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Volker, Greenspan and Donner, Too
Old 08-27-2005, 01:03 PM   #1
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Volker, Greenspan and Donner, Too

“Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.


I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change

So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. We had a taste of that in the stagflation of the 1970s -- a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions.”

* * * * * * * * * * * * * * * * * *Paul Volker, Washington Post -- April 10, 2005

http://www.washingtonpost.com/wp-dyn...-2005Apr8.html

“The structure of our economy will doubtless change in the years ahead. In particular, our analysis of economic developments almost surely will need to deal in greater detail with balance sheet considerations than was the case in the earlier decades of the postwar period. The determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets, and the liabilities that finance them. Our forecasts and hence policy are becoming increasingly driven by asset price changes.

The steep rise in the ratio of household net worth to disposable income in the mid-1990s, after a half-century of stability, is a case in point. Although the ratio fell with the collapse of equity prices in 2000, it has rebounded noticeably over the past couple of years, reflecting the rise in the prices of equities and houses.

Whether the currently elevated level of the wealth-to-income ratio will be sustained in the longer run remains to be seen. But arguably, the growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk. They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon.

The lowered risk premiums--the apparent consequence of a long period of economic stability--coupled with greater productivity growth have propelled asset prices higher. The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions. The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions.

Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”

* * * * * * * * * * * * * * * Alan Greenspan,* Jackson Hole, Wyoming* Aug 26, 2005

http://www.federalreserve.gov/boardd...26/default.htm

These guys are talking about the same thing and the thing that I have been pounding* my head against the wall about here on this Board-- really to no avail and at the cost of being viewed as a doom ‘n gloomer--since I first began posting last Christmas.*
There are tremendous imbalances in the world economy at present which on the one hand have had the effect of firing up asset values all across the board but which on the other hand are unsustainable over the long run.* *Both Volker and Greenspan see the situation clearly enough.* What is really, really of concern is that both of them see no likelihood of policy action to forestall a coming crisis.* The crisis will be a crisis of* “confidence”.* *Volker posits “an event or combination of events” as the trigger.* Greenspan, in his much more nuanced and oblique way* references “ any onset of increased investor caution”* arising from …..what?* Probably “an event or combination of events”.

Both men, and Donner, too,* see market values today, including equities, bonds and real estate, as incorporating a greatly elevated degree of “confidence” or “animal spirits”.*

I think Greenspan’s comments in particular are pretty chilling.* You really should read his entire comments.* Weeding through the Greenspan-speak, what he says, basically, is that:* a) we really don’t know what the hell is going on; b) we have no effective simple monetary tools to deal with what we don’t know is going on; c) our most recent experience has shown that we can survive the financial collapse of markets (1987, Tech Stock Meltdown etc.) without experiencing undue adverse effects in the real economy; d) our job is not to pamper investors or the international financial community but to assure some balance between monetary stability (inflation) and unemployment in the “real economy”; e) we are mildly amused at investors willingness to swallow an amazing amount of risk without demanding risk premiums, BUT WE ARE NOT WORRIED ABOUT IT AND WE DO NOT PLAN TO DO A DAMN THING ABOUT IT; f) if we stay “flexible” enough we will be able to ride out the next surely coming crash in real estate, bond, equity, and exchange markets without too much damage to the real economy – too bad for those wacky investors who are going to get killed when “events or a combination of events” ultimately transpires; g) our job is to have enough bullets ready in the gun to deal with the aftermath of the surely coming financial and real estate market meltdown – i.e., don’t expect any halt in our “measured” pace of rate hikes any time soon; h) rest assured that we will rush to support the real economy with needed liquidity when the time comes after the next market collapse – that is our MO and it* worked real well after the last couple of collapses.

Investors should take heed.* I believe one of the reasons that risk premiums are so low right now is that many players, including the Chinese and Japanese central bankers, are convinced that the Fed will play the role of buyer of last resort when “an event or combination of events” occurs.* That is, they believe that the Fed will enter the bond markets in a big way to prevent a collapse of prices as interest rates rise unchecked because of that durned “event or combination of events” that zaps “confidence” and* “animal spirit” leading to escalating risk premiums and associated plummeting valuations in the markets.* Reading Greenspan’s remarks I think you have to conclude THAT IS NOT THE PLAN AT THE FED. The plan is to pick up the pieces after the blood is spilt.* Whose blood?* Why* that would include the Chinese, the Japanese, all those other foreign investors and, oh yes, all the ERs, ER Wannabes, Rs and R wannabes, like you and me, that’s who. And Mr. Greenspan, and his successor whoever that is going to be, won’t shed a single tear over what is going to happen to us.* And the real economy is going to go merrily along its way.* The problem of* too much liquidity in the system will evaporate in a very rapid meltdown.* One day it will be there, the next day it will be gone. Balance will be restored to the financial system – the hard way as far as investors are concerned but the easy way as far as the Fed is concerned.* Consumers will continue to consume – the Fed will see to that.* No recession.* No depression. Inflation will be “well contained” and unemployment won’t budge an inch.* GDP growth will be at a sustainable pace.* Productivity – that golden nostrum for all that ails – will continue to improve.* Corporate profits will continue to hit their “consensus” targets this quarter.* All will be well in the real economy.* All that will be missing is investors over-priced capital investments – gone to rising risk premiums.* The best part of it is the Chinese and Japanese will be stuck with the bill, along with all those unfortunate domestic investors who have their retirement portfolios parked in over-priced long-term financial assets and real estate.* I guess the Fed will just consider that as “collateral damage”, an unfortunate side effect of sticking it to the foreign investors and re-establishing balance here at home.* Oh well, there’s always safety net programs like Social Security to take care of the casualties.

Now, I know, I know.* The laptops are just heating up all over* the place as many of you are leaping to be the first to condemn this post as the ranting of a crazed gloom ‘n doomer who has finally gone over the edge into total mental derangement.* Save your breath.* I am prepared for that and I am quite immune to it.* I am posting this simply because I think there are some really good, honest, hard-working people reading these posts who may be in a quite vulnerable situation. Also, it’s raining here in DC on this Saturday morning and I can’t do any yardwork!* I know there are a lot of people here who are very put off by my lengthy posts.* I apologize for that but it’s because these are very complex issues and I am not a good communicator.* I wish I could articulate in the short, brilliant bursts which is so characteristic of this Board.* But after some practice I must conclude that I am not very good at that.* Sorry.

Don’t take my word for this admittedly downbeat view of the future.* Read Volker and Greenspan and come to your own conclusions.* Folks, the handwriting is on the wall. Volker, Greenspan, Donner and others can read it quite clearly.* I have advised my family and others to take measures to protect their hard earned savings.* I, like Volker or Greenspan, cannot tell you when the “event or combination of events” is going to take place.* It might be tomorrow, or next week, or next month, next year, or three years from now.* But it is surely on the way.* I agree wholeheartedly with Greenspan’s observation that “history has not dealt kindly with the aftermath of protracted periods of low risk premiums”.* This is Greenspan’s own quirky and inimitable way of warning you to take cover.

There are those here that will advise riding the storm out.* 4% SWR and FIRECALC and all that.* A decline of 20% to 30% in the market value of their portfolio is no biggie to them. Think long term. Asset allocation will protect and immunize you. Modern Portfolio Theory-- diversify and hold through thick and thin.* The market has never failed to reward those that have the faith to persevere through adversity. CONVENTIONAL WISDOM. That’s ok for some folks – young ERs and ER wannabe’s with a sizable portfolio cushion, a working spouse and the option of going back to **** with a* long way to go in retirement and old farts praying for one more good year can afford to ride the wave of price volatility over a considerable period and come out whole at the end or dead, as the case may be. They have the legs to carry them through. God bless ‘em.* But a 20% to 30% hit to the portfolio for someone like me at the brink of retirement with only a small cushion in the portfolio and lingering health issues precluding the likelihood or opportunity of returning to ***** constitutes a very big biggie.* It would put off my retirement, possibly for a long time. And I’m not sure I am going to be able to put off retirement for very much longer. As I have described in previous posts, I have a high and dry portfolio that is concentrated in cash and short to intermediate term Gov’t bonds that I believe will survive the coming acceleration of risk premiums in the market.* So my retirement is going to remain on track “event or combination of events” , or, no “event or combination of events”, either way.

I realize I have used very strong language, perhaps shocking to some, to describe the problem as I see it.* But I am not ranting.* I realize my apocalyptic view is hard to swallow for many people given the benign nature of the economy and the markets right now. All is calm and the sunsets are beautiful.* If you want the warm, fuzzy and optimistic take on growth and stability stretching out to the unbounded horizon check out any Lawrence Kudlow article or tune in to CNBC any afternoon. It’s there and it is well articulated based on the economic facts on the ground.* Just keep this in mind – a good many people in the “finance industry” cannot and will not tell you what they really think.* They would be fired and/or lose their client base, probably both.* Wall Street and its professional flack class is compromised.* They proved that in the 1990’s.* You will never, never get the straight stuff from them.* They are trying to make a buck and you can’t get rich in that business by urging caution.* Don’t worry, be happy! is their permanent mantra.

Personally, I feel as prepared as I can possibly be, short of selling my residence and renting for a while, to weather the storm I see coming down the road.* I feel no urgent need to convince anybody here of anything.* *As Wab put it in another thread –“you choose your valuation model and you takes your choice!”* Couldn’t say it better myself.* *I am just trying to pass along my concerns honestly to the good people on this Board who I have come to view as friends for well over a year now – lurking and posting.* *So, read, think what you will,* and act accordingly. Evaluate your own personal circumstances carefully.* We are all different.* One size does not fit all. What is good for the goose is not necessarily good for the gander.* Try to avoid the “I’m right and you’re wrong!” yadda, yadda, yadda.* *Don’t let anybody here or at Fidelity or Vanguard or elsewhere lay their market ideology, philosophy,* wishes, fears, hopes and fantasies on your particular situation.* Not even me.* Go in peace whether you agree with me or disagree violently.* *

But please don’t say you were never warned by Volker,* Greenspan, and Donner, too!

Donner






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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 01:41 PM   #2
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Re: Volker, Greenspan and Donner, Too

Donner, I know you aren't new to the board and don't recall you ever using the forum to spam and/or try to sell us something. Yet as I read your post, I kept expecting to find a link for investing in black paint futures...

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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 01:47 PM   #3
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Re: Volker, Greenspan and Donner, Too

Donner- I know what you're saying...I don't follow asset allocation...I'm in and out of anything that I think makes sense for the particular time...right now I'm in MMF, Munis and TIPS and just 2 small stock holdings...any of this "allocation" can change next week...I spend a good amount of time on this because I like to and others may not have the time or inclination for it and would rather spend it on other worthwhile activities like this board or fishing or or so setting a course with AA MPT for the long term could make more sense for them (it has in the past so the theory is that it will be more of the same in future)......the US economy(and the market) is an awesome beast, but still I think there is just too much for it to cope with right now...although it has surprised me before....

I have to say that Alan is a tough guy to "read"..I think I can read between the lines of his obtuse language some of the time...

what I want to know from you... are you really AG and does this board give you the chance to say what you can't say in official public utterings??
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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 02:08 PM   #4
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Re: Volker, Greenspan and Donner, Too

Quote:
Originally Posted by Donner
Personally, I feel as prepared as I can possibly be, short of selling my residence and renting for a while, to weather the storm I see coming down the road.
What, specifically, have you done to prepare?* *Personally, I think it's a good idea to look at worst-case downside, but I also like to SWAG a probability of that scenario and plan according to probability.

If you look at the Great Depression, that was basically a 50% drop in our GDP.* *That's an outlier event -- maybe once in 500 years.* *But if your lifespan is 100 years, that means there's a 200 year window (100 years before, and 100 years after) that you might see such an outlier.* *Bottom-line: everybody basically has a 40% probability of seeing an event the magnitude of the Great Depression at some point in their lifetime.* * And that completely ignores the current "economic undercurrents."

Anyway, the problem of course is figuring out when such an event might happen.* *Personally, I have no idea.* *So, I diversify.* *My core is bonds.* *Mostly short-term + some TIPS, both of which are relatively immune to inflation.* *I own a chunk of real estate because there will always be significant underlying value -- that's why it's called a "real asset."* * And,* I own a chunk of stocks to participate in economic growth.

So, I feel that I have a handle on my downside risk as well as a handle on upside participation.* * For the most part, I ignore the "economic undercurrents," but if something happens to make stocks very cheap, for example, I'll take action by buying more stocks.
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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 02:15 PM   #5
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Re: Volker, Greenspan and Donner, Too

Donner--Sent the following to The Magambo. He thinks I'm a libertarian . It is about religion and politics, so . . . .

A Call to Arms

I am a liberal but not the sort of liberal that often comes to mind when that word is thrown around the room. I’m a euro-Liberal in the traditional sense of someone who believes that science and reason can solve the problems of the world. I don’t believe ideologies, whether political or religious, have much real chance of solving anything more than personal problems. And they should be confined to smaller realms as much as possible: “Render unto Caesar that which is Caesar’s . . . etc.” I dislike neo-cons. I like moderate, practical Republicans, I don’t like Democrats that throw money at walls and hope some of it sticks. But I love Democrats when compared to Bushies, especially the W type. It’s a tough and crazy world. When I watch the political parties function I end up thinking it’s a fight to see who is the least despised.

My first principle as a liberal is “Do the most good possible while doing the least harm.” This often includes social science ideas and psychological stuff—when reasonable. My goal is not the compromise or middle course between two extremes. I can’t see splitting the difference between two goofy ideas. Half of one goofy idea and half of another goofy idea fused together does not create a good solution. Same with my financial plan: A middle course is mildly goofy to me. I see either hyperinflation or a serious recession as real possibilities. John Mauldin best expresses my own middle ground, a muddle through economy—but very very dangerous on either end. I protect myself on either end of these possibilities by buying TIPs and PM shares on one side and dividend stocks and bonds on the other side. In between I try to make as much money as possible, right now. Risk adjusted, of course.

There are real solutions to the problems out there. But all I see right now is a bunch of Democrats getting ready to throw money at walls in hopes of it sticking and Republicans throwing money at any target that moves—mostly lobbyists and other agile special interests. I don’t see any possibility of a workable compromise between these two sides. The whole suffers. Every last citizen suffers. I’m waiting for a leader from a third party or at least someone inside the beltway that just says the craziness has to stop--now. A little exposure to a little truth would be a good thing.

Spin: Nowadays everything is spun—e-v-e-r-y-thing. Spin is a connected set of lies. Yet even the spin is spun so that the truth disappears completely. We end up dealing with “facts” that don’t even come close to the real issues. We take up sides over whose lie might be better. Even the Bible is spun by some groups. This is our real enemy: Our own ignorance of truth. Local newspapers spin the facts (although oftentimes it is due to lazy writing or lack of money to investigate long enough to find truth. Lots of excuses for spin.) Fox Network spins the fair tax into something that actually appears fair—to some. Given the burdens of the alternative actual tax system as a comparison, it does appear fair. It’s not, but ‘they’ certainly chose the ‘correct’ name in order to keep the game going (“OK, now let’s spin up a good name for this horrible tax.”). The Democrats spin the ‘benefits to the poor.’ The benefits shouldn’t have anything to do with money. It should have to do with making more functional and able human beings. Make the poor real participants in the country—not more dependent and helpless with handouts. A little feeling of usefulness make people want to be even more useful. Some training would be required to start the process up.

Opportunity in the abstract is meaningless; money is an abstraction. People like their jobs if they feel they are doing something worthwhile, of significance, making a positive difference in other’s lives. Somehow our society has destroyed the true value of work--the joy of adding value to life--and turned it into a money acquisition spree. The media hasn’t helped. No wonder some Islamists don’t want our system in their countries. They see what it has done to us.

People need to feel that there is some stability out there, that when they get up in the morning most everything important is still there. Cheney scared the hell out of people in the last election cycle: “WMD, nuclear strike, anthrax, no gas/oil, etc., etc.” Frightened people can’t think straight. They get sucked into the machine. Cheney made people weaker and dumber with his spin, his lies. Then asked for votes. Bush did the same thing with greed. “That SS money is yours. You need it in your own account to protect it.” “Lower taxes” etc. etc.” Fear, Greed, Fear, Greed, now vote while your brain is scrambled. What a mess.

The very cure offered by Bush has turned into our present problems: Stability in the middle east? Not likely soon. Financial security for our future? Deficits and debt and possibly runaway inflation or a recession, pensions gone awry, etc., tic-toc-tic-toc. A better place for our children? See above. Job and wage stability? Ask the Chinese.

I’m a liberal and an optimist about future possibilities. First preliminary principle: Stop the lies and spin. The second one: Shun both Democrats and Republicans if possible. Third: Puke on the neo-cons who have hijacked a grand old party and use Christians as a cudgel in their frenzied march to hell. I’m mad.

Adam and Eve fell from grace and from the Garden of Eden. It all started with one lie. Then the corruption started. Today it is the lies and lies about the lies that extend and perpetuate corruption that is rapidly moving from the places of power (George W’s and Rove’s minds) toward the corruption of the entire body (us?). Truth exposes lies; it’s the first step on the road to recovery. Shame on the media; double shame on the Democrats for not mustering to the truth; infinite shame on George Bush and those who support him. IMO

Stop the lies.
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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 03:05 PM   #6
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Re: Volker, Greenspan and Donner, Too

Donner, it's great to hear from you again. The only thing I strongly disagree with you about is your statement to the effect that you don't write well. You are the best writer I've read on this board, and much more importantly, I think what you write is dead-on. What some call "doom and gloom" or "noise", others call "the handwriting on the wall". I'm in that camp, with you, Volker, Greenspan, and the folks at www.safewealthadvisory.com . Their newsletters are free, and anyone who OD's on the 'don't worry be happy' pablum should email them and ask to be put on their mailing list.

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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 03:13 PM   #7
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Re: Volker, Greenspan and Donner, Too

I would have to agree that risk premiums have shrunk to surprisingly low levels. *The credit spread on risky bonds is peanuts compared to the last 20 years, earnings yield of the S&P is very low, real rates on treasuries are nothing to get excited about, and the housing market looks overvalued. *However, it is entirely possible that there will be no crash and the economy will just keep chugging along. *I see perhaps three possible outcomes:

1) A crash, just as Donner is afraid of. *This would be a crash in financial markets and/or the housing market, and it could be triggered by even a loss of confidence (1987, 1998, etc.). *This might or might not affect the "real economy".

2) A long, slow slide or at least a sideways drift for an extended period. *In the absence of a crash, risk premia, earnings yield, real rates and housing values could just adjust back to historical levels over a longer period of time. *There wouldn't be a short, sharp shock in this scenario, but over 5 or 10 or 20 years returns on all assets might be below historical average.

3) Might be no problem. *Maybe this really is "the best of all possible worlds" and asset prices merely reflect this.

Note that each scenario creates winners and losers. *#1 benefits those who have gone to cash and would be painful for asset allocators with big risky asset exposures. *#2 is most painful for those in the accumulation phase. *Low returns means not much boost to your cash savings. *#3 would hurt those who have fled to cash. *You'd be missing out.

I don't know what's going to happen, but I think some markets are definately at risk. *It seems unlikely that the housing market won't get hurt. *Credit spreads on even the junkiest of issuers are absurdly low and it isn't clear to me why we couldn't go back to a 2002 to 2003 level of credit spreads. *Earnings yields are low, but are likely justified if you think that the high earnings growth of the past 2 to 3 years will continue. *I am getting increasingly concerned about the possibility of an inverted treasury curve (10 year minus 2 year spread is under 20BP now).

What to do about all this? *First, make sure you are diversified. *Second, if you are worried about a crash, consider hedging. *I personally will almost certainly be either putting on short positions in companies that would get badly hurt in a crash, or I might buy some puts on the nasdaq or a junk bond ETF or CEF. *Third, I am taking a hard look at valuations in my portfolio and trimming or entirely exiting anything that appears to be priced for perfection. *The proceeds will either be put into something I think looks a lot cheaper or sit in cash until I find a cheap asset to buy.

I think that if you just move to cash, gold, etc., you are probably too exposed to the possibility of getting killed over time if the crash doesn't come.
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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 03:48 PM   #8
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Re: Volker, Greenspan and Donner, Too

Quote:
Originally Posted by Apocalypse . . .um . . .SOON
* My goal is not the compromise or middle course between two extremes.* I can’t see splitting the difference between two goofy ideas.* Half of one goofy idea and half of another goofy idea fused together does not create a good solution.*
.

This is the essence of Modern Portrfolio Theory.* Diversify a bunch of goofy ideas and the net result will get you through.

Quote:
Spin:* Nowadays everything is spun—e-v-e-r-y-thing.* Spin is a connected set of lies. Yet even the spin is spun so that the truth disappears completely.* We end up dealing with “facts” that don’t even come close to the real issues.
*

You are bang on on this one.* Through a glass darkly.* Seems pretty obvious that we take much at face value when we know we should'nt.* Makes you wonder why so many investors are willing to hand over their hard earned savings in return for little or no risk premium.* I guess a shoeshine and a smile are still persuasive to most.

Quote:
People need to feel that there is some stability out there, that when they get up in the morning most everything important is still there.*
*

If you can't trust the NY Times who can you trust?* Dan Rather?

Quote:
I’m a liberal and an optimist about future possibilities.* First preliminary principle:* Stop the lies and spin.* The second one:* Shun both Democrats and Republicans if possible.* Third:* Puke on the neo-cons who have hijacked a grand old party and use Christians as a cudgel in their frenzied march to hell.* I’m mad.
We had a guy who adopted this approach.* His name was Pat Buchanan.* He got 440,000 votes nationwide in the 1996 election.* It will be a long, long, long time before anybody tries that again.
Not a bad operating theory though.* I would support this.

Quote:
Stop the lies.
Let's hope so.* But I think you are more of an optimist than you think you are.

Greg-- you are in a hard place to be.* It must be very lonely there.* But keep plugging because the world surely needs people who think the way you do.* Maybe you need to change your moniker to Man of LaMancha!

Donner
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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 04:58 PM   #9
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Re: Volker, Greenspan and Donner, Too

Quote:
Originally Posted by brewer12345
I think that if you just move to cash, gold, etc., you are probably too exposed to the possibility of getting killed over time if the crash doesn't come.
Agreed. My portfolio is in the crash position, but I hedge against the possibility of not crashing by remaining in some equities. All this really means is that I reduced the % that equities carry in my portfolio, increased my % in money market accounts (increasing short term rates is a + for CDs and such), and have added a precious metals component to the tune of about 15% of my portfolio assets. I like the idea of buying some puts, but don't have the resources to do so at the moment Sucks to 25 and still paying off student loans with a fiancé still in school.... oh well.... on the + side of that, I still have many more years ahead of me. Can't complain too much
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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 09:26 PM   #10
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Re: Volker, Greenspan and Donner, Too

Donnor
Stronger than what I was thinking in the thread I started but basically agree.

When you say inequities in the world economy, I see most of those in America. The US is the country most reliant on oil, it is hugely in debt (personal and public) with no savings, employment, healthcare, and pensions have all gone wacky, we are in the middle of a (very expensive) war, plus the US demographics are begining to change. America is much more risky than it was. But these things have not shown up in the stock market.* *

I agree with, I think, everyone else. I think there has been a reduction in risk premiums with an increase in risk. However, this doesn’t make sense. I think there has been a shift in the perception of risk along with the perception of debt.

I think that people who can see this change in risk (intelligent people like those who inhabit this board) can feel something coming. It seems there are three routes the first is as Wab said trust asset allocation. The second is as Donner is doing running to security and accepting lower returns. The third is Brewer’s approach actively surf the storm. Anything else?

I don’t like the idea of being out of the market completely so Donner’s approach is not appealing (also I am still working so can afford to lose money). I like Brewer’s approach but it is too advanced for me. So I guess I will be going with asset allocation. But I will play around with the allocations.

I think a lot of ordinary people ((talking about americans in general not the people on this board) are trying to follow brewer’s way. They are moving into more risky assets without completely understanding them like Greenspan said. I think the people who have the time, the ability and the inclination to do the same as Brewer are rare. These other people and a few fund managers will get clobbered if the risk assumptions move against them.

I don’t know but it seems there has been a shift on the board recently. There is much more talk about individual stock, index funds that are not very diversified, and things I don’t understand like MLPs all of which which carry more risk than well diversified index funds. Before it seemed almost all index funds. Does this mean we as a group are becoming less risk adverse?

There is also a lot more talk about god which I don’t understand either.

(An interesting idea is that the markets are reacting to this lower return on increased risk in traditionally safe investments and money is rationally diversifying into what should be considered higher risk investments like EM bonds. This in turn is lowering their returns on risk. )

Just thinking out loud here
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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 09:34 PM   #11
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Re: Volker, Greenspan and Donner, Too

mikew, don't mind my babblings. Sometimes I think I am in danger of being just sharp enough to cut myself.
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Re: Volker, Greenspan and Donner, Too
Old 08-27-2005, 09:55 PM   #12
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Re: Volker, Greenspan and Donner, Too

Brewer
I find a lot of value in what you write. I mean the things that people on the board seem interested in recently have more risk (which is not inherently bad). People in general just seem less risk advse. Which can come back to burn you, if you don't know how to play with fire. (Of course this does not apply to anyone on this board.)

Mike
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Re: Volker, Greenspan and Donner, Too
Old 08-28-2005, 07:59 AM   #13
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Re: Volker, Greenspan and Donner, Too

I guess risk is in the eye of the beholder. Is a portfolio that is 65% S&P500 and 35% Lehman Agg riskier than a portfolio with 20% each S&P500, EAFE, Lehman AGG, GIM, and VGSIX? I think the latter probably will offer better risk adjusted returns. Now if you are talking about the options and futures discussions, those instruments can be used to take on or lay off risk.

I see more risk-taking in the real estate market than anywhere else. No money down on a $750k house in a bubble area with an Option ARM that you can only afford to make the negative amortization payment on looks a lot riskier to me than anything else I have seen discussed here.
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Re: Volker, Greenspan and Donner, Too
Old 08-28-2005, 12:04 PM   #14
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Re: Volker, Greenspan and Donner, Too

Nice post Donner,* like you I think US markets appear unstable.* I don't feel well compensated for the risks of holding stocks or real estate right now.* I also agree with Brewer that staying in cash long term has no future...But, for the present I've become quite defensive (DMT* ).* Even Brewer more or less acknowledges "Three things can happen, and two of them are bad".* I understand that predicting the future is impossible, but managing risk is not.* I'm not horrified by the thought of being cash heavy right now (while waiting for better values), because an ER limiting outcome is simply unacceptable.*Bernstein talks about avoiding risk that you don't need to take. This makes sense to me.

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Re: Volker, Greenspan and Donner, Too
Old 08-28-2005, 12:58 PM   #15
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Re: Volker, Greenspan and Donner, Too

Quote:
Originally Posted by R*K
Even Brewer more or less acknowledges "Three things can happen, and two of them are bad".
Before anyone gets too anxious, the same can be said for the forward pass in football.

Not too many teams get to a winning season by only running the ball (bonds?) or just handing the ball back to the other team and hoping they do something stupid (cash?).
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Re: Volker, Greenspan and Donner, Too
Old 08-28-2005, 12:58 PM   #16
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Re: Volker, Greenspan and Donner, Too

Quote:
Originally Posted by R*K
Nice post Donner,* like you I think US markets appear unstable.* I don't feel well compensated for the risks of holding stocks or real estate right now.* I also agree with Brewer that staying in cash long term has no future...But, for the present I've become quite defensive (DMT* ).* Even Brewer more or less acknowledges "Three things can happen, and two of them are bad".* I understand that predicting the future is impossible, but managing risk is not.* I'm not horrified by the thought of being cash heavy right now (while waiting for better values), because an ER limiting outcome is simply unacceptable.*Bernstein talks about avoiding risk that you don't need to take. This makes sense to me.

You will note that I did not attach any probablilities to those scenarios. One's view on the likelihood of these different possible outcomes makes all the difference.

Having said that, if you are already X standard deviations above what you need, I agree that it makes no sense to take extra risk.
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Re: Volker, Greenspan and Donner, Too
Old 08-28-2005, 08:27 PM   #17
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Re: Volker, Greenspan and Donner, Too

Quote:
Originally Posted by brewer12345
I guess risk is in the eye of the beholder.*
I am still trying to get a handle on risk. It has too many aspects. I think that a part of risk is also personal. In my situation, I am living overseas and have only been back to the US 3 months over the past 12 years. For me compared to average Americans, currency risk is not as much of a problem, also I don’t mind being more overweight in foreign stocks and bonds because I have traveled to several of the countries and know several of the companies. OTOH investing in the US especially individual US securities carries more risk than the average American because I don’t have a feel for America. Things that are household names, I have never heard of.

I also agree with (). Basically, those three things Brewer said were the market could go down, go sideways or go up. One of those could happen anytime. I feel like things are coming to a head but that could be in a month, a year, or 15 years, or we could slip the noose yet again. I think an extreme plan that can only take advantage of one possible outcome is more dangerous than being able to profit from several possible outcomes. Unless you happen to be right. (I am also a little DMT)*

Mike
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Re: Volker, Greenspan and Donner, Too
Old 08-28-2005, 10:35 PM   #18
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Re: Volker, Greenspan and Donner, Too

Quote:
Originally Posted by brewer12345
You will note that I did not attach any probablilities to those scenarios.* One's view on the likelihood of these different possible outcomes makes all the difference.

Having said that, if you are already X standard deviations above what you need, I agree that it makes no sense to take extra risk.
I agree with you on the first part of your statement but kind of wonder about the second.*

With respect to the three possible outcomes:*

Outcome 1 --* I thnk this is what Volker anticipates.* He is from the old school.* He sees the Night Train barreling down the track and we are stuck on the crossing.* The Fed will be around to pick up the pieces but its going to be a mess.* I used to be an Outcome 2 man myself but I am leaning increasingly to the big bang theory.* More* and more think the trigger will be some geo-political event leading to a massive loss of "confidence" or "animal spirit" all across the globe all at the same time courtesy of CNN.* It won't originate on Wall Street but the Street will take the hit in loss of confidence.* *People will be shocked because "the economy is so strong!"* It will be a bolt out of the blue and it won't make sense to a lot of people, especially the professionals.* 1987 may look like a Sunday school picnic.

Outcome 2* --* I think this is what Greenspan is praying for.* Kick the can down the road, stay "flexible" and we can grow our way out of the imbalances through productivity , education and uninterupted international free trade over a long period of time.* He is a bobber and a weaver, a master counter puncher who outlasts the opponent.* My own personal view is that the Fed and other Central Bankers will increasingly focus on bobbing, weaving and managing the real economy and let the financial markets sink or swim on their own.* *But please read Greenspan's Jackson Hole swan song.* I think the Central Bankers are losing ability to control events.* The "measured pace" policy of interest rate hikes and transparency on future policy have had zero effect on the markets.* Hasn't changed a thing for a year now.* They are increasingly jawboners who nobody is listening to.And increasingly they are backing themselves into a policy corner.* I think your will begin seeing a lot more articles along the lines of "* Is the Fed still Relevant to Anything?"* I used to think Greenspan and his successor could pull
it off over the long haul.* They might still be able to right the economy with infusions of liquidity after a setback but I have no confidence in their ability, or their inclination,* to forestall a collapse in asset values.

Outcome 3-- The markets continue to power up?* Well they haven't been powering anywhere for quite some time now.* I don't see where the juice is to power this market 20% or 30% higher from this point.* Earnings comparisons are going to get increasingly difficult from here on out.* Disappoinments are not going to be received well.* There is some small risk of missing out on a really significant move higher but I think that risk is quite small.
Investors may be "exuberant" but they are not crazy.*

I agree that the proper response to all this depends on your own personal situation.* That's the hell of it.* One size does not fit all.* If I had large taxable positions (I don't) I would certainly be hedging them at this point. I would at least be selling covered calls for a little extra income and I might even be buying puts.* But that's not a problem I have to deal with.* I am no expert in option transactions. I personally am using preservation of capital as the guiding principle until valuations make a little more sense to me.* Cash and short to intermediate term bonds as well as some I bonds. I am settling for covering "official" inflation with the guarantee that the Govt will pay me back dollar for dollar.


I disagree with the notion that if you are X number of standard deviations above what you need, you shold take no risks. I think that's when you can afford to take some risks and I wish I was in that situation. I am where I need to be with little or no cushion. I feel I have to play it tight to the vest with the cards I am holding. So I am proceeding ultra cautiously in the present market environment. I would not recommend my approach to everyone. But I think there a lot of people in the same boat with me who need to go real slow in here.


Donner



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Re: Volker, Greenspan and Donner, Too
Old 08-28-2005, 11:00 PM   #19
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Re: Volker, Greenspan and Donner, Too

Its not that complicated. We're lumping 'risks' until they get very, very scary.

There is volatility risk. Frankly, if moderate volatility risk scares you, you're in the wrong business. Long term investors that are looking to unclemicks norgwegian widow perspective, which I highly recommend, dont care much about a reasonable level of volatility risk. Those with pensions or working spouses can all but laugh in the face of volatility risk.

There is bankruptcy/default risk. Anyone investing in broad based funds buys insurance against this sort of risk by...ummm...default. Even 'racy' funds like vanguards high yield corporate dont have enough credit/default risk to be very frightening.

There is speculative risk. In certain areas, such as burgeoning real estate markets at the coasts...this is a real risk that should be considered carefully.

There is market risk. I think the big problem here is that a lot of people with good calculators and measuring sticks are noting a lot of short to intermediate term market risk. Well taken. However, short to intermediate term market movement has little to do with calculators and measuring sticks...its psychological. In 10-20+ year periods, the calculators and measuring sticks make good sense. In periods less than that, you have to measure the feelings, emotions and reactions of the greater investing public. Unfortunately, most people with good calculators and measuring sticks suck at that. On the flip side, people with good handles on feelsing and emotions stink at measuring business value and momentum.

It all comes back to one place. Make enough forward passes to keep the defense honest. Run the ball efficiently when it makes sense. Provide a good enough defense to make up for any points lost by the offense being overly aggressive.

Note that in modern history, only two teams have won superbowls by running the ball effectively and utilizing overwhelming defense without a spectacular and productive offense...the '86 bears and the '00 ravens. They didnt repeat or become 'dynasties'.

The teams that had the systems and the guts to throw the ball...with its 2/3 results being bad...and did so well enough became dynasties...the packers...cowboys...49ers...patriots (as a boston born, I cant say how much that makes me happy). You HAVE to have a well balanced offense, along with a strong defense.

You KNOW what happens to the guys that play it too close to the vest hoping they'll squeak by.

Any Jets or Chargers fan from last year can stand up and testify.

The bottom line is that many people live their lives in fear of one thing or another, and some manage to safely arrive at their gravesite. Some are reckless and fly off the road into a tree in their 20's.

Try to master and moderate the fear, and fall somewhere in the middle.
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Re: Volker, Greenspan and Donner, Too
Old 08-29-2005, 02:12 PM   #20
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Re: Volker, Greenspan and Donner, Too

Lots of good points here. I'm all for balance, but in this unbalanced environment I prefer to to scale back in slowly just in case better values do become available. I'm cursed with the conviction that my opinions have some value... a small delusion I allow my self

I also agree that ones personal situation may factor into it. Investments that need not be touched for 20+ years might be considered almost "risk proof", but funds that absolutely must be available in 5-10 years are in a different category IMO. I'm willing to risk some upside for the sake of security. I believe the first ten years of ER are the most market-sensitive. Is this unreasonable?

R*K

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