9 July 2008

Sentiment? Forget about it.

A guy is going down the Niagra river in a barrel. He says, "I am so screwed." Does that change the reality one bit? There are 1000 people on the shore saying, "He is so screwed." Does THAT change the reality? Ambac is bouncing 50% today. Does that mean they are not totally, uncontestably insolvent? Some things simply have nothing to do with sentiment. When the guys at the gym know you are hosed, you probably are hosed.

I grew up in a bad economy. Everybody talked about it. That didn't make it any better. It lasted years. In a related case, when the Nikkei took a dip in 1989, how long do you think it took for pessimism to start to show up? A year? Maybe two? 19 years later and the Nikkei investors are still hosed (down 70% unadjusted for inflation and 19 years closer to retirement). I listen to these wingnuts talk about bear markets lasting months. They are crazy. Bear markets can last decades. Within those secular bear markets you get mood swings, but the big trends last decades. I am not sure I will see another real bull market in US equities--the kind of bull market you buy and hold and look like a genius--within my investing lifetime. Want another example or two? Boot up lifetime charts of AMD and GM. Every major general fund owns these. Despite the occasional five-fold run up and down, they haven't moved a penny in 25 and 55 years, respectively. What do investors see in these stocks?

As a physical scientist by training you will not be able to avoid the conclusion that we are in a one to five decade period of pain. The inflation adjusted "DOW" (fake DOW actually) chart is compelling because it shows that if we regress to a multi-century mean by the most gentle method imaginable--the DOW simply tracks inflation--we will get to the mean in 2055. The other [consumer debt and savings rate over the century] shows that our problems were decades in the making (and, by inference, will require decades of correction). Show these to your colleagues and ask them to rationalize them. Post these on the wall next to your desk. I have had an equivalent of these two next to my desk for eight years.

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