Friday, January 15, 2016

Wheeeeeeee

Random Barking:  Dog Track Daze

Would Risking It All At The Dog Races Be A Better Retirement Option?

The Great Curmudgeon, Blogger extraordinaire and member of the Kool Kidz, used to report days like today in the stock market under the title "Wheeee", and the usual note, "Another exciting day at the dog track." In fact, he still does.

And, it does appear to be an open question whether it's a better retirement option to bet your entire 401(k) on Greased Lightning in the fourth, as opposed to letting it ride on the Craps Table of the open market.  The Dow Jones Industrial Average has lost over 1,000 points since the market opened on January 4th.

The plunge is historic -- the Dow has never dropped that far in so short a period of time.  And, since the market's last true high on May 19, 2015 (18,312), it's lost over 2,300 points.

(For a little perspective, in the 2008 Crash the DJIA went from a then-all-time high of 14,066 to 6,626 -- however, that took nineteen months, most of it in a 3,300-point slide over eight weeks in the fall of 2009; you can see it in the chart below.)

The DJIA, 2006-2016 -- As Your Significant Other Says, "Click To Enlarge"

The most obvious effect of a drop in the market is that the value of investments decreases; and, a company's value (it's Market Capitalization) also drops.  But the longer-term effects are hard to project. It's likely that hundreds of billions of dollars in stock value has been lost by investors, just on the Dow Jones -- the international stock market has lost over $2.4 Trillion US in just the past ten trading days  (international market losses in the 2008 Crash have been estimated at $15 Trillion; the GDP of the United States is $14 Trillion, just for comparison).

All of this has been happening against a backdrop of regional wars, migration; politics (in Europe and the U.S.); an increase in global terrorism -- and a lack of consensus, a tremendous irresolution, in the world over how any of it should be dealt with.

And, all the talking heads on finance programs, asked to explain what's happening and look ahead to the future, all say that future is bright -- but the market will remain volatile, possibly with further losses; be cautious! Or, maybe be ready to pick up a few bargains! Or not. Or some of both! Most of these people work for one major investment house or another, or have firms of their own; their clients wouldn't appreciate it if they simply said, "Hey, man; who knows?"

One question which keeps being asked (and by these same talking heads) is: has the 'recovery' of the U.S. economy since the '08 Crash been "real"? Corporations in the U.S. have been reporting record profits for five years -- and while the wages and salaries of their "individual contributors" (read: Peasants) have stagnated, salaries and bonuses for managers and executives have skyrocketed.

Millions of jobs have been added to the American economy since 2009 -- but are they sustainable positions, tied to businesses that manufacture or build things, and sell them? Or are they jobs with Uber and TaskRabbit, tech startups? As they part-time, working from home? Are they waitpersons or others in the "service economy", which can vanish with the next downturn? 

Companies like Uber and Airbnb, Facebook and Twitter, or Rovio (developer of 'Angry Birds') are worth billions, traded at hundreds of dollars per share -- and all of that value is blue-sky; strictly on paper. As in the Dot-Com era, the vast majority of Tech companies only provide access to online services which many might want to use, but which no one truly needs.  This is the current shiny new business model -- an economy (and an investment market) driven by businesses built on "sharing".

It's a Geek Dream: You build a business to do something cool -- a different way to do this or that with your smartphone, or connect to a a service. People's lives will be... just so much better! It'll be powered by software, available online or via mobile -- so you hire people whose lives revolve around coding, project management; 'presentation'.  And you need money. Lots and lots of money.

However, businesses like this don't create anything that has separate, definable and independent value -- like a hammer, or wristwatch or dinnerware.  The people driving the "sharing economy" sniff, "Making and selling things? So 20th century; not cool. Leave that to some poor people in Malaysia or Bangladesh. We're building the future."  But their businesses sell concepts; nothing more. Any business has to consider image and position and marketing; but in these days, it may be all these businesses are about -- appearance.

After manufacturing left the U.S. for elsewhere, and the businesses dependent on selling the things being manufactured closed... how were Americans supposed to make a living? Since Clinton's first term in office, the dream that keeps being touted (including by Obama in his most recent SOTU) is that, somehow, American workers will just have to become better educated, and trained, and take "tech jobs" in the "new digital economy." That rising digital tide, allegedly, will lift all boats.


My concern is that the present 'recovery' and the "sharing economy" is based on the development of businesses that are forced to quickly turn a profit in a vicious cycle: Venture Capitalists put their money into Tech startups specifically because the business models (unlike those for industrial processes, or manufacturing) have a rapid ROI. Everyone just wants to get richer. This same focus and method in the 90's helped create an overvalued, "overheated" Tech sector, better known as the Dot-Com bubble.  

If America's so-called recovery since 2008 had been a real sea-change -- for example, if more capital investment had gone into developing a new manufacturing base for next-generation technology to move away from fossil fuels, or create entirely new economic sectors for development and investment -- then, I'd feel more confident about the future.  With few exceptions, that didn't happen; so I don't.
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The global economy is more interconnected than even before the 2008 Crash. No matter how many Quants are running algorithms to analyze market action and so allow the firms who employ them to trade more effectively (and make more profit), there are simply too many variables in play for anyone to say what will happen next. So as it turns out, Hey man, who knows? really is what it comes down to.

I don't pretend to understand how international stock markets, international banks and finance corporations; falling oil prices and the effect on dependent sectors of the global economy; and how the stability of economies in China, the EU and the U.S. inter-relate and affect each other.  I've met people who make decisions involving hundreds of millions of dollars in institutional investments on a daily basis. If they make a bad call, people could lose their employment; pensions could be affected.  You couldn't pay me enough to live with the level of stress associated with that.

One thing is true: investment markets are in part experiments in crowd psychology; John Maynard Keynes coined the term "Animal Spirits" in the 1930's to describe something already known -- that investment decisions can be influenced by emotion over reason:
Even apart from the instability due to speculation, there is ... instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations... [Most] of our decisions to do something positive... can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of [reasoned decisions based on weighing the data].
-- The General Theory Of Employment, Interest, And Money (1936)
It's an election year. Expect more "volatility and uncertainty", and of course, plenty of Animal.
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MEHR, MIT EL-ERIAN; For Those Who Do:  Mohammed El-Erian, Very Wired-In Guy, writes about current global market instability in Canada's Globe and Mail. While I believe there are some additional forces at work, his main points I've extracted here:
Financial markets are undergoing two consequential transitions... The first has to do with the shift from a prolonged regime of repressed financial volatility to an environment in which such instability is higher and less predictable. The primary reason is that central banks are less willing ... or less able ... to act as suppressors of volatility. 

...The second transition involves liquidity... Facing tighter regulation and sharply reduced market appetite for short-term [losses], broker-dealers are a lot less willing to take on inventory when the market overshoots. Other pools of capital, including sovereign wealth funds, also face constraints in increasing their risk-taking.

Left unchecked, these two transitions would feed each other, accentuating the general sense of financial instability and insecurity. The longer this continues, the greater the volatility... and the higher the risk that the instability could then spill back onto financial markets, fueling a destabilizing vicious cycle of economic and financial dislocations.

The good news is that such dynamics ultimately exhaust themselves. Unfortunately, that only happens after a lot of volatility, accompanied by a heightened risk of very sharp and disorderly declines in financial asset prices as well as contagion.
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