Housing? Maybe 2011.
Stocks? I’m buying at these levels.
Looking back? Peter Schiff got most things right. I don’t think we’ll see inflation for a little while more, that might come when people actually have money, but we’re in a deflationary recession right now. Everything is hit. Everything.
I think we’ve got more pain to come, but after a nearly 45% hit to the broad indexes, my opinion is that it’s got to get better sometime. This could be a replay of the late 1974 double-bottom. JMHO, this is not investment advice. If you get gains, take ‘em, you may not know when they’ll come again.
Don’t buy SoCal housing yet, you’ll be handsomely rewarded in the future for patience. There’s a lot of knife catching out there that might tempt some people, but the trend is in, and it’s down.
I’m always personally wary of the “got to get better sometime” philosophy for evaluating markets, stock or otherwise. For the stock market in particular, it comes down to fundamentals: when will the future earnings and expected dividend payouts be substantially above fixed-income investments (to pay for the risk). There’s still a lot of valuation in companies with no future outside of government support (eg: the auto industry, many financial companies, etc.), and it’s a total unknown what value, if any, investors will eventually receive from those companies if/when they ever become dividend-yielding entities again.
The wariness extends to the broad economy in general too. I find the idea that “things will fix themselves, because they have in the past” particularly repugnant, along the same lines as the idea that the government can continue to borrow/spend at an ever increasing rate without consequences, because there haven’t been severe consequences yet. I see no reason to believe that the US will magically “get better”, and lots of reasons to think we’re in for a long period of bad times. As they say, the first step to recovery is admitting you have a problem, and we’re not even there yet.
Nick,
Good points all around. But, many companies do still have solid earnings; and growth potential, though it’s hard to see how in the current deflationary environment. However, there is substantial sideline capital waiting for some signal. Look at treasury yields as signaling a lot of cash waiting in the wings. Fear has gripped the markets, and just like in the opposing frenzy of the investment mania, there’s no certain way of knowing when it will stop.
However, many great companies with solid earnings and scalable enterprises and pay excellent dividends are cheap by historical standards, and downright super-cheap when compared with alternative yields. What happens at the bottom is that many find themselves with too much cash. Two years ago, I felt we were having a boom like 1972 when some were comparing our monetary situation more like 1979. I still believe that we are experiencing a difficult time like early-mid 1970′s. However, without having lived through it as an investor, I’d be a fool to not recognize that there are differences.
At the same time, while there are many similarities between the 1920′s crash (that have been brought up endlessly in media and blogs), the differences are so stark and immutable that I have to say that we show very little resemblance to that time and therefore can show few parallels besides the most superficial. Just my opinion, and not investment advice.
Chuck Ponzi
I guess I just don’t see the argument for solid earnings and growth potential for hardy any industries or companies in the current climate. For example, you might consider oil to be fairly safe, but with the new government administration we could see substantial “excess profit” taxes and “environmental” taxes, as well as more overt market manipulation, and both of those lend uncertainty to that potential investment. Financial companies still have hundreds of billions in unrealized losses, RE dependent industries will fall further, defense contractors will likely be eviscerated in the next 4 years, enhanced union power will sap strength from mainstream companies, etc. There’s virtually nothing coming which is going to help American businesses, and lots of uncertainty and downside potential.
Add to that a massive national debt burden, spiraling health care and retirement obligation costs, heavy government market interference, and forced industry nationalization (eg: health care), and I just don’t see the rational case for future health of virtually any industries in the US, at least for the private investor without insider connections to the Looters in Washington. There are a few growth industries (eg: carbon credit selling), but the profits are entirely dependent on the Looter laws, and mainly funneled to government insiders. It’s no wonder private money is waiting on the sidelines: the market is going to be a very unfriendly place to be for the next few years, unless you have the Washington connections to ensure your continued payouts at taxpayer expense (eg: Paulson now, the dems soon).
Well, I try not to stick my neck out on things, as I have often been proven wrong, but there is one area that I have more comfort investing in.
However, I am very keen on biotech, personally. In my opinion, there are some amazing buys available currently there. Good growth possibilities, and solid earnings with dividends.
Chuck Ponzi
There are 5 essential items. Water, Food, Clothing, Shelter, and fuel. If your investment does not depend these then there’s still a chance to lose money on it.
The Japanese made it through the 90′s because they were frugal and were savers. Americans in general are neither.
Americans were doing the Charleston in the 20′s shortly before things fell apart. Now they watch dancing with the stars.
I would go one step further… there are no safe investments. None. Savings is a critical component of investing, not mutually exclusive. You need savings to begin investing; which is what the problem in the first place was, people like Casey Serin believed they were “investors” when they had no savings and no skin in the game.
Chuck Ponzi
Hey fellas…
Been trying to get a feel for what the world thinks of deflationary pressures and I found your blog, Chuck.
After reading some posts from back in March, I gotta say you made some good calls on the imminent (now current) deflation.
I’ll be reading and posting in the future…looking forward to it…
Must say, I’d be wary of buying stocks right now…we just crashed right through the low on the S&P and 8k on the DJIA…even though the technicians threw their charts out the window a long time ago, that is pretty significant…everytime we’ve dropped below 8k on the Dow, we’ve seen a big move to cover (with no bulls buying, of course), but now the shorts seem pretty fearless…they didn’t cover and we may even see some piling on tomorrow…two words: caveat emptor
But, then again, KC is always wrong…
There are psychological barriers all around, and nothing makes sense in this type of environment. However, recoveries come very quickly in the stock market and can be missed when every chance is second guessed. The key is to keep some powder dry and look for what you believe is the best opportunity.
Chuck
Amazing video, Chuck! It’s a little funny to hear the other panelists laugh at him when he was so dead-on right. Well, it would be funny if I hadn’t lost 40% of my retirement funds so far…
it’s fine to buy now, but i’d be mentally prepared for another 50% downside. that feels right to me on both a top down and bottoms up basis.
from a top down perspective, S&P earnings peaked at 100. the pre-tax income was 150 (roughly). revenue was approximately 1000; COGS 70% (30% gross margin) and SG&A was roughly 15%.
in a two year, severe recession i wouldn’t be surprised to see revenue down 25%. that’s 750. COGS is still 70%, for a gross margin of 225. SG&A has some fat in it, but by and large american business is pretty lean (record margins). SG&A is largely fixed. that yields pre-tax income of 75, tax adjusted is 50.
what kind of P/E do you put on that in a world where utilities, telcoms and tobaccos (A rated, highly durable industries) are issuing bonds at 550 over treasuries? it sure as heck isn’t 15x. i’d like to see at least a 300bps spread to that. that implies a market multiple of around 8.5x. which is 425, or almost 50% down from current levels.
that would make the peak/trough decline 70%. not as bad as the Great Depression, but significantly more worse than the 73/74 bear or the tech bubble collapse.
given that this is probably going to be the worst recession any of us will ever experience – and the worst since the big one in the 30′s, splitting the difference between 73/74 (down 50%) and 29/32 (down 90%) feels about right to me.
bottoms up is tougher to quantify. but i’ll put it this way. negative operating leverage is a bear. there are lots of stocks in the market that are discounting a 5% GDP contraction in 2009, but few that are discounting a 10% contraction. and few stocks are discounting a multi-year downturn. most analysts still have estimates and price targets that assume mean reversion (revenue & margins) in 2010.
well, given that profitability didn’t mean revert basically from the entire period from 1982 until 2007, it seems highly possible to me that profits could go through a multi-year period where they refuse to mean regress on the other side of the coin.
bonds are a much better deal right now than equities. you have a contractual claim on the cash flows of the business that is senior to equities and the government. Inv grade is 500-600 over and heading lower. high yield is 2000 over. who cares about equities when you can get these types of returns in bonds.
Question – when has Peter schiff ever been incorrect? I have listened/watched everything this man has made public since 2004 and have never found him to be wrong. So list what he has not been accurate on.
Peter Schiff last year was calling that oil would go to $200 and stay there.
He also told everyone to pile into Foreign assets just as all major foreign markets were peaking late last year. Many of the markets he recommended are substantially off their peaks, even more than US assets. In fact, the dollar rallied since he made his most bearish USD calls.
It may all still happen in the long run, but I think he seriously underestimates the deflationary effect of international deleveraging in the meantime. Personally, i don’t care so much what happens in 3 or 4 years WRT the stock market, bond market, or USD. I want to know for the next 6 months, and frankly, I only care about the long run for an asset that I intend to hold for the long run; a house.
Don’t get me wrong, Peter Schiff has been right about a lot of things, but if you follow his advice about investing, you’re likely to do poorly. He’s either too far ahead of the curve, or too far behind it.
Chuck