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Equities are dead?


JAllen
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One could sure make the case that many (at least the commenters on this Bill Gross link) believe that stocks are in fact dead.  The comments are the most pessimistic I have ever read.

 

I invite others to read some of the comments at the end of this article.  To be fair, I think many of the comments are from retirees and that there are some posters who have somewhat optimistic attitudes.

 

http://www.dailyfinance.com/2009/02/26/bill-gross-the-747-billion-bond-man-declares-the-death-of-equ/2#comments

 

"I have been saying this for the past year. This depression will never end no matter what anyone says. Obomma and his people can not heal this thing..EVER..the whole world should face the facts and start to build toward some kind of NEW money system and Trading System, that will take decades to do. There still is one thing that is worth its weight when you hold it in the palm of your hand, Gold and Silver coins and can be traded, sold ,cashed in anywhere in the world."

 

"Perhaps it's just not stocks that are dead but the whole financial system...paper has never been worth so much as it is now...maybe we should switch to shells or beads."

 

"I tend to agree with Bill Gross's view that stocks will perform poorly for a very long time, now that our biggest banks are insolvent & dependent on government aid. Gross's views have historical evidence given that Japan's Nikkei average peaked at 39,000 in December, 1989. Now 19 years later, it is trading below 8,000, which is down more than 70% from the peak. A buy-and-hold stock investor in the world's 2nd biggest stock market is down 70% over the past 19 yrs. What makes us think the US market will do better over the next 19 yrs. We are in debt-deflation mode now, just like Japan has been for 19 yrs. The game has changed and it will take a long time for deflationary forces to unwind all the bad debts accumulated during the past 30 yrs."

 

"It's cash all the way from now on for me. Lesson should have been learned from the depression years. "

 

"The stock market and equity capitalism have been dying a slow death thanks to the CEO's and Board of Directors that have put their interest above that of the shareholders. A person would have to be both blind and deaf to invest in the stock market. The greed that exists in both Washington and Wall Street have led to this downfall. Now all the greedy people can either go to Washington with their hands out or get in the food line at the soup kitchen.........HOPE THEY ARE SERVING YOUR FLAVOR!"

 

 

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Yeah, Gotta love it.  And Bill Gross was right on with his prediction of the Treasury rally.  :P

 

The problem with prognostications is that no one really knows.  Since the bears of the 80s and 90s the information flow has multiplied 1000 fold or more, with more predictions available then ever before.   

 

People reviewing market crashes conveniently forget the recovery phase:

 

History tells us that the Dow went up 450% from 1932 to 1937, and hit a low in 1938 that was still 200% higher than 1932.  World markets in real estate and stocks this time around were no were near as inflated as the Japan episode. 

 

People also suffer from recency bias.  Markets in 2008 suffered the greatest calendar year loss ever so it is bound to be the case forever more of course. 

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I think this is more a reflection of current expectations than anything else.  I think part of the issue may also be reflected in the GMO letter.  There was hope that with a new president that Volcker was more than window dressing (the market rallied into year end) but I think given the financial teams actions, lack of realizing/dealing with the issue of overconsumption and the black hole of bail outs it may sink the ship.  Clearly, the unveiling of unrelated spending priorities is taking the attention off the treasury policies that are a continuation of the bail-out and hope policies of the past. 

 

An interesting exercise in using some of the data from GMO is that we had $50 trillion in asset before the crash which declined to $30 trillion.  He estimates the debt to be about $25 trillion.  If you add the $5 trillion Gross estimates as a loss hole and the $2 trillion already on the Feds balance sheet you are at $32 trillion, or 110% debt to equity.  This before any of the additional spending proposals.  It is hard for me to believe given this situation that interest rates will not go up.  I think the game of the gov't trying to finance its spending from fear based investors may cause interest rates to skyrocket once losses are known and/or if the gov't continues to bailout.  I think that the spending now has no margin of safety built in (as we had via a net creditor position in the US in 1930's and Japan had amongst its consumers in the 1990s) and if it fails and causes interest rates to spike the game will be over.  These are aggregate numbers and this is where is Gross' logic falls apart.  If the US gov't held this much debt I would be concerned, but since the debt is spread around, there will be pockets that will be blown away but pockets that will do fine.

 

Packer 

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