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Notes From the Fieldby Martin Weil

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August 24, 2015

Quick note to clients (before Monday’s open)

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”  Benjamin Graham

The past week has been a stomach churner for any investor watching the equity markets.  And I wouldn’t count on things settling down just yet.  So much for the typically quiet August I expected.

Pointing out that this sell-off was long overdue, given that the US equity market has gone up for more than three years without a routine 10% decline, is of little comfort.  While last week’s decline was sudden and felt enormous, historically declines are often like this.  The bigger picture is that the US equity market has been very good to investors since the financial crisis.  Anyone who had the stomach to go “all in” in early 2009 has earned more than a 160% return, before dividends, even after last week (see DJIA chart below from March 2009).  From the 10,000 foot perspective I think is essential to adopt, last week’s declines in the major US market indices hardly register at all.

DJIA

But I suspect the question most will ask is whether the market continue to fall and if so how far [NB: this was written Sunday].  The likelihood is that markets are undergoing that overdue “correction,” the term pundits use for a decline of 10-20%.  Could it get worse than that?  Sure, but that is a less likely result.

Whatever happens, CNBC and its counterparts in the print and electronic media will be weighing in on “WHY THE MARKET SOLD OFF” and “WHAT INVESTORS SHOULD DO NOW!”  That is how they grab attention and make their money.  The simple truth is best captured by the Ben Graham quote at the top.  Markets rise in the short term because investors are confident, and sometimes even giddy.  They fall in the short term because they are uncertain or even fearful.  And for the moment, investor greed has given way to investor fear.

On the other hand, to paraphrase Warren Buffett, the American economy remains a strong engine of growth and over the long term will provide ample returns to prudent investors.  That is the value that is weighed and that is the value that one invests in for the longer-term.

Assuming one is diversified and invested prudently, the only concern should be for those funds that you expect to be spent in the coming few years.  For our clients who are, or will be, withdrawing funds, we maintain a significant cash reserve precisely because sell-offs such as these are unpredictable and we do not want to have to fund cash needs by selling assets under duress.

For anyone else, especially those who are accumulating retirement or other wealth, equity prices are some 10% cheaper than they were a month or so ago.  They may get cheaper yet before they stabilize.  But this is an opportunity to add assets to your portfolio at a lower price.

I know I have written the above repeatedly over the years.  Frankly, the advice doesn’t change.  One of my favorite investment observers, Jason Zweig, has said he just writes the same thing over and over again, trying to keep it interesting.

And speaking of Zweig, if you want some further reassurances, click on the link to read his “5 Things Investors Shouldn’t Do Now” in the WSJ.  Channeling his inner Douglas Adams, Zweig’s important second rule is “Don’t Panic.”

August 20, 2015

$800 Billion. 150,000 deaths. What do these statistics have in common?

According to Fareed Zakaria, sadly nothing whatsoever.

$800 billion is the total amount that taxpayers have spent on Homeland Security since 9/11. During that time, 74 people have lost their lives on American soil due to actions deemed to be terrorist events. While there is no way to know how many other lives the $800 billion has saved, I suspect it is not a very large number.

On the other had, in those same 14 years, 150,000 people have lost their lives in the US due to gun homicides, a constant 11-12,000 deaths per year since 9/11. To combat this deadly threat to life and limb, taxpayers have spent … well, nothing, according to Zakaria. Had terrorists been responsible for these deaths, one can only imagine the all-out response.

There is something very wrong with this picture.

As Zakaria points out, this is not a mental illness problem, as many on one side of this issue are quick to claim. We have 50 times the gun homicide rate of Germany for example, but hardly anything close 50 times the incidence of mental illness. We do however have hundreds of thousands, if not millions, more weapons in public hands.

Another popular gun rights retort to the recurring loss of innocent lives in mass shootings is just to “give everyone a gun.” It is hard to imagine a more apocalyptic vision than one of pitched gunfights in public shopping malls, movie theaters, schools and churches across America. If armed, well-trained, professionals on American military bases cannot defend themselves against this sort of threat, it is difficult to see how giving guns to grammar school teachers would lead to more public safety.

Of the many things that make me furious about today’s political landscape in America, the hijacking of the American public’s basic safety concerns by a well-funded commercial interest group is near the top of my list.

It is not an act of fate that has caused 150,000 Americans to die over the last 15 years. It is a product of laws, court decisions, lobbying and pandering politicians. And we can change it.

Zakaria is certainly more optimistic on this, and many other issues, than am I. But I will give kudos to this E.J. Dionne Op Ed in the WaPo as a rational look at what has to be done to make America safer from the lethal menace to each and every one of us from guns in America.

July 27, 2015

Millenials and Their Risky Financial Behaviors

20-Something? Know or related to one?  This short article should be required reading for those in college or recently graduated.

Only 58% of students from four-year institutions say they feel prepared to manage their money. Three out of five don’t use budgets. 17% say they don’t even manage their money; their parents do it for them. 16% say they lived paycheck to paycheck, and yet only three-quarters stop spending when their bank account balances were low.

@Michael Kitces

July 6, 2015

Ben Hunt Channels 1914

In 1914, Europe had arrived at a point in which every country except Germany was afraid of the present, and Germany was afraid of the future.

Sir Edward Grey

That from a Ben Hunt piece drawing parallels between today’s Greek debt crisis and the lead-up to WWI.

Since the 2008 financial crisis, I have held that the US parallel to that event was not 1929-32 but the financial panic of 1907. Subsequent events seem to at least loosely confirm this thesis. My biggest fear was, and remains, that in the inevitable game of global musical chairs (who ends up holding the bad debts), the risk was that one party or more was going to be a sore loser. And that war, not financial collapse, was the bigger concern.

Ben is not predicting a war in Europe over who should pay whom what. But his is a cautionary perspective and reminds us that we take the status quo for granted at our own peril.

In spite of all the apparent turmoil in the world and the terror events in our country and abroad, the seven decades since WWII have been among the most pacific in modern history. A great part of this is due to the establishment of international trade and the maintenance of a global order by the US. The Euro experiment was created in part as an add-on attempt to further preclude another catastrophe such as befell Europe twice in the 20th century. But the antecedent attempt to bridge European borders with a common currency (Austria Hungary in the 1880s) did nothing to prevent WWI. And I suspect when push comes to shove, neither the Euro, nor all the trade agreements in the world, can prevent a desperate country from doing what desperate countries do.

We shall see whether, hopefully, calmer heads prevail, or whether the US will be called upon (and is still willing) to play the global order enforcer should events take a more hostile turn.

July 5, 2015

1953 London Debt Accords

Der deutsche Vertreter bei den Verhandlungen όber die Regelung

 

Wherein major creditor nations – that included Greece – forgave 50% of German debt. It makes an interesting contrast to the situation today where debtor and creditor nation have switched places.

(pointer @VisualEcon)

 

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