This three-part Youtube clip of a recent speech by Bob Shiller is worth watching. His comments near the end of Part 2 on the lack of unbiased financial advice is something I have been harping on for years now. The present crisis is a failure to manage risk. It is also a mess caused by widespread financial ignorance and the salesmanship of the money business.



We can't take medical advice from drug manufacturers. We can't take financial advice from financial broker/dealers.   more »

Picking up on my post from yesterday, we have more incredible stats today via The Big Picture and Bianco Research on the relative cost of US government bail-outs to date in this crisis versus other historic interventions. It is hard to even get one's mind around the numbers involved here. Every American could have government paid room, board, designer clothes, state of the art medical care and Harvard's PHD's for the money that has been spent on these bail-outs. Great waste has been a stubborn cancer on humanity. Is there hope we can learn from this mother-of-all episodes?

"If we add in the Citi bailout, the total cost now exceeds $4.6165 trillion dollars. People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay In American history.

Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion"

See Big Bailouts, Bigger Bucks   more »

Thanks to reader Will for sending me a link to this rare Jeremy Grantham interview clip from November 21, 20008. I have long respected Grantham for his realist views and tactical advice to real life investors. He was one of the few who called the tech bubble in the late '90's and warned investors of the irrational risk to capital invested. As far back as 2005 he was also one of a seemingly small group of us warning about world wide bubbles and the threat that was mounting to the global economy and investors.

I agree with what Grantham says in this interview. He still believes that there is a 2 to 1 probability that stock markets will be lower next year before they bottom this cycle. He acknowledges that they could go a lot lower before this de-levering phase is complete. On the other hand, there is a smaller probability that markets could rally from present levels. Market sentiment is a wild and wooly beast. We have to be develop our plan for a range of possible outcomes...   more »

The late date rally on Friday was long, long, overdue. Sadly even with 5%+ gains, the markets still finished steeply lower on the week. The carnage of 2008 while not unprecedented will be legendary on all metrics. When markets become so relentlessly oversold, it is usual to expect at least interim days and weeks of a counter-trend rally. Maybe we are seeing some follow-through on that hope today. Europe rallied strongly today as news of the Citi bail-out part 2 spurred fresh hope.

The question is will this rally have some staying power over the next few months? Will it be the start of a cyclical shift back to the next bull? I would be content if it were. I doubt that it is. Yet. But we will watch the technicals carefully as always.

Despite the 494 point rise on the Dow late Friday, we see that in the broader market, there were 1245 new lows and only 2 new highs--poor breadth. We also know that the Lowry’s buying pressure broke to yet another new low, while selling pressure broke to a fresh high. This is a menacing combination.

Meanwhile there is no question that fundamental valuations appear much more favourable today than they have for the past several years. One can't help but notice for example that dividend yields on REIT ETFs that were less than 4% in 2006 are now about 12%. Financial shares are yielding more than high quality bonds and this is as it should be. As we have seen vividly over the past 13 months, financial shares can carry a lot of financial risk. A few years ago people were blindly holding risk assets without any likelihood of adequate reward. Investors have now learned the hard way that they need to be adequately compensated for the risk of holding equities. This is a good lesson to learn...   more »

Watching the auto bailout hearings the past couple of days has been riveting. I believe business history will record this episode as a low point for both capitalism and unions. Business schools will teach the story for decades to come about the classic demise of a mature business devastated by abuse and failed leadership. Everyone from management to unions were resting on past success and their entitlements so hard, they forgot to protect and nurture their franchise.

But as Rick Wagoner stands there with his well-manicured-hands out to the American taxpayers I would love someone to ask him one question from me:

"Ricko, why in 2005 did GM systematically collect and crush its fleet of EV-1 electric cars?

It was among the fastest, most efficient production cars ever built. It ran on electricity, produced no emissions and catapulted American technology to the forefront of the automotive industry. The lucky few who drove it never wanted to give it up. What the hell were you thinking?"

(If you haven't seen the documentary "Who killed the Electric Car?" yet watch it now and be amazed.)

I am very torn on what the government should do now. My intuition is that they should not bail these top heavy, sub-standard companies out. I think any money given to the big 3 will ultimately be money (they don't have) thrown down the drain. For sure, the executives should be summarily fired for the failed leadership they have offered to this cause. My hesitation though is about the 700b they have promised to the banking sector. The banking sector has also been hopelessly flawed and scandalously led for many years. These failures are at the very root of our present global angst. Why should they be saved while the bluer collar auto workers get the punt?

In the end, as painful as it is, I think that the auto makers do need to go down. If there are other American car companies to come they will have to rise out of the ashes by starting with new energy, innovation and lean work ethic.

The government should spend money helping the auto workers to re-learn and re-train to a new, productive and sustainable career. It will be hard for many, but in the end this change has been a long time coming and in many ways stubbornly earned.

Meanwhile the TSX broke through 8,000 today...   more »

Off to speak at the CFA Institute Asset Allocation for Private Clients conference in Atlanta, Georgia. My topic: "When to hold 'em and when to fold 'em: Investment policy that real life people can stick."
That is, so long as the snow storm here today doesn't cancel my flight Monday. Glad we finally got our leaves raked last week. Merry Christmas!   more »

Ms. Park did an interview on BNN today at 1:35pm EST talking about recent market action and economic developments.
A link should be available after the show on the BNN web site.   more »

After a year long down cycle and losses of more than 40%, world market trends turned tentatively positive at the end of October and suggested weeks or months of at least interim rally. Responding to this evidence, we took a small entry position in the broad market in Canada and the US(hedged). What happened next was that the trend broke down again this week and we sold.

Often a trade like that will stay in play for a few months. This time it broke down really fast.

The trouble with the financial news and economic data is that the market will turn long before the data. So if we were to just react to the news or how we or our clients feel about things, we would be of no value as a service. The rational approach is to measure and count the actual money flow and respond tactically to the evidence as it comes.

For now, we are content to remain out and watch carefully as the markets search for its next support level.   more »

Retrospective economic evidence has now prompted most members of NBER to individually acknowledge that the US is in the midst of the worst recession since at least the Second World War. Jeffrey Frankel, a professor at Harvard University and member of the committee was interviewed by Bloomberg on November 10.

For about a year, we have believed that the US is in a recession. It started with housing and the financial sector and then moved to manufacturing and the auto industry. We know that the contagion continues to spread and that even the previously perky service sector is now in outright contraction. We are clearly still in the early stages of this recession which could last for another year, maybe more. I have long observed that based on anaemic wage and job growth, we really should have experienced a two year recession in 2001 and 2002. Had it not been for the plentiful supply of cheap credit and Home Equity Withdrawals that prompted consumption, we would have had our two year recession 6 years ago. In a sense then, the carnage now, is really just that same recession delayed and magnified.

Useful analysts could see that the economic injury from the credit crisis would be significant and long to heal. The stock market was reluctant and slow to acknowledge and re-price this realty. This fall it caught on at last, reacting rather violently. Based on the October 10, 2008 lows, after average losses of more than 40% on markets around the world, fundamental prices for stocks are relatively more attractive than we have seen in many years.

But relative valuation does not mean we have yet seen the lows of this bear market. It struck us as just a little suspicious that October 10 could be "the' low of this bear, when "the" low of the 2000-2002 bear was also October 10. Could it be that the markets had hoped October 10 was the low in wishful thinking and this had triggered some buying and a bounce? Today averages are putting the October 10 lows to the test once more. So far this morning the Dow has breached the critical 8451 and the S&P has dropped through the psychological 900 like butter. Today's close will tell us the next chapter of this tale...   more »

18 months into the credit crisis, Oppenheimer bank analyst Meredith Whitney says she is still "equally worried" now about the future of the banking sector as she was over a year ago. She discusses the ongoing negative impacts that the credit crisis has brought to our real economy and the challenges ahead as de-levering unwinds.
Watch the clip here.   more »

My friend Laura recently tipped me off to exciting developments in Algae as a clean, domestic, alternative energy. Watch this amazing YouTube clip:



Actually we have had known about the potential for Algae oil since the 1970's. See Algae Interests Align...   more »

Over the past couple of weeks I have written that we were getting close to a technical buy on some of the broad equity markets. This week we toed in our first buy tranches on the S&P and the TSX. We still have a lot of cash not yet committed. If the recent up trend of the past week continues, we will be no doubt be adding more capital in the weeks ahead. But if the trend breaks down again, we will have no hesitation to exit.

I can make an argument for why markets could rally here. I can make an argument that they may be likely to break down again in the not too distant future. I have said prices could react similar to 1973-74, when the market fell 40% to October 1973 before rallying 13% from November to February, and then breaking down to a fresh low in the fall of 1974. That produced 2 back to back annual losses of -26% for the US markets during that cyclical downturn of the secular bear that ran from 1966 to 1982.

This recession is going to last longer than most are prepared for. The economic data will undoubtedly be dark for several months to come. The stock market will work away at re-pricing as it goes. At present, I am neither a bull nor a bear. Until the trend stabilizes further, I would caution against making strong bets with capital either long or short.   more »

America came out in record numbers last night to choose their new leader. It was a sight that inspired hope.

Whatever your politics, to see so many people from all walks of life come out to claim a stake in their own future, has to be encouraging. For at least the last 15 years, many people have blindly followed marketing and salesmanship without accepting personal responsibility for themselves and their countries. Many have allowed themselves to be blindly tossed about. Waking up now, they find that neglect has left them weakened and vulnerable on many fronts.

As a Canadian I could not help but note what great emphasis was placed on the colour of the candidates in the US election. But then, colour has always been a very defining attribute in America. I can say that it has never been a defining issue in Canadian elections. But lest that sound smug, I acknowledge that for all our melting-pot-diversity, in Canada we have never yet elected a person of colour or a woman to be our national leader.

To its credit this year, America seriously contemplated all kinds of leaders, black, white, male and female. In the end, the majority chose the person they thought most able for the enormous job at hand. Last night Americans picked their leader, not a colour or a sex.

I am reminded of so many wise and illuminating Dr. Seuss stories. The Sneetches on the beaches fought over whether those with stars on their bellies were superior to those with none. The people who liked to eat their toast butter-side up fought to the brink of nuclear extinction against those who liked their toast butter-side down...   more »

Some readers have expressed surprise at my endorsement of the JP Morgan plan to re-work some of their existing mortgage terms with distressed homeowners.

For the record. I am not saying anything about the government bailing out homeowners here. I am saying the parties to the contract have a reason to seek a win-win solution where possible. I am saying there was a bad contract made between many borrowers and lenders. The borrowers over-borrowed and the lenders over-lent. The banks and mortgage dealers were over-paid on the front end for business that in many cases should never have been written. Both sides were at fault. It is in the best interest of both parties to the private contract to see if they can work out a solution other than kicking the borrowers out of the home and the bank/lenders collecting empty houses they do not wish to hold and cannot sell.

John Hussman suggests the written down principle could sit as a lien on the property interest free, and the banks can re-coup the lien some day if and when the house is sold at a premium above the first mortgage. This is another way to the same end. The goal is to be creative and come up with practical solutions that are better than immediate foreclosure and lose-lose for all parties.

There will be many cases where the borrower has since lost his or her job, and so no re-work will be possible. But where you have people able and willing to salvage the contract, on necessarily revised terms, I say the parties should be encouraged to think outside the box and negotiate an agreement.

I have much more trouble with the idea that the government should bail out banks for their bad lending decisions. Banks are supposed to be experts at lending. Aren't they always telling us what experts they are! They should be expected to figure out free-market solutions to their bad business decisions.   more »

For many months I have said that the banks will have to admit where they over-lent, write off some principal and start working with homeowners to keep as many as possible in their homes. Friday we got some encouraging news from JP Morgan.

"JPMorgan Chase & Co., the largest U.S. bank by market value, said it won't begin new foreclosure proceedings on some loans while it finds ways to make payments easier on $110 billion of problem mortgages.

Within the next 90 days, the bank, which two weeks ago accepted a $25 billion cash infusion from the government, will examine loans and may agree to reduce interest rates or principal amounts, New York-based JPMorgan said today in a statement. It will also open 24 centers to provide counseling in areas with high delinquency rates.

Congress has been urging financial-services companies to work with borrowers and avoid foreclosures, which rose to the highest on record in the third quarter. Bank of America Corp. said it will help more than 630,000 at-risk borrowers stay in their homes."

Finally some steps in the right direction to help heal the housing market...   more »