Another Bear Market Looming?

[wabmester]

In 1996- 2000 I was dumping lots of money into savings but hadn't studied allocation practices and the like.

I wonder how many people here did follow some "smart" asset allocation model 10 years ago.    Maybe it's just the places I hang out, but it almost seems like "asset allocation, index funds, and dividends" is simply the new mantra that replaced "cash is trash, and the trend is your friend."

So, what else has changed in the last few years?

The global markets are much more interconnected than they have been in the past (just look at the influx of foreign capital into the US), and we're no longer in a falling interest rate environment (the last one lasted 20 years).

Anybody besides me who thinks these last two differences have made "smart" asset allocation much less smart?    I think we'll see much higher correlations among asset classes in the coming years.

 

[TromboneAl]

What'll the new mantra be?

 

[wabmester]

What'll the new mantra be?

If the bears are right, it'll be "Brother, can you spare a dime million bucks?"  (updated for inflation)

Actually, I think we're about due for another "collectibles!" investing paradigm.   I'm putting my money into antique computers.

 

[haha]

I wonder how many people here did follow some "smart" asset allocation model 10 years ago. Maybe it's just the places I hang out, but it almost seems like "asset allocation, index funds, and dividends" is simply the new mantra that replaced "cash is trash, and the trend is your friend."

So, what else has changed in the last few years?

The global markets are much more interconnected than they have been in the past (just look at the influx of foreign capital into the US), and we're no longer in a falling interest rate environment (the last one lasted 20 years).

Anybody besides me who thinks these last two differences have made "smart" asset allocation much less smart? I think we'll see much higher correlations among asset classes in the coming years.

Careful Mr Wab, I will report you for promulgating non-PC thoughts.

Ha

 

[modlair]

Is all this a bit extreme? The market is down what . . . a couple of percent YTD? The previous three years it had been up 23+%, 10% and 5% -- which is not much of a bubble.

 

[justin]

Careful Mr Wab, I will report you for promulgating non-PC thoughts.

Actually, I think we're about due for another "collectibles!" investing paradigm. I'm putting my money into antique computers.

I'd say wab's thoughts are rather PC.

 

[unclemick]

How about the 70's and 80's - had a different label then.

Physical gold/pm stock, foriegn stock, foreign bonds, U.S. stock, U.S. bonds, land/R.E., - probably missing a few.

Collectibles had their day - the classics: guns, gems, stamps and the more exotic ala scotch, wine, art, cars, et al.

The name Harry Browne stcks in my mind.

I don't remember hearing MPT, asset correlation - but I sure remember some weird diversification schemes.

Used my freeze dryed food for backpacking - have a few gold, platinum, silver coins left in the old safe deposit box. And 10% interest in a non working CO patented mine. Also owned a lot of er ah - pssst Wellesley back then - which helped.

heh heh heh heh heh heh - I hear Chinese Panda's(the coins) are hot now among certain folks.

heh heh heh heh

 

[wabmester]

Is all this a bit extreme?  The market is down what . . . a couple of percent YTD?  The previous three years it had been up 23+%, 10% and 5% -- which is not much of a bubble.

The bear case isn't that the recent bull created a bubble, it's a combination of:

1) The last market bubble (2000 peak) was reinflated by the fed (and the prez via deficit spending), so it never had a chance to fully deflate.

2) In the meantime, the fed has created the largest asset bubble ever in the housing market (and foreign central banks did the same thing world-wide), which will *painfully* deflate

3) And we've created a GIANT debt burden due to the deficit spending

4) And we've got the largest trade deficit ever

5) And we've got a demographic bulge that's about to pass through the social security and medicare pipeline

6) And maybe we've got an oil crisis as well

So, the stock market isn't correcting for a price bubble as much as it'll be correcting for reduced future earnings (if the bears are right).

The bull case is basically:

1) Stocks always go up in the long term (which is only true if GDP grows long-term as well)

2) The economy is currently strong

3) Corporations have been hoarding cash, so there's a potentially large economic stimulus that hasn't been used yet

4) The fed might start lowering rates again

5) USA! USA! USA!

 

[cute fuzzy bunny]

Everythings going on sale! Run away!!!!

Everythings getting marked up! BUY! BUY!

 

[Scrooge]

Collectibles had their day - the classics: guns, gems, stamps and the more exotic ala scotch, wine, art, cars, et al.

Would't Persian rugs belong somewhere on that list? I think they were touted as inflation shelters back in the 70s (?)  8)

 

[haha]

The bear case isn't that the recent bull created a bubble, it's a combination of: (1-5)

I would also add #6- the Middle East is falling apart.

Israel took the deepest hit they have ever had into their territory. The Iranians may be building a bomb. Our president is probably well out of his depth, and who knows what Cheney and the Other Donald are about.

Our military command is quite concerned about what we are getting into. Almost no country in the world believes what our government says.

Meanwhile, back in the USA, we party on.

My best guess is that we have fallen under a mass delusion. Look out below if people should wake up.

Ha

 

[cute fuzzy bunny]

I would also add #6- the Middle East is falling apart.

Yep, thats new.

Soviets had and have lots of bombs. Reagan supposedly didnt know what he was doing and wasnt Cheney running defense then?.

My best guess is that its always something, and somehow we always figure out how to squeeze by.

 

[Cut-Throat]

My best guess is that we have fallen under a mass delusion. Look out below if people should wake up.

Ha

Mikey,

The mass delusion has existed for at least as long as you and I have been alive. You might like to believe that you or someone else can predict the future, but you can't - That is the delusion.

If I have learned anything the past 55 years, that is it.

 

[IBWino]

I would also add #6- the Middle East is falling apart.

Ha

Re #6, there has always been some sort of turmoil; War of 1812, Civil War, Spanish-American War, WW I, WW II, Korean War, Cold War, Vietnam War, Iran Hostage Crisis, etc.

Periods of world calm are actually unusual.

 

[Scrooge]

My best guess is that its always something, and somehow we always figure out how to squeeze by.

During one of Greenspan's final appearances on the Hill, a Representative asked him why he was so optimistic about the state of the economy even though factors X, Y and Z clearly suggested that things were bad and getting worse. Greenspan responded that on an average day he had to worry about a list of roughly 20 intractable problems that seemed to have no solution. Since there were only about a dozen such problems on his list in late 2005, he figured we were doing reasonably well 

 

[haha]

I guess that is what makes markets. Everybody has his own opinion. I agree, it could be that we are in the usual SN-AFU! I am guessing that all the factors today add up to more risk than I like, but like anyone I have only opinions, not certainty.

Ha

 

[Cut-Throat]

I guess that is what makes markets. Everybody has his own opinion. I agree, it could be that we are in the usual SN-AFU! I am guessing that all the factors today add up to more risk than I like, but like anyone I have only opinions, not certainty.

Ha

The great 'hope' of the H*cuses of the investment community is that stocks will dive to a P/E ratio of 4 and then they bail out of their CDs and buy stocks real cheap!

And I'd also like to buy southern California Ocean Front property for what it sold for in 1935, but I'm not pinning my retirement on it!

 

[bpp]

Would be interesting if we were in 2000 if everyone here would be touting being diversified.

Not trying to start anything but being diversified was not the mindset in 1999.

Now we are being diversified experts.

I started investing in 2000, and the first thing I read was a Peter Lynch book that Fidelity had put on the web. (Seems to be gone now.) He didn't push passive funds of course, but he did stress diversification, so that was one of the first lessons I learned even in 2000. I think if you go through the Vanguard Diehards archives over on Morningstar, you will find that they were talking about it back then, too.

 

[renferme]

I've been saying on this forum, at least several times, that the bear market started in year 2K. A year and a half or so of UP, but OVERALL near 6.5 years of DOWN.
After so many, many years of BULL we are now having to pay the price with a very, very long BEAR. At least, that's my opinion. But, that's why I continue to have slightly less than 30% in equities. Just bought a 13 month CD, 5.7%, from Countrywide - 5.7% looks pretty good to me. Another CD comes due in October and I'll buy another CD with that money.

 

[Mwsinron]

Funny over the years the market always goes up over time. Somehow someway it always works out. My new mantra is I believe in the market ....

 

[Scrooge]

Funny over the years the market always goes up over time. Somehow someway it always works out. My new mantra is I believe in the market ....

There are two caveats here.

First, in this case "always" covers less than a couple hundred years since it's hard to do meaningful comparisons with pre-mid 19th century markets. That's not a whole lot of cycles from a purely statistical point of view.

Second, even if we assume that the market will indeed always go up over a sufficiently long period of time, will that period of time be too long in your particular case? After all, a bear market can last many many years. To go back less than 40 years, it lasted from roughly 1966 until 1982. What will it do to your finances if another one starts tomorrow and lasts until 2022?

In the end, it mostly depends on your risk tolerance and personal circumstances. I am and have always been in cash and cash equivalents, but that's because I wouldn't sleep well if I owned anything riskier. Different squids to different kids

On the plus side, although nobody knows where the market will be a year or 10 years from now, one indicator to keep an eye on is labor productivity. As long as it's growing as rapidly as it has been lately, the economy and, indirectly, the market should be OK over a sufficiently long period of time.

I have seen some of this growth first hand. At one point in the 1990s one of my clients was getting new generations of instruments (each one 30-50%+ more productive than the previous generation) so frequently that they couldn't write custom software to take advantage of them fast enough. They had the latest generation sitting in the storage area while they were writing software to take advantage of the previous generation!

 

[modlair]

If the magnitude of the net total number of negative influences is so overwhelming that the economic world is about to end, then why would anyone think bonds or CDs will survive the devastation? The gov't being bankrupt means FDIC doesn't pay up. It also means treasury securities are not paid for. It means money has no value. It means the world ended.

If the magnitude of the net total of negative influences is not overwhelming then this would appear to be another manifestation of there being nothing new under the sun and all will be well when it is time for all to be well.

If folks are trying to time when things are not well on the presumption that they will also accurately time when things will be well again, one would think their odds are not good.

 

[brewer12345]

I started investing in 2000, and the first thing I read was a Peter Lynch book that Fidelity had put on the web.  (Seems to be gone now.)  He didn't push passive funds of course, but he did stress diversification, so that was one of the first lessons I learned even in 2000.  I think if you go through the Vanguard Diehards archives over on Morningstar, you will find that they were talking about it back then, too.

Funny! I started investing in 1999. Even though I was very wet behind the ears, I knew enough to be deeply suspicious of all the stuff that was shooting up based on businesses that seemed not to ever be able to actually produce cash. I started buying stuff like Coors, retail banks, etc. that nobody seemed to want to invest in. I still remember when all the .com stuff was shooting up seemingly without limit while boring business stock prices dropped almost every day. I watched BUD pretty much grind everything to a halt in order to get ready for a mammoth stock buyback because it was so cheap. I'm pretty sure the market regained its senses (sort of) before they got the chance.

 

[Cransten]

3 years to go wrote: "Energy and gold are defensive?  If the economy tanks commodities will be off by 50% easy - its called demand destruction and $70 oil will turn in to $30 oil before you have a chance to say Ooops! "

I didn't say energy and gold were defensive (but my portfolio is doing so well lately that maybe they are after all).

I agree with you that we could see downward pressure across the board, including commodities.

 

[brewer12345]

I agree with you that we could see downward pressure across the board, including commodities.

Very likely, but commodities will go down after their spike has tanked the economy...