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This amazing market!



June 25, 2009 – Comments (20)

I don't know about the rest of you, but I'm humbled by this market.

Just about every day the market moves in the opposite direction of what I think it will.

The market hasn't behaved on fundamentals for months.

Lately I've been playing a sideways market and that seems to work best at the moment.

I know a few things...

1) We haven't possibly hit bottom, but the government is making it a mission to make sure that we don't.

2) In recovery, inflation is inevitable and hyper-inflation is probable.

3) The financials are way too overvalued, but the government has officially scared me out of the sector. They have more borrowed money than I have patience.

4) No matter how things turn out, I know that they won't turn out well.

5) All this pumping of money is gonna lead to the same thing happening again in less than a decade.


I really hope that I'm wrong, but I don't see how. Can anybody boost my spirits, by showing me a time where government manipulation of the economy worked out well in the long run?

20 Comments – Post Your Own

#1) On June 25, 2009 at 11:11 PM, AllStarPortfolio (24.32) wrote:


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#2) On June 25, 2009 at 11:50 PM, Mary953 (84.21) wrote:

no   *sigh*  not unless you like revolutions and rebellions 

(Disclosure - Degree in History)


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#3) On June 25, 2009 at 11:56 PM, Harold71 (< 20) wrote:


The fundamentals will return CG...they always do.

Mary nailed it as well.


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#4) On June 26, 2009 at 12:10 AM, ReadEmAnWeep (90.21) wrote:


I'm sorry sir, but you are wrong....

Oh I know how about at the beginning of the great depression when the german government started printing marks like made so everyone had money, and then they all did! So now they had a case of hyper-inflation... But then it was like a whole cart of money for a loaf of bread and then ... wait no this was another example of when it was bad....

So no... I think you are right....

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#5) On June 26, 2009 at 8:43 AM, rofgile (99.52) wrote:



 You need boosting of spirits?  Read checklist's latest blogs on the valuation of the market.  Its a much different perspective. 

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#6) On June 26, 2009 at 8:55 AM, Rebkong1 (< 20) wrote:

there are 2 scenarios...depression or hyper inflation..i dont see any middle ground here...if this market continues to go up will be b/c of the weak dollar and b/c of inflation may make a ton of money by trading this market...but it wont be worth a damn...


 the best case scenario is we fall stay in a depression..obama is exposed for his deliberate attempts to tank this economy so his ultimate plan (new world order, single currency) etc can be fulfilled..will be thwarted..and we can let things correct as natural process..not by some artificial..government induced bandaid....its gonna take a while to get this country back on track...but really that is our only hope

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#7) On June 26, 2009 at 9:06 AM, booyahh (< 20) wrote:

The market has rarely ever reflected fundamentals. Why would they suddenly do so now ? All asset prices are ultimately driven by the amount of money pumped into them. Whenever money flows into an asset,  prices get inflated, while whenever money flows out of an asset, prices get deflated.

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#8) On June 26, 2009 at 9:17 AM, ChannelDunlap (< 20) wrote:

They gov't jumped in after 9/11, right?  That didn't turn out so bad.  That whole "New Deal" thing wasn't quite as direct but still had the same effect and didn't blow up in our faces.  Just a couple examples of where the gov't has attempted to boost the economy and succeeded. 

If I thought they would do it, I'd say some inflation might not be a bad thing if I helped the gov't shed some of it's debt.  But it's silly to think that they would use the opportunity.  

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#9) On June 26, 2009 at 9:45 AM, bigpeach (27.87) wrote:

We hear this sort of thing a lot. Bears proclaiming the market is behaving irrationally and against the fundamentals because it's not plunging as they believe it should. I'll say what I usually do, when things don't go the way you expect you should rethink what you believe you know. Some food for thought, and perhaps spirit boosting:

Large scale inflation is not inevitable, despite what a lot of arm chair economists think. The Fed has printed enough money to potentially cause hyper inflation, but what many people seem to forget is that they can pull in out of the economy as well. If they get it right, inflation can be avoided.

Banks overvalued? Maybe, maybe not. I don't think anybody really knows. If you've never taken a deep look at a structured security, it's an interesting exercise. One that will leave you realizing that the market has no idea how to price them. Historically speaking, large degrees of uncertainty lead to large risk premiums. If we let history alone be our guide, we would assume current market prices for many bank assets are too low. It's entirely possible that banks are horribly undervalued.

Americans are finally saving. The savings rate came out today at 6.9%. While that leads to a lot of paid at the moment (the paradox of thrift) it also will lead to sustainable growth in the future.

Remember, we're two years into this mess. Time heals any economy.

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#10) On June 26, 2009 at 9:57 AM, russiangambit (28.91) wrote:

> Americans are finally saving. The savings rate came out today at 6.9%. While that leads to a lot of paid at the moment (the paradox of thrift) it also will lead to sustainable growth in the future

They are not saving, they are paying down debt because they can't get anymore credit. There is a difference - they don't have any more disposable income than they had a couple of years ago. Actually, they have less due to wage stagnation and unemployement.

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#11) On June 26, 2009 at 1:11 PM, tonylogan1 (27.73) wrote:

bigpeach makes some good points.

look back in the 80's in the USA at some of the things Warren Buffett was saying about the US Dollar's inevitable collapse due to our trade deficits and national debt.

He was right that it would eventually collapse, but here we are 30 years later and we still have not "collapsed"... 

My point is just that the timelines for some of these events may be MUCH longer than some of we bears expect, so we should be on guard that we do not overlook potential signs that the collapse may be delayed.

Those would include things like what bigpeach says... If we see signs that the FED is going to reign in monetary policy (not now but when/if then do...) , if the federal government tells California to drop dead (deflationary and good) or if they give the state a 20 Billion bailout (inflationary and bad)... etc.

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#12) On June 26, 2009 at 1:37 PM, bigpeach (27.87) wrote:

Good point Tony, timing is very important. There are people who have spent their lives warning about the impending hyper inflation due to irresponsible fiscal and monetary policy. Maybe they will eventually be right, maybe not. If they are right, but our currency doesn't collapse for another 20 years, should we really allow it to make our investing decisions for us now?

I would sum up my thoughts on this market by saying this is by far the most uncertain time I've ever seen. We have assets held at financial firms that many proclaim are worthless, but in reality nobody knows what they're worth. I've looked at a few and can authoritatively state that many structured securities are nearly impossible to value with any degree of certainty. We have a credit system, whose functioning is more critical than at any time in history, that could still collapse any day. We have centuries old businesses going bankrupt. We have a government that is intervening in the economy on an unprecedented scale.

I would discourage anyone from assuming they know anything. It is precisely this not knowing that leads to this amazing market.

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#13) On June 26, 2009 at 4:23 PM, Desertfox44 (< 20) wrote:

Bigpeach I must disagree with you on several of your observations.

>The Fed has printed enough money to potentially cause hyper- inflation, but what many people seem to forget is that they can pull in out of the economy as well. If they get it right, inflation can be avoided. <</p>

 Fed debt was ~$875bn before this crisis began and it was in highly liquid securities. To date they have bought around $1.4 trillion in MBS and other toxic debt from banks; and possibly ~$800bn more still to come. These securities are anything but liquid and are nearly impossible to value above 50 cents on the dollar - unless you believe in tooth fairies and banker assurances. The Fed has flooded the monetary system w/ quantitative easing. The Fed has become highly political and history has already proven Bernanke blew it in 2003 when he should have inceased rates, not decreased them - thereby inflating the housing bubble. Bernanke will not have the political will like Volker did to put the screws to the economy nor will he have the liquidity to mop up the blizzard of dollars unleashed, given such a bloated toxic balance sheet. Also, who will buy this? Reason #1 why the Fed must be audited and Bernanke not be reappointed!

>Banks overvalued? Maybe, maybe not...<</p>

The banks have been completely bailed out by the government and, their toxic debt back stopped with so many alphabet soup lending programs that the market pricing mechanisms heretofore used to assess/evaluate are no longer effective - therefore even determining a stock's true value is a fool's errand in reading their "balance" sheets.

What we do know is that the "stress tests" were a gov't farce to induce the market to invest dollars in private raisings, and it worked. But the banks are truly no better off for long term growth because of massive debt overhang - they still hold between $1.5-3 trillion in bad: CDS. CDO, RMBS and CMBS debt that still must be addressed no matter how much chicanery the gov't is allowing with mark to market revsions and similar magic to make the banks appear more healthy than reality will prove  out.

Believe me there are still more shoes to drop here despite the govt's most ardent market manipulation - many banks are truly insolvent. While we lectured the Japanese on their serial banking crises we have learned nothing from their ongoing disaster. The lesson if applied with courage: nationalize the bad banks, take a fire hose to the toxic debt by forcing blistering haircuts to the share and bond holders and reverse out of legitimate CDS's and flush those that were truly speculative. Painful and necessary.

>Americans are finally saving. The savings rate came out today at 6.9% <</p>

This is because they are out of money! Why? Household debt is out of control. I must agree with russiangambit, Americans are not saving they are paying down debt and must do so in spades because they no longer have access to credit lines as: ATM= houses, credit cards and  brokerage accounts. Americans still have a household debt/disposable income of 127%. The 35 year average is 88%!

Please read the The Fool's Morgan Housel article (6-24) on what it would take in terms of household debt reduction to get back to the 35 year average - it will drop your jaw. Until that happens the new reality of household deleveraging will continue with a vastly constrained access to any new, stupid levels of available liquidity. Remember too we still have a tidal wave of home Option-ARM resets, Alt-A resets and prime defaults blasting through the economy for the next 3 years. There is not enough liquidity to bail all these people out too.This is why the bank are not lending.

Finally unless you are over 50 you have never invested through times like the 70's and early 80's when blood was in the streets and interest rates topped out at 21%. Then, the Fed (Volker) and government, did not intervene to prop up the system in such reckless, socialistic ways, while accompanied by the dangerous issuance of long term debt that will now rise from 40% debt/GDP to 90% within 3 years. In some form or fashion we have added/committed $12 trillion to our national debt via monetary infusions and/or assumed debt backing on top of $11.7 existing national debt.Remember, debt is debt and it must be repaid and the interest on the debt must be paid. All that interest paid out could have gone to real productivity and that too will be a drag on the economy.

 No country in history has ever carried such a debt/GDP burden while maintaining its currency as the world's reserve standard - just ask the British after Bretton Woods - the pound was replaced by the dollar. Backing off this tar baby (dollar) may prove difficult but countries with remaining reserves are not going to buy and hold the 30 year bond with inflation eating their yields alive. They may not have a real choice now but believe me when their yields start getting eroded they will find or make some IMF or currency baskets fast to park their reserves.

 ChrisGraley I wish I could give you some better news but our country has devolved into a state where there are few consequences for the banking and political elite failing our country in such catastrophic and myriad ways. In that vain, we have become a kleptocracy where those in positions of power have, for the most part, isolated themselves from the consequences of their decisions and profit mightily at our expense. That does not mean you cannot make money in the market, but you will have to be more well-read and nimble than ever before. "Long term" investing for anything inside of 20 years has just been reduced to a lost decade's rubble due to all that has happened and that will continue to cascade from such governmental intrusion into the markets.

Most important is the reconition that the markets will just not work "normally" for a long time due to the unprecedented impact, manipulation and footprint the government now has with mortgage rates, insurance companies, GMAC finance, banks and auto companies. The concept of an "efficient" market, if there ever was one, has been obliterated. Just realize this, the "invisible hand" of the market is now visible and holding quite a bit of market-making firepower that will, at times, massively skew the markets in unknown and unexpected ways. Stay sharp, perform serious due diligence and tap into the pools of hive minds (like: The Fool); not the media mind. The brokers are selling their "book" to sucker you and the media is too lazy to truly reflect what is happening because THIS fiasco cannot be reduced to 3 or even 5 minute sound bites. 

BTW. I am somewwhat new to the Fool site, have never commented before, but have seriously invested in the equity/bond markets since 1972, so I do have some observations I might lend to these uncertain times. Bigpeach keep up the good work on your blog. Apologies for the length - but alot is being said in this blog, some without a historical market perspective, and I felt compelled to comment at length to clarify some ideas. Thanks for the patience and hope this helps.

A republic can be found on its last legs when politicians realize a citzenry can be bought off with it's own money. When the citizens finally figure this out in large enough numbers, or the economic conditions start to unravel in a negatively stochastic manner, the results are often very messy and more Black Swans start to circle.




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#14) On June 26, 2009 at 4:50 PM, Mary953 (84.21) wrote:


I have a serious problem with your comment.  You urge us to tap into the hive mind of CAPS and deliver an insightful, carefully constructed essay on the economic situation that afflicts our nation.  This is all to the good.  You then bury it in a comment in the blog of another person.  This decidedly is not good.  Your analysis needs to be under its own heading with the comments of other CAPSters and it needs to be read by as many as possible.  Please consider a copy-and-paste to transfer it to a blog of its own. 

All too often, a brilliant or thought provoking piece does not get the attention that it deserves.  Do not let this be one of those times.


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#15) On June 26, 2009 at 5:56 PM, Desertfox44 (< 20) wrote:


Thanks for the comments. New to the process here at Fool. However I was attempting to clarify some observations that Bigpeach made on ChrisGraley's blog. I was not attempting to bury my observations anywhere, only addressing on a point by point basis some of bigpeach's comments.

Please advise as to how I should transfer my comments to a (my?) blog of its own since I do not have a blog, and not sure my comments here even rate a blog - do you? Additionally, I suppose my comments would have to edit out the bigpeach quotes I use as a point of comment and start over? Thanks for the help and encouragement - I appreciate the feedback.


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#16) On June 26, 2009 at 6:38 PM, Mary953 (84.21) wrote:


First, I did not want to include these instructions in case you did not need them.  I was not wanting to offer insult, but this is not the first time that an excellent blog came from comments written in response to another set of comments.

To gather your own comment here - left click and drag your mouse over the entire area of the comment to highlight it.  Then right click to open the on-screen menu that includes COPY.  Click copy to store a copy into your temporary storage.  (If your computer keyboard has copy, cut, and paste keys, you can use the copy key instead.  You can use CTRL C to copy if you want that option - Any one of these will work)

Now go to your own CAPS page.  You have a set of tabs at the top - Quick Stats, Profile, Favorites, etc.  Open the last one, "Blog"  From the side, choose "Create a new blog".  This opens a template for a blog.

Put your cursor in the body of the blog and - hit CTRL V or press your Paste key on the keyboard or Right click your mouse and choose the PASTE option from the on-screen menu.  Any one of these three will drop your comment into the body of the blog template, ready to be edited for CAPS.  Add a title, do what editing you wish, and preview for typos.

I recommend a title that starts with "First Post - " and then adds the title.  This usually ensures that you get an audience with a large number of people that otherwise might not check your blog out.  Also post it mid afternoon Monday so that the weekend traveling CAPSters are back at work.  You may want to take a week and wait until the July 4th week is done.  Timing is up to you, but you should have a great audience for such a topic. 

Also, if you haven't seen it yet, this is my attempt to add a bit of my own area back to CAPS as a thank you.  There may be something here you can use -


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#17) On June 26, 2009 at 8:22 PM, ChrisGraley (28.68) wrote:

Let me know when that blog is up desertfox and I'll be the first to rec it. That was an extremely good post.

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#18) On June 27, 2009 at 1:11 AM, checklist34 (98.78) wrote:

some friends of mine got married today.  He makes, I think, about 100k, they have a house worth probably about $180k that they bought for ~$150k and then put some money into finishing the basement.  For the heck of it (I don't konw the details) lets assume that they made a 10% downpayment, and after 2 years of payment or so they probably still owe $125k or so.  Their next door neighbors house sold after 1 week on the market, 10 days for the hosue 2 days down, both of those sales happening this summer so its basically certain that they can move their home.

Lets assume no CC debt, again for the heck of it.  

Disposable income here is what?  70k? (disposeable income is  income less income tax)

He drives a company car, she drives a new car, so lets throw out $15k for the debt left on the car, making $140k in debt).

So thats a debt/disposable income of 2.  A dramatic figure per charts.  We should assume that they are doomed beyond belief?  

$6k/month of disposable income.  A car payment of probably about $700, a house payment of probably $1200.  Throw in whatever else (they live pretty well) and at the end of the day, they are saving money.

Similar story, fleshed out less thoroughly:  a friend of mine and his wife each make about $120k.  So thats maybe roughly approximately 160k of disposable income.  They built a house for $450k.  I'm sure they paid 20% down and all, as they are people I consider very fiscally responsible.  But here again, even if they had no car payment (they do have 1), they are vastly high in terms of debt/disposable income.  They save alot of money and plan to retire early.

A debt/disposable income of 1.2 isn't necessarily bad at all.  One just has to look at what the debt is, what its structure is, and all of that stuff.  Mortgage debt is probably less negative to the economy than, say, credit card debt because the payments are over such a long term and ultimately the house will have some value when it paid off, meaning that it has become in essence savings. Credit card debt has no value, represents no source of savings, and generally has a more aggressive repayment schedule.

But again, the situation isn't that simple, or that bullish.  

Because the vast bulk of their debt are houses, constructed in the last 5  years, and its not likely that they will consume another newly constructed house anytime soon.  So if we looked at their contributions to the economy, you'd see a huge spike in the years that they bought their houses.  Ultimately the economy should suffer a bit of a shelf-down effect if too many houses are built over a period, as this would lead to less houses being bought/built over some future period as these are rare purchases for any purchaser.  And if one person buys  a newly built house every year, that would ultimatley mean that some other person is buying a used house (far less contribution to the economy).

But in any case, I don't care to blabber on endlessly here, I just wish to offer this thought:

its not likely that things are happy happy sunshine out there, and the fact that stocks aren't up in 12 years and down 40% from recent highs, unemployment is hight, etc, etc, clearly shows that.


What I want to say is just this.  I think that the debt figures are paraded around quite often without proper analysis.  Pointing to a fact and declaring doom (or boom) isn't usually quite that simple.  Like my two friends above, who by a simple look at this metric are greusomely debt-ridden, yet both are saving at a fairly high rate and both, frankly, are financially responsible couples that are relatively well off.  

I am not arguing that the consumer doesn't have too much debt or a debt problem, but I offer that more analysis is needed before conluding.  If the rising debt coincides with rising home ownership, meaning a build up of mortgage debt, this is likely vastly preferable to a situation where, for example, credit card debt was rising rapidly as a percentage of total household debt.

If the rising debt over the past 10 years or whatever is related to a rising rate of home building/buying, meaning a rising level of mortgage debt, that doesn't necessarily have to have a profound impact on, say, how many cars or clothes we buy.  But it would have a profound impact on the contribution of new hole sales to the GDP over some period of time as home building/buying regressed to the mean (which itself would probably basically be population growth).

Just some thoughts. 

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#19) On June 27, 2009 at 1:19 AM, checklist34 (98.78) wrote:

it is almost a certainty that prices, on average, are depressed in an environment where fear or negativity is prevalent and values cannot be assertained easily or simply.  thats an important comment from above in this thread.

imagine that 10 stocks would either go to zero or 20.  Binary outcome.  What is the likely price that the market would puton them?  In bullish times it might be 12 bucks each, in bearish fearful times it would probably be closer to 8 bucks each.

That is the defining hallmark of the big crash from october through march, massively low pricing of risk.  Much is made about how the stocks that popped the most in the first part of the move from the march lows were "low quality" stocks, of companies with some risk.  Of course they were, this is typical of both the onset of bull markets and bear marmket rallies.  

As sentiment shifts toward the positive, risk pricing regresses towards the mean, towards normal, towards 10 bucks in the example above.  

What did someone expect to rally most from the march lows?  Proctor and Gamble and WalMart and McDonalds?  JNJ?  Thats just impossible, they weren't down enough to rally huge.

And thats why I am skeptical of this weeks moves up, I don't buy it.  From where I was sitting the move was bigger in safe stocks and stocks that aren't high risk than it was in the most beaten down risky fearful stocks.  

I think a good sign that another actual leg up in the market has commenced will be another period where risk gets re-priced, i.e., the most beaten down stocks rally more than the broad market.  This peaked on May 8th during this current move from the march lows, and a whole lot of "risky" names have retraced considerably in the meantime.

I am bearish on the markets short term right now for that reason.  I don't trust the bump up thursday because it wasn't in stocks that represent improving sentiment the most.  


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#20) On June 29, 2009 at 11:43 AM, Desertfox44 (< 20) wrote:

Mary 953, Sorry for the delay in response. Thanks for the help in your additional comments. Wow have you done an excellent job with your link helping new CAPSTERS navigate what is akin to falling down the Looking Glass hole in terms of the sheer immensity of the CAPS community and the information being disseminated. It will be very helpful to me in terms of orientation and guidance.

Although I have successfully invested for over 35 years, I claim no end to what I need to learn to be more successful - particularly in these most perilous of times. If I also can help people avoid mistakes I have made in interpreting: the market's movements, macroeconomic conditions or, a misunderstanding of financial history, then I am happy to have found a robust group in the CAPS community with whom to share information. Your link is so good, it should be listed under some general orientation guide for all users to be guided to when first getting started with CAPS.

Per your helpful comments -I am quite good on computers and all related software - have to be as an engineer. What you so helped me with is the actual mechanics of how to go about setting up a blog post of my own at the Fool. As I said, not sure if my comments really qualify as blog worthy but I will take your advice that it is as, well as ChrisGraley's, and work something up for after the July 4th weekend. Thanks again for encouragement. 


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