Bill Fleckenstein posted some interesting thoughts in “Thank Uncle Sam for the Rally.” Here are some snippets:
There is nothing like a monumental surge in government stimuli to help boost the markets and, by extension, people’s perceptions of the news.
I’ve been struck by how well the recent stock market rally illustrates an old saw — the market writes the news — because as this powerful rally has built over the past six weeks, enthusiasm has increased with it.
The primary reason for the rally, in my opinion, is the extraordinary amount of liquidity and fiscal stimuli that has been provided by the Federal Reserve and the federal government.
In a recent issue of Grant’s Interest Rate Observer, Jim Grant charted the stimulus money (both monetary policy and government spending) as a percentage of gross domestic product for this downturn, compared with the previous 13 recessions.
In those earlier recessions, if you added all the percentages, the cumulative monetary stimuli constituted about 6 percentage points, while thus far in this recession, the stimuli have clocked in at 18%. Add in the 11.9% (of GDP) supplied by the government and you get 29.9% for the combined stimuli. That’s compared with a total of 39.3 percentage points for the prior 13 recessions.
When the current recession is compared with the Great Depression, we find the relative amount of stimuli is almost four times as high today as during the 1930s collapse, even though GDP has dropped only 1.8% versus 27% back then.
Given the massive stimulus efforts, one must be leery about the conclusions one draws concerning what this rally might mean.
This rally could indicate that times are getting better — or just that massive liquidity is leaking into the stock market and that the real economy is going to see more inflation.
…
The patience required in investing is not so much the patience for sitting with a position after you establish it but the willingness to be patient beforehand.
To quote my friend Jack McHugh (using a Texas Hold ‘Em analogy): “Waiting for more information allows a patient gambler to better know when to commit his or her chips. . . . There’s always another hand to be played, just as there will always be a new set of investment opportunities to consider.”
I agree. And I will continue to wait for opportunities where I believe the risk-reward ratio is really in my favor and I am able to muster up some conviction.
[My emphasis]
This pretty much reflects what I have been saying. It is important that you as an investor have a plan in place and part of that plan is to wait for opportunities to present themselves. This is opposite to what most people do by feeling the overwhelming need to “do something.”
Using our hedge strategy has allowed us to move into the market earlier than our conventional trading rules call for. However, patience by waiting for the right moment to execute is just as critical with hedging as it is when establishing outright long or short positions.
Missing out on an opportunity is far better for your portfolio value than pressing the issue by forcing yourself into some positions too early and then watching the market prove you wrong.
Comments 8
Ulli,
Most of my sources that I have some trust in are now saying that we are overdue for a correction since we came up so much so fast. They are saying time frame wise that we are in that range where the corrections usually start. My hedge will protect me on the downside when this correction does in fact happen. I have 4 managed mutual funds (long) and SH (bear)which at the moment are balanced 50% long 50% short.
Ulli,
I can’t help but think of that 74 year old half broke retired guy that wrote a blog message several days ago about buy and hold, trend timing etc. and stated how good he had done. It was so funny because he had already lost half of his money and possibly will lose the other half if he doesn’t change his trading plan that hasn’t worked very well. He in a round about way has already indicated by the 50% loss that is insn’t very successful. This current government induced rally probably makes him feel better, but what if we make new lows over and over again for several more years. Just a thought and that scares me especially if I were a buy and hold type like this person. I really don’t want to have to eat dog food when I am 74 or any other age.
Ahmad
Anon,
You have the right idea. Be sure to rebalance to 50/50 once you get lopsided by 61% on either side.
Ulli…
Ahmad,
My sentiments exactly.
Ulli…
Ulli, Hallelujah! Massive government spending (just like the consumer bubble- based on borrowed money) and super low interest rates will get the economy moving faster than most people think. The democrats in Congress will spend every billion (the new bubble) needed to insure their re-election in 2010. They won’t even think about the massive deficit that they are creating for a couple more years. But then, when inflation comes, and the Fed must raise interest rates- the party will be over. I guess only the Chinese will be able to bail Washington out.
Ulli,
I’m the 74 year old buy and hold investor whose blog elicited several comments, the most recent from Ahmad, who assumes I am eating dog food. In point of fact, in looking back over my investment lifetime (some 40 years), i see a 9%/year increase, attained with minimal short-term capital gains taxes. I assume Ahmad, et. al., have exceeded that performance, and if so, I give them props, but I smile when I review my current portfolio, and so far, have been able to afford cuisine slightly superior to dog food.
Ulli,
After reading the last message, I would have to say that if the 74 year old’s cusine is “only slightly” better than dog food that it would still be close to being dog food. I agree that 9% per year over 40 years is ok especially after losing half of his money so long as he doesn’t lose the other half later on.
B.M.
Ulli,
I see we finally heard back from the older gentleman. I just want to say that you made clear and confirmed what a lot of us already believed. Thank you.