain is uncertainty; the current circumstances might prove that it is better to keep what one has than risk it all for more. The market is nothing but a lean, mean reversion machine. If to revert to the mean demands a double dip recession then it would happen somehow. As for when one cannot fairly say but it can only be delayed via monetary and fiscal policy interventions which won’t solve the problem but just postpone the difficulties it brings.

Paranoia in economia is evident. The property bubble has forced Ireland to go on its knees and beg for bail-out which imposed harsh covenants. All the quantitative easing measures focus on one thing, liquidity, which can’t be powerful enough to convince the people that the economy is altogether falling into place. Some if not many would still question whether the real hole has been filled. It is no more subprime crisis; it’s now a gigantic catastrophe – sovereign debt crisis.  Some market commentators having tricked themselves into thinking that they have grasped a deep understanding of economic complexity and now highly overcome by paranoia would curse the market as being irrational. In the real economy, the tradition of extravagant spending either on exotic toys pronounced as tourism magnetism or military expansion pronounced as national security which was praised in the past would be cursed in the near future. As the societies all over the world realize that somehow the states are not acting in their best interest, they would by any means necessary demand accountability. Eventually, ultimately, the rubicon has to be crossed. And it shall gradually become a norm that taxpayers should be viewed by any state as shareholders. And the state states shall realize that what the old Kind Leah said was more precious than gold; “Have more than thou showest, speak less than thou knowest, lend less than thou owest.”

By: Mogapi Legodi – a concerned observer.