Video-Rama: Global Economy Banked Into Recession

Friday, January 30th, 2009

While financial markets remained mired in uncertainty, the who’s who of global economics descended on Davos in Switzerland for the annual meeting of the World Economic Forum. This week’s harvest of video clips therefore includes a number of interviews set against the backdrop of the snow-covered Alps.

The overall message of the video footage is aptly conveyed by titles such as “Mountains of doom” (Nouriel Roubini) and “Wall Street winter blues” (Robert Shiller). Also discussing aspects of President Obama’s stimulus plan, the mooted bad bank, and other crisis-related issues are Jamie Dimon, Edmund Phelps, Steve Forbes, Joseph Stiglitz, Barry Ritholtz, Chris Whalen, George Soros, Stephen Roach, Kenneth Rogoff, Jack Welch, Jan Hatzius, George Friedman and Michael Lewis.

But although gloom prevails, money-making opportunities do exist as highlighted by John Murphy (StockCharts.com), who expects gold bullion to be the best investment for 2009.

In lighter vein, this week’s compilation is rounded up by Bunny and Mimi (the Pinky Show) with a clip entitled “Banked into submission”.

CNBC: Dimon on economic recovery
“Jamie Dimon, JPMorgan chairman and CEO, tells CNBC’s Maria Bartiromo when he’s expecting an economic recovery.”

Source: CNBC, January 29, 2009.

CNBC: Orszag on Obama’s stimulus plan
“Peter Orszag, director of the Office of Management and Budget, discusses Obama’s stimulus package and what the final product will look like.”

Source: CNBC, January 28, 2009.

Bloomberg: Edmund Phelps says US needed “more coherent” stimulus
“Edmund Phelps, a professor at Columbia University and winner of the 2006 Nobel Prize in economics, talks with Bloomberg’s Francine Lacqua and Erik Schatzker about the US government’s plans to stimulate the economy and ease the credit crisis. Phelps, speaking at the World Economic Forum meeting in Davos, Switzerland, also discusses measures to remove toxic assets from banks’ balance sheets and the outlook for US housing.”

Source: Bloomberg, January 28, 2009.

Fox Business: Steve Forbes talks stimulus, economy & Geithner

Source: Fox Business, January 28, 2009.

CNBC: Stiglitz on the economy
“Opportunities for your money at the World Economic Forum, with Joseph Stiglitz, Columbia University professor and Nobel Prize winner, and CNBC’s Becky Quick.”

Source: CNBC, January 28, 2009.

CNBC: Barry Ritholtz – nationalize the banks

Source: CNBC, January 29, 2009.

Yahoo Finance: Chris Whalen – give money to healthy banks, let FDIC’s Bair handle the dying
“Why should taxpayers have to keep bailing out banks that aren’t lending and are black holes? Why can’t Congress just force these banks to write down their bad debt then recapitalize them? Why doesn’t the government create a bank that does not have toxic assets and will fill the void of much needed loans to businesses who need them?

“‘Lack of political courage [and] ignorance of finance’ in Congress are the answers to these and related questions, according to Chris Whalen, managing director and co-founder of Institutional Risk Analytics. ‘Our friends in Washington who’ve been receiving a lot of money from Wall Street don’t want to put these people out of work.’

Click here for the article.

Source: Aaron Task, Yahoo Finance, January 21, 2009.

BBC News: Soros on getting out of the global crisis
“Financier George Soros has outlined his recipe for stabilising the global economy to the BBC’s Business Editor, Robert Peston. Speaking against the backdrop of the World Economic Forum in Davos, he said the present problem was ‘bigger’ than in the 1930s.He was asked if he thought there were any signs of recovery in sight.”

Source: BBC News, January 28, 2009.

CNBC: Roubini – mountains of doom
“Discussing the stimulus and the disaster that is the world economy, with ‘Dr. Doom’, Nouriel Roubini, RGEMonitor.com chairman.”

Source: CNBC, January 28, 2009.

Bloomberg: Roach sees “longer and deeper” recession, weak recovery
“Stephen Roach, chairman of Morgan Stanley Asia, talks with Bloomberg’s Betty Liu about the outlook for the global economy. Roach, speaking from Zurich, also discusses the US recession and the state of the Chinese and Indian economies. Mario Gabelli, chief executive officer of Gamco Investors, also speaks.”

Source: Bloomberg, January 27, 2009.

Fox Business: Rogoff – 80’s crisis a “baby” compared to now

Source: Fox Business, January 28, 2009.

CNBC: Jack Welch on the economy
“Perspectives on the government’s stimulus plan, with Jack Welch, former GE chairman/CEO.”

Source: CNBC, January 29, 2009.

Bloomberg: Hatzius says Fed will likely buy treasuries eventually
“Jan Hatzius, chief US economist at Goldman Sachs, talks with Bloomberg’s Betty Liu about the likelihood the Federal Reserve will buy US Treasuries. Hatzius, speaking from New York, also discusses the outlook for monetary policy and need for a ‘large’ stimulus package.”

Source: Bloomberg, January 28, 2009.

John Authers (Financial Times): Housing and the Fed
“If there is a single key variable to determine when the crisis in the US banking system can be brought under control, it is house prices. The further they fall, the higher the likely default rate on the mortgage-backed securities that banks now hold on their balance sheets.”

Click here for the article.

Source: John Authers, Financial Times, January 27, 2009.

Barron’s: Santoli’s market outlook: 8,000 and 800
“Barron’s Mike Santoli explores whether the Dow hovering around 8,000 and the S&P around 800 carries a certain significance and what this could mean.”

Source: Barron’s, January 26, 2009.

CNBC: Robert Shiller – Wall Street winter blues

Source: CNBC, January 28, 2009.

CNBC: Steve Forbes discusses outlook for stocks

Source: CNBC, January 28, 2009.

Bloomberg: StockCharts’s Murphy sees gold at $1,000 by year end
“John Murphy, chief technical analyst at StockCharts.com, talks with Bloomberg’s Brennan Lothery about the outlook for the gold price in 2009. Murphy also discusses commodity prices, the US equity market and investment strategy.”

Source: Bloomberg, January 27, 2009.

BBC News: Trichet – system must be more resilient
“The president of the European Central Bank, Jean-Claude Trichet, has warned about imbalances in the global economy for some time. He told the BBC’s Tanya Beckett that it was a question of ensuring that by being extremely bold in the short term, long term confidence was not hampered.”

Source: BBC News, January 29, 2008.

CNBC: China – the next world superpower?
“China is unlikely to replace the US as the world’s dominant superpower, says George Friedman, CEO of Stratfor. He tells Kirby Daley from the Newedge Group & CNBC’s Amanda Drury why. He also reveals the other key challenges we may face in the next 100 years.”

Source: CNBC, January 30, 2009.

YouTube: Michael Lewis on how to avoid bankruptcy

Source: YouTube, January 28, 2009.

Pinky Show: Banked into submission
“Part III of the globalization comic series. In this mini-episode, Bunny tells Mimi about the World Bank and IMF and how wonderful they are.”

Source: Pinky Show (via YouTube), March 21, 2007.

Tags: 2006 Nobel Prize In Economics, Alps, Amanda Drury, bank, Barry Ritholtz, Bbc, Becky Quick, Betty Liu, Bloomberg, Brennan Lothery, Business Editor, Ceo, chairman, chairman and CEO, chairman/CEO, Chief Executive Officer, chief technical analyst, chief US economist, China, Chris Whalen, Columbia University, Congress, Credit Crisis, Davos, Davos Switzerland, director, Director Of The Office Of Management And Budget, Doom, Edmund Phelps, Emerging Markets, Erik Schatzker, European Central Bank, Fdic, final product, Finance, Financial Times, Financier, Francine Lacqua, Gamco Investors, GE, George Friedman, George Soros, Gold, Gold Bullion, Goldman Sachs, India, Institutional Risk Analytics, International Monetary Fund, Jack Welch, Jamie Dimon, Jan Hatzius, Jean Claude Trichet, John Authers, John Murphy, Joseph Stiglitz, Jpmorgan, Kenneth Rogoff, Kirby Daley, managing director and co-founder, Maria Bartiromo, Mario Gabelli, Michael Lewis, Mike Santoli, mooted bad bank, Morgan Stanley Asia, New York, Newedge Group, Nobel Prize In Economics, Nouriel Roubini, Obama, office of management and budget, Peter Orszag, Pinky Show, president, professor, RGEMonitor.com, Robert Peston, Robert Shiller, Stephen Roach, Steve Forbes, Stimulus Package, Stockcharts, StockCharts.com, Stratfor, Switzerland, Tanya Beckett, United States, Us Federal Reserve, Us Government, Us Treasuries, usd, Washington, World Bank, World Economic Forum, Yahoo, Youtube, Zurich
Posted in Credit Markets, Economy, Emerging Markets, Gold, India, Markets, Outlook | Comments Off

Jeremy Grantham: Riveting Interview with Steve Forbes

Thursday, January 29th, 2009

Whoa! Jeremy Grantham gives a riveting, in-depth, specific and eloquent must-see interview. It is a clear and enlightening discussion with one of the finest and quiet geniuses in the investment world.

Subsequent to publication of Jeremy Grantham’s quarterly newsletter a few days ago, Steve Forbes conducted this interview with the chairman of Boston-based GMO. The video clip and transcript are published below.

Click here or on the image to view the video.

Click here for the transcript of the interview.

Here are the topical headings from the interview:

• Steve: China’s Long Tale
• Grantham’s Big Call
• A Whole New Bubble
• Time To Buy
• Cheapest in 20 Years
• Japan A Blue Chip?
• Emerging Markets
• Buy Big US Stocks
• Stimulus!
• Our Leaders Failed
• Dysfunctional Markets
• China Bubble

Here are a few paragraphs:

Steve Forbes: Well thank you, Jeremy, for joining us today. First, since you have bragging rights in this situation, what made you a bear, [a] great skeptic? Between 1999 until about a couple of months ago, you were saying, “Stay out.”

Jeremy Grantham: Well, really very simple. Not rocket science. We take a long-term view, which makes life, in our opinion, much easier.

Steve Forbes: Well everyone says it, but you certainly practiced it.

Jeremy Grantham: We actually do it. Well, we tried the short-term stuff and it was so hard; we thought we’d better do the long-term. We just assume that at the end, in those days, of 10 years, profit margins will be normal and price-earnings ratios will be normal. And that will create a normal, fair price. And more recently, we’ve moved to seven years, because we’ve found in our research that financial series tend to mean revert a little bit faster than 10 years–actually about six-and-a-half years. So we rounded to seven.
And that’s how we do it. And it just happened from October ’98 to October of ’08, the 10-year forecast was right. Because for one second in its flight path, the U.S. market and other markets flashed through normal price. Normal price is about 950 on the S&P; it’s a little bit below that today.

And on my birthday, October the 6th, the U.S. market, 10 years and four trading days later, hit exactly our 10-year forecast of October ’98, which is worth talking about if only to enjoy spectacular luck. The P/E was a little bit lower than average and the profit margins were a little bit higher, so they beautifully offset. And given our methodology, that would mean that on October the 6th, the market should have been fairly priced on our current approach. And indeed it was–that was even more remarkable–950, plus or minus a couple of percent.

Steve Forbes: And what did you see during that 10-year period that made you feel–other than your own models–that this was something highly abnormal, that this couldn’t last?

Jeremy Grantham: Well, first of all, the magnitude of the overrun in 2000 was legendary. As historians, you know we’ve massaged the past until it begs for mercy. And we saw that it was 21 times earnings in 1929, 21 times earnings in 1965 and 35 times current earnings in 2000. And 35 is bigger than 21 by enough that you’d expect everyone would see it. Indeed, it looks like a Himalayan peak coming out of the plain.
And it begs the question, “Why didn’t everybody see it?” And I think the answer to that is, “Everybody did see it.” But agency risk or career risk is so profound, that even if you think the market is gloriously overpriced, you still have to get up and dance. Because if you sit down too quickly–

Steve Forbes: Famous words of Mr. Prince.

Click here for the transcript of the interview.

Source: Forbes, January 23, 2009.

Download the Forbes: Jeremy Grantham Briefing Book here.

Tags: Blue Chip, Boston, Bragging Rights, chairman, China, Dysfunctional, Emerging Markets, Few Days, Flight Path, Geniuses, Gmo, Half Years, Himalayan, Interview Source, Investment World, Japan, Jeremy Grantham, Paragraphs, Price Earnings Ratios, Prince, Profit Margins, Quarterly Newsletter, Rivetting, Rocket Science, S Market, Seven Years, Skeptic, Steve Forbes, Steven Forbes, Stimulus, Stocks, Topical Headings, United States, Video Clip
Posted in Emerging Markets, Markets | Comments Off

David Swensen on Charlie Rose

Thursday, January 29th, 2009

David Swensen, legendary portfolio manager and CIO of the Yale Endowment speaks to Charlie Rose in a rare 15-minute interview. The first interview features Sen. Chuck Schumer. David Swensen follows. To get to David Swensen, advance the video using the arrow indicator to 38:40 mins.

Tags: Arrow, Charlie Rose, Chuck Schumer, Cio, David Rose, David Swensen, legendary portfolio manager and CIO, Minute Interview, Portfolio Manager, Rose David, Yale Endowment
Posted in Markets | Comments Off

Baltic Dry Index Up 7 Straight Days Bullish Sign

Wednesday, January 28th, 2009

The Baltic Dry Index, the indicator of global shipping activity is now sitting at 1014, having hit its low of 663 December 5, 2008. This is a valuable measure of global trade activity, and it is indicating a resumption of trade. It is still a long way off its all-time high of 11,793 of last spring, down 91.4% from the top, but up over 50% off its bottom.

We’ll keep watching this. This is bullish for both finished exports and commodities. Its still early, and this is a promising sign. The loss experienced in the index includes the value differential owing to the crash in commodity prices experienced during the last 6 months. The BDI Index fell off a cliff in September which coincided with the collapse of Lehman Brothers, which happened to be a large underwriter of trade related financing. With other banks unwilling to take Lehman’s place, trade fell into the crater left behind.

Global trade credit froze along with the credit market as it became very difficult, if not impossible to trade, with banks unwilling to issue letters of credit.

This is a sign that the trade finance market is thawing and that shipping can resume. A continuation of this trend should be considered bullish, particularly for China exports, global trade, and for commodities producing companies and countries.

The Baltic Dry Index does not measure the price of oil, although it does include the price of fuel as a component of the shipping cost.

Chart: Bespoke Investment Group

Tags: Baltic Dry, Baltic Dry Index, Banks, Bdi, Bdi Index, Bespoke Investment Group, China, China Exports, Collapse, Commodities, Commodity Index, Commodity Prices, Commodity Producers, Crash, Differential, Failure, Finance Market, Global Shipping, Global Trade, Investment Group, large underwriter, Last Spring, Lehman Brothers, Letters Of Credit, oil, Price Of Oil, Promising Sign, Resumption, Shipping Activity, Shipping Cost, Straight Days, Trade Finance, trade finance market, Underwriter
Posted in Commodities, Credit Markets, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Where Credit’s Due

Wednesday, January 28th, 2009

Michael Gregory, Senior Economist, BMO Financial Group, posits in the latest issue of Focus that recovery in credit formation has and will be key to economic recovery.

The typically rapid transition from decelerating to accelerating credit growth results in a v-shaped credit cycle, a critical characteristic that effectively fuels economic recovery (Chart 1).

However, the global credit crisis has impaired credit creation processes around the world, particularly in the U.S. and the U.K. The cost of credit to consumers and businesses was initially hoisted higher than it otherwise would have been because of bank funding costs.

Note: Canadian money market spreads have been very healthy, indicating their strong financial position.

Just as the global financial crisis unfolded in four waves (Chart 2), with the latest surge the most damaging, the policy responses by central banks and governments have had four distinct themes, all designed to repair and prime their local credit markets, with the latest tactics targeting the asset root of the problem.

First, policy rates have been cut to historic lows (Chart 3). In cases where rates are already effectively zero (e.g., U.S., Japan), central banks are providing much more liquidity than required to prod banks into loaning out the excess-the essence of “quantitative easing”.

Second, some central banks (Fed, BoJ, BoE) are participating directly in local commercial paper markets-which were among the first casualties of the global credit crisis-and purchasing mortgage-backed and other securities.

Despite the “credit easing” measures, banks have not eased up on lending requirements. (Chart 4)

The third policy theme has been to ensure banks have adequate access to capital and other funding at reasonable rates. Governments are guaranteeing bank liabilities and, in some cases, directly injecting capital.

While government is able to use moral suasion to twist banker’s arms to lend, it is not able to assuage concerns that the deepening recession could lead to more losses, which is keeping lending tight.

Household deleveraging (Chart 5) means that consumers are starting to save more and spend less, reducing consumption in the economy. Non-financial businesses are doing the same. This reversal in credit formation means deflating assets, and lower capital expenditure.

Thus, the fourth policy theme is to bolster the asset side of balance sheets. This week, the U.K. government introduced an “Asset Protection Scheme” designed to partially protect financial institutions against future credit losses.

In the U.S., there’s growing talk of establishing an “aggregator” bank that would purchase troubled assets from banks, as the new Obama Administration is promising action on a “dramatic scale” to strengthen banks and revive credit markets.

The longer the economy stays starved of credit, the greater the risk of a deflationary outcome, with Japan’s “lost decade” quickly coming to mind (Chart 6).

You can read the entire report here.

Tags: Array, bank, bank funding costs, bank liabilities, banker, BMO, BMO Financial Group, Canadian Market, Canadian Money Market, Casualties, Central Banks, Creation Processes, Credit Creation, credit creation processes, Credit Crisis, Credit Markets, Distinct Themes, Economic Recovery, Economic Research, Economist, Financial Group, Financial Position, Global Credit, Global Financial Crisis, Japan, liquidity, Lows, Michael Gregory, Monetary And Fiscal Policy, Moral Suasion, Obama administration, Paper Markets, Policy Actions, Policy Responses, Rapid Transition, Recessions, U.K. government, United Kingdom, United States, Us Federal Reserve, Waves
Posted in Credit Markets, Economy, Markets | Comments Off

Albert Edwards: Back in the bear camp

Wednesday, January 28th, 2009

Albert Edwards, London-based strategist of Société Générale, has always been a firm favourite among Investment Postcards’ readers. His latest research report appeared a few days ago and saw him firmly back in the bear camp after turning short-term bullish at the end of October. (See the previous posts “Albert Edwards: Turning More Bullish” [October 24] and “Market Fundamentals are Appalling” [July 5]).

Edwards’s “Global Strategy” report is sub-titled “Technicals say it is time to bail out. Cut exposure and prepare for rout. US depression looking likely. China’s 2009 implosion could get ugly.” The executive summary below provides the gist of his thinking.

“After increasing our equity exposure at the end of October we believe that the market is set to quickly slide sharply towards our 500 target for the S&P. While economic data in developed economies increasingly reflects depression rather than a deep recession, the real surprise in 2009 may lie elsewhere. It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the Yuan. A subsequent trade war could see a re-run of the Great Depression.

- Economic data has been truly dreadful through the fourth quarter. Over a year ago we forecast deep US recession. As it had not suffered one since the early 1980s, we thought this outturn would shock. Yet recent data has been consistent with something far worse than deep recession. There is no agreed definition of a “depression” as opposed to a deep recession. But The Economist magazine is probably more qualified than many to take a view. They consider a peak-to-trough decline in GDP in excess of 10% a reasonable definition. We had been thinking of deep GDP declines of the order of 5% peak to trough but we are now thinking that this view might be too optimistic.

- But, until yesterday, equity markets had been paddling quite happily sideways for most of the last few months. They have been broadly flat since we increased our equity weighting sharply on 23 October. Within that time the intra-day peak-to-trough rally in the S&P was a creditable 28% from 740 low of November 21, but we do not claim to have captured that. Nevertheless we feel very comfortable that the technicals at the end of October cried out to close our extreme underweight equity exposure. They now tell us to cut exposure again.

- 2008 was a shock for investors. But 2009 could be an even bigger shock. There is evidence that the Chinese economy is imploding. Investors should consider what would happen if China descends into social chaos. Yuan devaluation could spark a 1930’s style trade war. Do you really trust the politicians to ‘do the right thing’?”

Source: Albert Edwards, Global Strategy Weekly, Société Générale, January 15, 2009 (hat tip: David Fuller, Fullermoney).

Tags: Albert Edwards, Bear Camp, China, Chinese Economy, David Fuller, Economic Data, Economist, Economist Magazine, Equity Exposure, Gist, Global Strategy, Global Strategy Weekly, Great Depression, Implosion, London, Market Fundamentals, October 24, Recession, Regime Change, Rout, S&P, Societe Generale, Strategist, Strategy Report, Target, The Economist, Trade War, Trough, United States
Posted in Credit Markets, Economy, Markets | Comments Off

Nouriel Roubini: “The worst is yet to come.”

Tuesday, January 27th, 2009

Nouriel Roubini, or RGE Monitor and NYU Stern School of Business, appeared on CNBC, January 15, 2009, to discuss his outlook for 2009. Roubini’s best-case call is a U-shaped recovery from this now synchronized global recession we’re in, if the authorities can turn around the situation in the financial sector, which is by his account, “effectively insolvent.” If not, we could enter into a period of economic stagnation combined with deflation, similar to Japan. He is joined by 2001 Nobel Laureate, Michael Spence.

Roubini clings to the notion that “the worst is yet to come.”

To watch the video, click play:

Tags: Authorities, Cnbc, Deflation, Economic Stagnation, Financial Sector, Global Recession, Japan, Michael Spence, Nobel Laureate, Notion, Nouriel Roubini, Nyu Stern School, Nyu Stern School Of Business, Outlook, RGE Monitor, RGE Monitor and NYU Stern School of Business, School Of Business, Stag, Stern School Of Business, Turnaround
Posted in Markets, Outlook | Comments Off

Hugh Hendry: Outlook for 2009

Tuesday, January 27th, 2009

Hugh Hendry visited CNBC on January 12, 2009, and the entirety of the available footage of his commentary is worthy of your attention. In previous articles we partially covered this. As usual, Hendry’s command and perspective is stark, and sensible, and to date, canny and accurate. We have found the complete video excerpts from January 12, 2009, and share it with you below. Its fresh and compelling for 2009; don’t miss out on viewing this.

Hugh Hendry, January 12, 2009, Part 1 of 6

Hugh Hendry, January 12, 2009, Part 2 of 6

Hugh Hendry, January 12, 2009, Part 3 of 6

Hugh Hendry, January 12, 2009, Part 4 of 6

Hugh Hendry, January 12, 2009, Part 5 of 6

Hugh Hendry, January 12, 2009, Part 6 of 6

Tags: Cnbc, Hugh Hendry, Outlook, Perspective, Video Excerpts
Posted in Markets, Outlook | Comments Off

Cast Your Vote: Recession or Depression?

Tuesday, January 27th, 2009

This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management.

As unpopular as it may have been over the past several years, I have been writing about the impending Recession in the United States and in other nations. I am rather used to criticism as a “perma-bear”, as it relates to our asset-based, over-leveraged mess that we call our economy. It has been no fun whatsoever to be the one to “call ‘em as you see ‘em”, but to be perfectly frank, an outlier view has been a necessary evil, and one that I have been proud to have had the guts to provide.

And so now I will say what the biggest risk of all is in my view. There is no doubt, whether it is in retrospect as most economists suggest or not, that (shhhhhhh …) we are in a Recession … Oh my Goodness, what an unpopular view – that the economy can actually shrink. And shrink it has, it is, and likely will continue to do. The question on my mind, as it has been over the past several months, is if we are going through a traditional Recession or a once-in-a -lifetime Depression? I have actually HOPED that Recession as the result of the unprecedented credit unwind would end up as just a nasty Recession at best. Sadly however, I feel that a Depression is either upon us, or soon will be upon us.

To be truthful or daring is important in markets and other parts of life. To be truthful, you must suck it up. To be daring is to avoid the bad news that is so obvious, but not at all too fun or exciting to focus on. There is no thought clearer in my mind, as I have stated many times over the past year, that we are in a Recession, or quite likely much worse. I hate to say this, as unpopular as it may seem (so what’s new with what I write?), WELCOME TO THE DEPRESSION. For my reasoning, please read on.

Click here for Bennet’s full report.

* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.

Tags: Asset Management, Atlantic Advisors Asset Management, Bad News, Depression, Economists, Economy, Focus, Fun, Guts, Impending Recession, Lifetime, Nasty Recession, Necessary Evil, No Doubt, Oh My Goodness, Portfolio Management, president, Retrospect, risk, Sedacca Capital Management, United States, Unpopular View, Vote
Posted in Credit Markets, Economy, Markets | Comments Off

Teresa Lo’s Rules of Market Survival

Monday, January 26th, 2009

Teresa Lo, founder of InvivoAnalytics, retired from the securities industry in 1998 after a twelve-year career.  Since then, she has helped thousands of individual investors, traders and investment advisors achieve their goals and secure their financial futures. She is currently the portfolio manager for a private investment fund. You can find out more by visiting invivoanalytics.com.

We found this particular reference piece written by Ms. Lo to be an excellent set of rules for investing.

I’ve [Teresa Lo] been working on this post for a long time, and might come back to edit the rules on this page from time to time.

1. TEMPERAMENT TRUMPS INTELLIGENCE
You don’t have to be a rocket scientist to succeed. It’s a certain combination of intelligence and personal qualities.

Success in investing doesn’t correlate with IQ once you’re above the level of 25. Once you have ordinary intelligent, what you need is the temperment to control the urges that get other people in trouble investing. – Warren Buffett, The Real Warren Buffett

Staying the course requires a certain stoicism and balance:

From Maximus I learned self-government, and not to be led aside by anything; and cheerfulness in all circumstances, as well as in illness; and a just admixture in the moral character of sweetness and dignity, and to do what was set before me without complaining. I observed that everybody believed that he thought as he spoke, and that in all that he did he never had any bad intention; and he never showed amazement and surprise, and was never in a hurry, and never put off doing a thing, nor was perplexed nor dejected, nor did he ever laugh to disguise his vexation, nor, on the other hand, was he ever passionate or suspicious. He was accustomed to do acts of beneficence, and was ready to forgive, and was free from all falsehood; and he presented the appearance of a man who could not be diverted from right rather than of a man who had been improved. I observed, too, that no man could ever think that he was despised by Maximus, or ever venture to think himself a better man. He had also the art of being humorous in an agreeable way. – Marcus Aurelius, The Meditations of Marcus Aurelius, Book One

2. NEVER LOSE MONEY
This one is simple enough:

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1 – Warren Buffett, The Real Warren Buffett

3. WHERE THERE’S SMOKE, THERE’S FIRE
Another obvious one:

I follow the old dictum: There’s never just one cockroach in the kitchen. – Warren Buffett

4. DIVERSIFY, DIVERSIFY, DIVERSIFY
They all say they do, but no one ever does. Then they are sorry:

You have to diversify against the collective ignorance. I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.” – David F. Swensen

5. PERCEPTION IS EVERYTHING
Refuse to become intellectually bankrupt. Avoid dogma:

Facts per se can neither prove nor refute anything. Everything is decided by the interpretation and explanation of the facts, by the ideas and the theories. – Ludwig von Mises

Have the courage to see the world as it is:

The glass is not half-full or half-empty. It’s just a half glass. – Teresa Lo

6. THE PARTY ALWAYS ENDS SOONER THAN YOU THINK
Dance close to a working fire exit at the end of the night:

The one eternal aspect of every market top is that it occurs before we’re ready for it. – Justin Mamis, The Philosophy of Tops

7. FOLLOW THE LEMMINGS
When the lead lemming disappears from view, assume he’s fallen over the cliff:

[I]t may often pay ‘smart money’ to follow ‘dumb money’ rather than to lean against it. – Mullainathan & Thaler

8. THE MARKET IS A BEAUTY CONTEST (or Why High School Never Ends)
John Maynard Keynes had opinions on issues other than deficit spending:

[P]rofessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees. – John Maynard Keynes, The General Theory of Employment, Interest and Money, Chapter 12

9. IT’S NEVER DIFFERENT THIS TIME
No matter what they say, don’t believe ‘em:

Stock prices have reached what looks like a permanently high plateau. – Irving Fisher, 1929

It’s always the same shit, different day:

What is badness? It is that which thou hast often seen. And on the occasion of everything which happens keep this in mind, that it is that which thou hast often seen. Everywhere up and down thou wilt find the same things, with which the old histories are filled, those of the middle ages and those of our own day; with which cities and houses are filled now. There is nothing new: all things are both familiar and short-lived. – Marcus Aurelius, The Meditations of Marcus Aurelius, Book Seven

10. HOPE IS A FOUR-LETTER WORD
How many accounts have gone to zero because the investor was too stubborn to do the right thing?

The market can stay irrational longer than you can remain solvent.” – attributed to John Maynard Keynes

11. INVESTING IS ANOTHER TERM FOR TRADING
It’s just a different time frame:

Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. . . . The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow. – John Maynard Keynes, The General Theory of Employment, Interest and Money, Chapter 12

10. LEVERAGE IS A BLACK HOLE
Not even light can escape it:

We’ve got to think harder about all the embedded leverage. I mean, it’s a little shocking that not more people understood that if you take a 30:1 levered, structured product and you put it on a 30:1 levered balance sheet, you’re not talking about 30:1 leverage. You’re talking about 900:1 leverage and you can magnify gains and losses pretty dramatically when you do that. So the risk management system, the capital rules just haven’t kept up with the instrument innovations-another decade has gone by. – Peter Fisher

Ten Rules for Trader Longevity

This list is for traders but also applies to investors.

1. Recognize mental blocks. If you believe that the financial markets are rigged, stay away. Bias is blinding. If your ego requires constant feeding and vindication, do not trade. If being right is more important than making money, steer clear of the stock market. If you must be dogmatic, direct your energy into following these rules.

2. There is no needle in the haystack. There’s no reliable way of picking a single winner from the thousands of stocks listed on the exchanges. Resist betting it all on the longshot because the outcome is based purely on luck. Dr. Ziemba explains the mathematics of horse racing. The point is that the bettor is better off with horses that finish the race “in the money”. They don’t have to come in first.

3. Diversify. Spread your bets around. It’s the only way to be on board the winner.

4. Trade small. Bet only a small fraction of your equity on each position. You must take risk to get reward, but ruin is certain if you take insane risk. It’s defined in Fortune’s Formula. Think Adventures in Conditional Probability.

5. Press the winners. You must compound a winning streak.

6. Never throw in good money after bad. Never double down. Ever.

7. Do not rationalize. Down is NOT up. Red is NOT the new black. If the account equity is shrinking, your bets are in the wrong direction.

8. Establish a stop loss. Place it in the appropriate location (except just above the swing high or under the swing low where everyone else put theirs), a place where you can be statistically confident that the move in the present direction is over. Don’t use a tight stop for lack of equity. The market doesn’t care about how much is in your account, so trade a smaller position size and put the stop in the proper place.

9. Use the stop loss. Just do it. Immediately. No excuses. Having a “mental” stop loss is the same as lying. There’s no point, because the longer you let it slide, the deeper the doo-doo.

10. Observe Rule Nine. Always. Don’t go to the bathroom without it.

The Role of Luck

Legendary hedge fund manager Jim Simons was interviewed by Hal Lux for the November 2000 issue of Institutional Investor:

When he does open up, Simons can seem exasperatingly coy in describing his success. “Luck,” he told a gathering of potential investors last spring in Greenwich, Connecticut, “is largely responsible for my reputation for genius. I don’t walk into the office in the morning and say, ‘Am I smart today?’ I walk in and wonder, ‘Am I lucky today?’”

In fact, Simons is being straightforward. Luck may be the residue of design to baseball minds, but to a mathematician it’s the twin of probability, which can be approached through statistical studies.

Last, but not least, my hero, the Roman emperor Marcus Aurelius thanked the gods, “that, when I had an inclination to philosophy, I did not fall into the hands of any sophist, and that I did not waste my time on writers of histories, or in the resolution of syllogisms, or occupy myself about the investigation of appearances in the heavens; for all these things require the help of the gods and fortune.”

While he was certainly not referring to the stock market but he might as well have for he summed it up well. Very well.

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