Monday, September 22, 2008

Uncle Stuey's Unsound Investment Advice

After a long illness, the American Dream died last week. It's not surprising that it happened. How long could it all last? Earning power in this country has been stagnant for about 30 years. Our growth has been based on higher and higher debt loads for the American consumer. Eventually, it had to crash. And now it has.

The 20th century was the American century. I have no idea who will own the 21st century, but it won't be us. That doesn't mean that we're headed for a depression with people camping out in the city parks across the country that Frederick Law Olmsted designed so many years ago. I'm not that pessimistic. But for the next decade or so, I expect hard times ahead. I'm not alone.

If you don't have money now, it's likely that you'll really be hurting. You have my sympathy. I didn't vote for Bush. I just benefited from his incredibly stupid policies just like I benefitted from Clinton's/Bush the elder's/Reagan's give everything to the business world that it wants stupid policies. And now you're being taken even further to the cleaners to help support a financial industry that has been disdainful of your mere presence on this planet. There's just no justice in this world or at least no government that doesn't protect the wealthy more than it protects the poor.

What if you do have some money that you've squirreled away. What do you do now? I just read a NY Times article that said essentially you should keep doing what you did before, but spend less. This seems like ridiculous advice. Anybody can give better advice than this including me. So here goes. I give you Uncle Stuey's unsound investment advice.

For me, the whole enterprise of stocks is a house of cards. I don't even believe in publicly held companies; a company has to be truly desperate if it asks for money from a public that has no loyalty and will buy and sell shares on a whim. If I had serious money to invest, I'd only plunk my money down on privately held companies. If I owned a big company, the only time I'd go public would be when I wanted to cash out and live on a yacht off the coast of Tahiti.

Be that as it may, others see things differently. Companies need money to grow and they frequently solicit for funds via an open marketplace. How a company is valued by the marketplace is mostly voodoo and fashion. But if everyone else says the emperor is wearing great clothes, who am I to say that they are wrong? I say follow fashion as long as companies are making money.

This last statement leads me to the late 1990s. Companies weren't making money. Instead they were burning capital like crazy. People were talking about "new rules" for the stock market where it was just great to see companies lose money every year. Stocks soared. Then all of a sudden people started to think that those new rules didn't make any sense. That turned out to be our last crash and it was a nasty time when a lot of people went broke.

This crash is worse. I have never seen anything like this in my lifetime.

The invisible hand that everyone had faith in (why I don't know) has been shown to not exist. We now have the US government trying to be a very visible hand. Uncle Stuey says that this very visible hand will hopefully keep things from crashing completely. But...

The growth of the stock market was based on magic. Riches were to be had and the dreary government supposedly played no role. Now just about everyone agrees that the magic isn't there. Without magic, there are no obscenely large gains in the market. It's just the day to day of companies needing money and soliciting for funds. It's a dull business this soliciting for money when there is no pot of gold at the end of the rainbow. The American stock market is now like a restaurant that still serves good food, but is no longer "the place."

We had a great run over the last few decades because people bought a lot of junk they didn't need. They bought everything imaginable on credit including houses they couldn't afford. All of that recycling of money kept everything going. From about 1981 to about 1999, a complete idiot, even me, could invest in the stock market and see his or her money grow ten fold. That game is over.

Expect credit to remain ridiculously tight. Expect people to be scared. Up until this past week, I thought our recession would last just a couple or three years. I was very optimistic that all of the spending would come back eventually. Now I don't think so.

For me, there is no upside to the current American market and a lot of risk (but a potential upside) to the overseas market. We are done with the era of people buying stuff they don't need on credit in this country. So I'll keep pulling out of the American market. I'll slightly pull back on overseas markets but not much. Eventually, the Chinese and the Indians will be like we used to be, buying piles of junk they don't need to make themselves feel good. Then the house of cards can be built again. It won't be based on our conspicuous consumption, but mindless spending taking place somewhere else.

As they say in Sicily, the sun doesn't shine on a dog's ass all day long. It shined on ours for a century. I wish it could have lasted longer. But it didn't. The American Dream RIP. Now aren't I the cheery one today.


Oh a little addendum. Today the stock market dropped 3 percent and oil futures shot up dramatically (16 percent) as money chased after commodities. The conventional wisdom is that the price of oil is not tied to speculation but is driven almost entirely by supply and demand. That conventional wisdom was wrong today. I think it's wrong most days.

No comments: