The sky is McCulleying, the . . . .

[greg]

My head is about ready to pop today (and I feel surrounded too):

http://www.pimco.com/LeftNav/Late+Breaking+Commentary/FF/2005/FF+September+2005.htm

Here's the secret to when/if the market crashes--to my mind.

--Greg

 

[haha]

I really don't see what you are talking about here, Greg. What is he saying that is different from what has been said before?

Ha

 

[greg]

I really don't see what you are talking about here, Greg. What is he saying that is different from what has been said before?

Ha

Ha:

I'm still trying to piece it together myself. I've got to read and reread until it makes sense. Much of it seems similar to what he's said before, but some isn't. This one takes a few days for me. I don't think he's giving a date or anything like that. I have to look for his 'identifiers' to watch for, whatever that means. I don't know. I've always believed the bond guys are much smarter than the stock guys. They primarily play defense. Pimco (Gross and McCulley) always tells you why they do things. I'm trying to see what they see, without their access to data. McCulley is pointing at something for us to look at--I think. Thanks.

--Greg

 

[Donner]

McCulley is saying that the Fed is losing control of events.

The Fed's philosophy is becoming clearer all the time: events in the U.S. economy are increasingly being driven by forces of globalization that nobody controls, including the Fed. These forces have neutered the Fed's ability to push the financial marketets around. So they are increasingly becoming re-active players and not pro-active players. They KNOW that values in the equity markets, bond markets and many real estate markets make no sense anymore. They believe that they can deal with the aftermath of bursting bubbles as they did after the Tech bubble burst-- they still retain the power to bring added liquidity to sustain the economy when "prices re-balance" or "come to their senses" in the financial markets. Their plan and strategy is not to forestall bursting bubbles but to pick up the pieces after the big bang.

What McCulley is saying is that Mr. Market knows that Greenspan is going to cut interest rates after the bubble bursts. Mr. Market is going to make money on the "pick up the pieces" strategy of the Fed.
Interest rates fall courtresy of the Fed picking up the pieces and bond values rise. It's exactly what happened after the Tech Stocks burst. Making money in the bond market has been like shooting fish in a barrel for the last 3 years -- like printing money-- the carry trade -- borow short and lend long. and Mr. Market expects that to happen again. Maybe real soon.

So what we have here is a game of chicken between Greenspan and the market. Greenspan does not want to go into history as the guy who caused two huge bubbles that crushed thousands of people. He wants to see the bubbles bursts . But he would like to see them burst in slow motion. A gradual letting out of the air in the stock, bond and real estate markets. A nice slow rising of risk premiums over say two or three or more years that kinda mellows things out. McCulley says that Mr. Market is on to him and will not let him off the hook. Mr. Greenspan won't be allowed to play the "pick up the pieces" role of the cavalry riding to the rescue. He will have to precipitate the crisis himself . The yield curve will invert -- and McCulley maintains that Mr. Market will perversely leap for joy and drive the inversion deeper as it aniticipates Greenspan's cutting of short term rates and the carry trade --printing money-- gets even more lucrative. They are backing the Fed into a policy corner.

But make no mistake -- asset prices are coming down. I don't think Greenspan is going to get his "cooling off" period. I think he is dreaming about this. He can't come right out and say: "Oh, My God, there is going to be the biggest ugliest pop in the markets that you ever saw in your life!"but he is positioning the Fed to deal with just that. I think he keeps raising rates until the bough breaks. And then comes riding to the rescue with renewed "accomodation". And the big boys get to print some more money. But he won't come out of this one with clean hands.

But I think McCulley is wrong about one critical factor. I don't think there is going to be any leaping
for joy and a perverse deepening of the coming yield inversion by crazed bond market players with visions of sugar plums and carry trade profits dancing in their heads. I think Greenspan is going to get his rising risk premiums in a big bang way which will be related to some geo-political event that is going to explode risk premiums -- Greenspan might call it a "rapidly accelerating risk premium" and nobody is going to dreaming about making money in the carry trade. Bottom line is the same -- Greenspan and/or his successor gets to play the hero and ride to the rescue of the real economy through short term rate cuts and the big boys get to make LOTS of money borrowing short and lending long, if they have the guts to lend in that environment.

I think for retirees all this boils down to a very strong likelihood of deflating asset values at some not too distant point in time. Whether it's in the big bang way that I believe is increasingly likely, or a slow
nice drizzle downward that Greenspan is praying will happen, or pursuant to the yield inverted induced economic recession that McCulley sees down the road -- the end is near for wacky asset valuations.

As discussed on other threads each retiree is going to have to assess his/her own situation and act accordingly. You can choose to ride the dip and hope it is short and sweet as the asset allocators and buy and holders advise on this Board. That's ok and will probably work well FOR THOSE THAT ARE PREPARED TO WAIT THE STORM OUT. Or, like me, you may decide it is time to pull in your horns and move to higher ground. Lighten up on equities. Shorten your bond durations. Look for strategies that preserve capital. Prudent use of hedge option strategies might be in order. If you use a CD laddering approach make sure your are dealing with a solid, insured institution. However you choose to deal with it, you have a lot of thinking to do in the days ahead.

Donner

 

[mikew]

Hi Greg
You seem to be working yourself up over this gloom and doom stuff. But I don't see why. If you aren't a market timer, a fall doesn't matter. If you are you a market timer, you should have a plan with triggers.

So, if Mr. Greenspan really wants to preemptively spank asset prices, he’s going to have to take off his own belt of nasty tightening, which is likely to invert the yield curve. I doubt he’s willing to do that and, in fact, suspect that he might just get lucky, with speculative froth in property markets exhausting itself of its own exuberance. But I wish I had more confidence in that suspicion. Investors in all risk assets - except, ironically, long-dated, default risk-free bonds - should consider themselves to have been warned.

Warned of what? That Greenspan may get lucky managing the froth or that he doesn't have confidence in his suspicion. This guy seems to want to be right either way.

These guys have a worse chance of being right than monkeys. Also, I don't like his mustache.

I think sometimes too much information is not helpful. Also reading something too many times can allow me to find what I want to find. Especially true when the writer wants to be vague.

In times like these I try to remember what my teacher Obi-wan said. Trust the force luke. Trust the force.

Mike

 

[greg]

Donner: Thank you. You're reading is a beautiful explaination. I was trapped by McCulley's 'time inconsisitency problem,' thinking I might find the point where the interest rate inversion he sees as a possibility might signal the future tipping point further out and at a lower level of inversion. I stare too hard into nothingness sometimes .. Sometimes it's just nothing.

I see a similar brittleness as you in the economy. But I also see a Fed/gov't that is different and more powerful than any before it. So . . . . it's different this time--but it certainly rimes.

--Greg

 

[greg]

Mikew: It's a balancing act teeter-totter for me, gathering as much infomation as possible and then finding some simple course. I sound much worse than I feel. Today I fretted about adding to my RYDEX funds (or some such negitive play) and finding out why or why not. Otherwise, I'm set to go for anything. I get too mystical over the stock market.

Martha wants to walk me to the basement stairs and let me roll down--again . I do want to time the big ups and downs myself.

--Greg

 

[wildcat]

Ah ha a closet timer

 

[moghopper]

You seem to be working yourself up over this gloom and doom stuff. But I don't see why.

It gets old. While I try to prepare for things, I refuse to curl up into a fetal postion in my basement.

I think I've lived through the "End of the World" at least 10 times now, and the "End of the Stock Market" at least 50. Eventually, one of them will happen and all the gloom and doomers will be happy taking to the streets shouting "I told you so!"

 

[greg]

I firmly believe that over the next five-ten-fifteen years that the stock market/financial instrument (debt) world will face a serious decline. That's what I see, and I'm not 100% sure. It won't be a straight line down, such as ten percent each year. Lots of up and down terrain to cover, some steep, some at a slight up or down grade. At this point, my strategy is to play the bigger hills and try to identify what's coming--up or down. I also get mildly obsessive about it at times (and don't take many vacations from it), but if you looked just at my portfolio, you would see a gradual, calculated move toward preparation for all possible events at any time. This is not preparation for random events. This is preparation for forseeable events. When they happen or I see something because the event may be closer, I'll make small, pre-calculated adjustments at that time. Preparation and leadership of my portfolio is done incrementally so that I don't have to make a disasteriously bad decision in a time of turmoil and fear. My portfolio is conservative. Unlike some other decision makers that I have seen in operation who fail at every level of decision making.

--Greg

 

[REWahoo]

Unlike some other decision makers that I have seen in operation who fail at every level of decision making.

--Greg

Greg, behave yourself. You know that statement isn't true; not every level. I know of one who chose very wisely when it came to finding a spouse. Might even say he read up on it.

REW

 

[greg]

Greg, behave yourself. You know that statement isn't true; not every level. I know of one who chose very wisely when it came to finding a spouse. Might even say he read up on it.

REW

I stand by my statement. You know exactly which decision maker I was referring to. If that decision maker's spouse really understood that decision maker, she would have run away screaming in terror and not aided him in his climb to power. IMO She should have "just said "No.'" One of those few points in life (the proposal) where the real solution can be seen in black and/or white. Maybe they were both drinking at the time. I'm less mad now--after venting. Thank you, again.

--Greg