Nervous in the Market

No particular point to this post - just thinking out loud.  As a warning, the best way to make a million dollars with my investment advice is to start with 2 million.  I know others are in the same boat so perhaps this is just commiseration

This is an odd stock market.  To me, and to many others, stock price increases have outpaced the economic recovery, and are being driven now in large part by huge injections of printed money by the Fed via ongoing quantitative easing.

First and foremost, quantitative easing has been a savior for bank income statements.  Much of the new money ends up in banks, which shows up as increasing excess deposits.  Even at fractional interest rates, a trillion dollars of new deposits does wonders for bank profitability.  It's an odd sort of bank bailout, cheap if someday the Fed can unwind its balance sheet gracefully, very expensive if not.

Second, though, this money has also found its way into the securities markets, inflating what many people fear may be a bubble in equity and bond prices  (and perhaps even into a newly-reignited bubble in real estate, as house flippers again make their presence felt in California and Arizona home markets).  I have a friend at a party the other night who shook his head in remorse that he had missed the recent run-up in equity prices.  But, unlike many personal investors, he is too smart to jump in now.

I have stayed in the market, though at a reduced mix of my assets, having been convinced by others that you don't fight the Fed and as long as the Fed was injecting money into the financial markets, that security prices would rise almost irregardless of the fundamentals.

Which raises this problem:  I am as certain as one can be in such things that in the next 6-12 months the stock market will be lower, at least 10-20% lower, than it is today.   I am also fairly certain there is some positive run left before the bubble deflates  (you can see that today -- the market is up about a percent as I write this).  So I stay in, ready to skedaddle at a moments notice.

My fear is that almost everyone in the market has the same plan, so that the skedaddling will happen so quickly and so in mass that it will be hard for me as a casual investor to stay ahead of it.  As a result I am slowly liquidating, willing at some point to just miss out on the last stages of the bubble.

The real question is liquidate into what?  Bonds are perhaps more overvalued than stocks, so I certainly tend to stay away from long-duration bonds and bonds that have enjoyed a big run up, such as high-yields, which are trading at some ridiculously small premium to government bonds.  I would not invest in Europe right now at the point of a gun, and I have been anticipating a bursting of the China bubble for a couple of years now.  Commodities are always a crap shoot -- gold is falling and if OPEC does not act soon oil will be falling soon too.  Right now I have decided to sit for a while in short duration bonds, checking my greed at the door and accepting a low return.


  1. LarryGross:

    where r u going to put your money instead? that's the question, eh? You wouldn't buy those nasty T notes would you?

  2. jon:

    The permanent portfolio. The book, of course. Of course, I have most of my money in cash in a bank since I am just living off of it as I transition of electrical engineering to programming.

  3. Chris Kahrhoff:

    I understand your reluctance to commodities but if you are still bearish USD (and USA) there is not a better store of wealth than AU and AG.

  4. Gorgasal:

    I like how you "wouldn't invest in Europe at the point of a gun"... I'm European, and I kind of feel the same way about investing in the US ;-)

    My personal solution: invest a little in Australia, diversify and brace for the worst. Let's see whether inflation, the bursting bubble or our politicians get us first.

  5. None:

    It's hard (if not impossible) to say what is pushing the market at the moment. It could be several other things than the Fed at work. Money could be leaving European banks (if you had mega large savings there would you be happy with that?), or even Chinese owned dollars returning on the sly.

  6. Matthew Slyfield:

    Gold and Silver have no more intrinsic value than paper currency. If the economy collapses as badly as some are predicting, we will be down to barter and both gold and silver will be useless in readily transportable quantities.

  7. Matthew Slyfield:

    If you are that nervous about the state of the economy, I would suggest putting your money into nonperishable foods and other disaster survival supplies such as guns and ammunition.

  8. Derek:

    Ive been thinking the same thing, and have decided on rental properties. You can buy them with cheap, fixed debt, do a little work (paint, carpet, roof) rent them, and get a high ROI. Inflation becomes your friend as you raise rents every year, while your expenses are the same.

  9. Russ R.:

    I currently like gold at $1381/oz and uranium at $40.50/lb. To the best of my knowledge, neither can be printed.

    BTW, it's probably worth mentioning that many European large-cap companies are actually global companies that earn revenue worldwide, but just happen to have their HQ in Europe... e.g. HSBC, Daimler, Royal Dutch/Shell, Nestle, Unilever, Philips, Siemens, Sanofi, Anheuser-Busch Inbev, SAP, etc... Bonus: A weakening Euro provides these companies an additional benefit.

  10. MingoV:

    "... stock price increases have outpaced the economic recovery, and are being driven now in large part by huge injections of printed money...

    A related factor is that bond rates are atrociously low. Money managers are buying stocks because corporate bond returns barely beat inflation.

    @Derek: Be very wary of property rentals. It's easy to lose money, especially if your monthly rents are low enough for welfare (or whatever it's called now). Welfare recipients in NY state can not be evicted for non-payment for 90 days. That's four months rent gone (3 + 1 for clean-up and repairs) plus the costs of the repairs. Enough of those will break any landlord.

  11. Mike Moran:

    Love your blog, but don't think you are right about market. Really pretty good economy for market, weak enough so interest rates stay low and you have no choices on where to put your money (with help of zero interest rate policy of fed) and strong enough for corporations to keep grinding out higher earnings. Unless Obamacare causes recession, market likely higher a year from now.

  12. NRG:

    The 'crash' or 'correction' or whatever ya wanna call it is sure to happen whenever the real pain from Obama-care is felt. We are going to completely lose our large deductible catastrophic plans in January. We are struggling to afford $1100 a month for the 3 of us with large deductible plans. Today it is double that for non-catastrophic plans. What will it be in November when the new plans must be bought?

    How many Americans are in the same boat? I'll hazard to guess MANY.

    Precious metals looking good. Poised for breakout when the crash happens.

  13. NRG:


    How do you mean? A 90% silver dime is worth about $15-$16 today. I can readily trade that to a farmer for a few days food.

  14. mesaeconoguy:

    Bonds got monkeyhammered today, bad auction (5yr tomorrow).

    Rates are on the way up, the question is how far?

    Bernanke may be backed into a corner, and be forced to moar QE it if the 10 year pushes past 2.50.

    This is significant as well:

  15. John O.:

    Well if you invest in a gold bar in a secured warehouse, its a bad investment for economic collapse, unless you have the gold bar shipped to you. If you invest in gold and silver as a coinage, its rather practical because it could be used in transactions over barter. But the problem is that the "market" will need to determine a proper trade in gold and silver which means being an assayer would be a wise career choice. The problem is knowing if and when this going to happen which in my book is possible but not all that likely.

  16. BGThree:

    Wow, it's time to hunker in the bunker if you think the stock market has gone a little nuts and might be 10% to 20% lower in a year?

  17. BGThree:

    Did you see that the Ninth Circuit (I know, I know) affirmed a lower court decision in which an able-bodied law school graduate was permitted to discharge most of his student loan debt? This is so incredibly bullish for equities if SCOTUS or Congress does not do anything to stop this precedent. Just imagine millions of people maneuvering to discharge their student loans - the banks will warn of Armageddon if the Fed doesn't buy their student loans before they can be discharged, and so they'll get even more dollars injected into the financial system. On top of that, everyone who gets relieved of their student debt burden will be free to lever up again and buy real estate with artificially low interest rate mortgages and various explicit housing subsidies. BUY BUY BUY BUY!

  18. Gil:

    The printing equivalent for gold and uranium is mining them.

  19. Gil:

    Why? If inflation is causing rents to rise then your expenses will rise with inflation too.

  20. hanmeng:

    I can't believe that you think you can time the market.

  21. marque2:

    Student loans are now almost all from the government. Government also guarantees the older (2006 and prior) bank originated loans but these are rapidly getting paid off - typical loan is 10 years. You can get a 20 year term through consolidation.

  22. marque2:

    Your biggest expense is the mortgage which gets reduced to peanuts. Plus inflation allows you to refy sooner and pull the equity out for a second income property.

  23. 3rdMoment:

    Are you more or less certain about this prediction than you were about your failed prediction about inflation?

  24. AnInquirer:

    In any Present Value analysis of the stock market -- in other words, the price that experts are willing to pay -- the denominator contains the interest rate. The smaller the interest rate, the larger the ratio. Therefore, since we are convinced that the numerator (cash
    flows) now has stable values, the calculated value of owning stock has climbed significantly. It is very logical for the stock market to be where it is given cash flows, dividends and interest rates.

    It is very possible that interest rates will not rise for the remainder of Obama's term because his administration policies imply no tightness in the labor market, and the FED will
    not raise rates while the labor market has so much room (especially in terms of employed work force / populaton) and inflation (as calculated by the BLS) is so benign. When interest rates rise later this decade, it will be interesting to see how the stock market behaves.)

  25. ErikTheRed:

    Not really the same - there is considerable overhead (exploration, CapEx, labor, financing, etc) involved in mining and refining ore. There is virtually no marginal overhead in printing.

  26. morgan.c.frank:


  27. morgan.c.frank:

    pretty good economy? what economy are you looking at? these numbers are being cooked. the gdp deflator has been a tiny fraction of cpi for 2 years. if you deflate gdp with cpi (which i already think understates inflation) then we have had only 1 quarter of over 1% annualized growth in the last 6. the economy is at stall speed. job creation is punk and this is now, by a wide margin, the worst jobs and economic recovery from recession since ww2.

    income is stagnant.

    savings and investment are way too low.

    revenues of the S+P 500 are actually dropping.

    this market is being driven entirely by the fed printing money and buying up assets.

    we are painted into quite a corner here, and there is no obvious way out.

    my prediction is that when ben retires next year, he hands this bomb off to the next guy/gal and 2014 gets nasty.

  28. Matthew Slyfield:

    And the values of silver and gold will likely also collapse under total economic collapse. If you think that gold and silver will maintain their present values under such circumstances, you are delusional.

    Don't count on a few days food costing less than several ounces of gold if things get that bad. For that matter, don't count on the farmer being willing to trade for gold or silver at all.

  29. Matthew Slyfield:

    "But the problem is that the "market" will need to determine a proper
    trade in gold and silver which means being an assayer would be a wise
    career choice."

    Under conditions of total economic collapse, don't count on this happening in less than several years. I would consider it highly likely that we would be down to direct trade of goods and services for goods and services for some time before even gold and silver become workable as currencies again.

    Do not forget that a very large percentage of the world wide supplies of both gold and silver are locked up in government or national reserve bank vaults.

  30. Matthew Slyfield:

    No. However, there are enough people who will think things are that bad that such supplies will be a good investment and even if things don't get that bad, those sorts of supplies will at least hold their value.

  31. BarbH:

    Good read, but use "regarless" next time, not "irregardless" which is not a word (if my memory serves).

  32. Kauf Buch:

    INVESTMENTS AT THE MOMENT? What are your thoughts on 1) Sovereign Debt in countries where Debt-to-GDP is relatively low, or 2) Corporate Bonds in foreign currency?

  33. Kauf Buch:

    "It is very possible that interest rates will not rise for the remainder of Obama's term...." SO: you're saying "Q.E. Forever!" can last that long? DOUBTFUL.

  34. Craig L:

    Agreed. The gains lost from getting out too soon, and those missed by getting back in too late, will take a large bite out of any potential gains from this strategy. It has also been pointed out that P/E ratios are not abnormal right now, unlike in previous bubbles.

  35. perlhaqr:

    I'd probably stick with gold and silver coinage myself. I look at it more as an insurance policy, though, than an investment strategy. I figure, if the dollar value of gold falls through the floor, that probably means the economy is doing well enough that I don't need it.

    I could, of course, be totally wrong about that. And I'm talking more on the scale of $20k here, not $200k or $2M or wherever you're at.