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Just staying alive
By Doug Wakefield with Ben Hill
usually very concerned about the economy and the markets, but very few of those
individuals really understand the benefits of short selling. Due to the large
losses of the late 1990s or the first few years out of the 2002 bottom, most
consultants still do not believe in the concept of shorting. So, the
consultants would rather a manager make the asset allocation decision between
long and short ratios, so if the results are disappointing, the consultants can
blame the manager. Most money managers don't even like to short. For example,
in the first quarter of 2008, the typical long/short fund was down 6%.
Obviously, shorting was not a part of their long/short strategy."
And in a way, when I think of the numerous conversations I've had with
individuals since the beginning of the credit crisis last July, I
completely understand.
Sometimes it seems like every time I think maybe the government intervention
schemes have reached an unsustainable level, and I am encouraging individuals
to consider managers or funds that use short-selling tools or I am ready to
move some money out of the markets, the "exercise in the folly of human ego"
takes over in Washington and Wall Street, and the markets don't decline. Think
about it; on Wednesday JP Morgan announced that their profits declined 50% in
the first quarter on a $5.1 billion dollar loss; its stock, and the markets,
exploded up.
I mean, we are reading the headlines and our world leaders even comment on
historic problems, and then we watch this happen. How would we feel? Would we
think, "Maybe I just don't get it? Maybe things really aren't as troubling as I
was lead to believe." General George S Patton once said, "Fatigue makes cowards
of us all." As government makes more frequent forays into the markets, we
should be careful to guard against it.
4: Wall Street's warnings are often "a day late and a dollar short". Those who
have studied the destruction of our nation's money at the hands of our Federal
Reserve may have profited handsomely over the past several years in
commodities, oil, and metals. As we look back over the last several weeks, I'd
like to pose a few questions. Has man-made inflation, through the destruction
of a currency, ever been sustainable? If not, will you know ahead of time when
the day arrives that the Federal Reserve's inflation and the government's
massive intervention fail - as they did in 1929?
Exit strategy
My question is not what constitutes money. Rather, as credit continues to
contract throughout the system, what happens when the collective groups of
investors, who have made money investing in inflationary strategies, are
increasingly impacted by the desire to lock in profits or the need for actual
money that they can spend in their daily lives? What would happen if these
marginal transactions flipped the switch on a number of quant models, causing
an inordinate number of them to exit the markets or short into the decline?
And lest we think that our current, historic juncture is substantially
different from the generations that preceded us, let's look at the London
Herald's front page from October 25 of 1929. That morning its headline read,
"WALL STREET CRASH!" The following excerpts are from two articles on the front
page:
A crisis meeting of New York's leading bankers was held in the
offices of JP Morgan & Co and prices recovered slightly in the afternoon on
the assurance from the firm's senior partner, Thomas W Lamont, that the
problems were "technical rather than a fundamental". Mr Lamont admitted that
"there has been a little distress selling on the Stock Exchange" but the most
influential financiers in New York concluded that the market was essentially
safe and was simply readjusting after four strong years of growth.
Next, we read:
Massive sales in the early morning created an
extraordinary atmosphere of chaos and panic. Brokers flooded the market with
orders from their investors to sell at any price. As the situation reached
crisis level, the market broke down entirely as the sea of brokers clamored
madly for non-existent buyers. Stocks were traded for any price and the value
of some companies halved during the course of the morning.
Has
human tendency changed so much over the past 80 years that we would take a 50%
loss in our stride? History records the plight of those investors who trusted
the financial leaders' comforting rhetoric that Friday in 1929. How did those
who stayed put "for the long term" do by 1932? What could the tumbling prices
of the two largest municipal bond insurers in the United States - MBIA and
Ambac - be telling us regarding future risks?
I can almost hear someone saying, "But certainly, with all the people at the
highest levels of government and finance working on this, something will be
done to change the course of yet one more credit bust, which has already been
stalled by the creation of new ways to repackage and sell yesterday's leveraged
debt to someone else."
After all, who am I to question the advice given every day by thousands of
advisors and newsletter writers? Who am I to question the system's
sustainability? At the end of the day, I'm just a person who keeps asking,
"What is the question that we all need to be asking that we aren't?"
A couple years ago, Gordon Graham, former director of the Socionomics
Institute, suggested I read Jared Diamond's book, Collapse: How Societies Choose
to Fail or Succeed. We included the story below in our June 2006
newsletter. As you read it, ask yourself if this information would be
appropriate for investors, advisors, traders, or for that matter, anyone.
Consider
a narrow river valley below a high dam, such that if the dam burst, the
resulting flood of water would drown people for a considerable distance
downstream. When attitude pollsters ask people downstream of the dam how
concerned they are about the dam's bursting, it's not surprising that fear of a
dam burst is lowest far downstream, and increases among residents increasingly
close to the dam. Surprisingly, though, after you get to just a few miles below
the dam, where fear of the dam's breaking is found to be the highest, the
concern then falls off to zero as you approach closer to the dam! That is, the
people living immediately under the dam, the ones most certain to be drowned in
a dam burst, profess unconcern. That's because of psychological denial: the
only way of preserving one's sanity while looking up every day at the dam is to
deny the possibility that it could burst.
If something that you perceive arouses in you a painful emotion, you may
subconsciously suppress or deny your perception in order to avoid the
unbearable pain, even though the practical results of ignoring your perception
may prove ultimately disastrous. The emotions most often responsible are
terror, anxiety, and grief. [Page 435 & 436]
If you are
growing more concerned by real world events, while finding emotional rest in
the long sideways movement in the US equity markets since January, I encourage
you to research. As one 40-year veteran from the institutional side of the
money world told me recently, "When I read your information, I know that you
are just telling me what you have learned from your research, with no agenda
other than presenting material for each of us to consider. In my 40 years of
managing money, this is almost unheard of."
Doug Wakefield is the president of Best Minds Inc, a registered
investment advisor. He can be reached at doug@bestmindsinc.com
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