For Sagarin: Is This Market Comeback For Real?

Citizen Runner wrote:

Flagpole (and most any investment advisor) has talked about a "dollar cost averaging" strategy, that is, buying into the market regularly over your working career in small increments rather than trying to time the market. The same strategy applies in reverse as you approach the need to draw down on that investment, that is, you should gradually decrease the percentage of your stock market holdings by moving into less volatile investments.

This is correct. An investor can even put all their money in a "target fund" which picks a date for retirement and gets gradually more conservative as you approach -- I like more control than that so I don't use them, but for people who are afraid of losing everything, it's not a bad idea -- hardly need to do anything other than dump money in it too.

target funds are nice for young investors who are starting out and need to diversify. it is tough to appropriately diversify with little money when min fund requirements are $3,000.

target funds are also good in that the more conservative ones (meaning retirement dates not in so distant future) include bonds and so many investors stick most of their investments with stocks when bonds, historically, only couple points lower and half as volatile. I know Flagpole has advocated index funds in the past and that is pretty much all I put my money in to ... Domestic large cap growth ... value .... small cap growth ... value ... reit... international large cap growth .... large cap value ... small cap growth .... small cap value ...emerging markets... 11 fund-types to consider and you have diversified as much as you can

John Hussman penned a very good read earlier this week that eloquently relates my own position on the macro-climate and the reality that we probably can't see a durable, sustainable bottom in the economy without sacrificing the bondholders, current improvement in the data notwithstanding (and the market tells you it's going to get better for a period of time and I can guarantee CNBC will be out in full force with the rally caps on and the all's clear signal). I've been pounding the table on this for awhile, but you don't have to listen to a word I say. Listen to this guy. He is a very bright economist/modeler turned investment manager and his track record speaks for itself. As for the current rally, the initial bear trap coming out of the depression was STRONG and LONG -- same with the pseudo-auspicious bounce coming off of Japan's initial low 20 years ago. Will the cylce repeat? Only father time knows, but I'm not personally getting married to this rally.

"Fundamentally, my view is that the U.S. economy is on very thin ice, and that by focusing on the bailout of corporate bondholders rather than the restructuring of debt, we are courting the risk of a far deeper downturn. Last year, I didn't think it was conceivable that policy-makers would attempt to address this problem by making lenders whole with public funds. This is an ethical abomination, putting the public in the position of absorbing the losses that should properly be borne by those who provided capital to these institutions. It is not sustainable. What it does is place the public in the position of losing first, but it will not, and cannot prevent the ultimate failure of the debt – for the simple reason that without restructuring, the debt can't be serviced."

"Until we observe large-scale restructuring of mortgage debt and the debt obligations of major financial institutions, we will be applying trillion dollar band-aids while the underlying cancer metastasizes. The longer we wait to restructure debt, to swap debt for equity, and to expect those who made the loans bear the losses as well, the more we risk allowing this downturn to become uncontrollable and unfathomably costly to the public."

http://www.hussmanfunds.com/wmc/wmc090413.htm

Sagarin,

Your are kind to come here and share your expertise for free. Your thorough grasp of the situation is immistakeable.

Thank you....

Sagarin, I read your posts regularly and have to say that while I consider myself very socially and economically liberal, what you're saying makes a great deal of sense to me. It is ludicrous that the government bails out the financial sector time and again and then attempts to force GM into bankruptcy. I'm not making excuses for GM- in fact, I think they deserve the grave they've dug- but the double standard between GM and financial giants like Citi is deplorable. My father said it best, during a phone conversation we had shortly after the Madoff scandal broke: "I think we ought to put Madoff on a dollar bill. He does the same s**t that all the financial companies do, but at least he admits to stealing. He espouses the values of contemporary Wall Street, which runs the country."

On a more detailed note, what would the restructuring of debt involve?

Read this month's Atlantic - a must read - by the former head economist of the IMF - Simon - now at MIT.

He speaks that we must break up the financial oligarchy - whatever the inefficiencies of smaller financial institutions, the costs of them being too big to fail are too great.

And the point to draw from Simon's piece is that he spent years telling other countries what must be done and those prescriptions generally.

Note that in breaking them up he would also impose a painful sweep, or liquidation of the toxic assets. Nationalization of some entities - only for a short time - is likely necessary.

And he would drastically reduce our spending. If the Bush administration earned a D for fiscal responsibility the Obama administration is earning a F. We must simply reduce spending - greatly. I don't see why everyday people don't see how toxic the announced budget is - it is a financial ruin.

No one knows what the market will do in the next two years. Financial stabilization is here but what will be the consequences of higher unemployment rates for consumer spending over the next two years? And what will be the consequences of worsening foreign economies? Those to me are the bigger danger by far than federal debt and inflation, since the former will still be very low as a percentage of GDP in comparison to so many countries, and the latter is not an issue at all at present, according to the numbers (deflation is a possibility). The deficit spending in fact is inadequate to cover the gap in consumer spending this year, so you could argue, as Krugman and Johnson have, that the deficit spending should be much greater; now it does not even cover the decline in state spending and we aren't getting help in this area from most European governments.