(originally written Oct 2, 2011. Part of Great Upload of 2013.)
I find it amusing that, while many of my fellow Vancouverites are attending places of worship this Sunday morning, I’m taking a break from work to muse about money, that root of all kinds of evil. :)
Right now, the stock market is a relatively cheery (I said relatively) topic for me, since I’ve fared so badly in my first few attempts at Fate of the World, a computer game in the “Civilization” genre where you, at the head of a UN-like agency, attempt to prevent catastrophic global warming.
Designed in conjunction with climate researchers, you need to shrewdly manage your budget by enacting effective climate legislation, while appeasing locals on each continent just enough that they don’t kick you out and pursue their own path. :)
In addition to the well-known options like cap-and-trade, renewables, biofuels, nuclear and efficiency policies, you can do more exotic things like legislate organic farming, enforce a vegetarian diet (cows burp a lot), spray aerosols to reflect sunlight, or use a Tobin Tax on financial speculation to raise funds.
Meanwhile, back in Reality…
While the planet (or at least, Texas) burns, stock markets hit an important milestone recently, with dividend yields from American blue-chip companies surpassing the yields on US gov’t bonds. This hasn’t happened for a very long time, and is a signal that in several years, the price of most stocks (relative to earnings) will reach the point where even your financial advisor can invest your money for a decent rate-of-return. ;)
This is due to the fact that — for whatever reason — stock market prices tend to cycle between too-optimistic (1929, 1966) and too-pessimistic (1947, 1980). We came off a too-optimistic high around 2000, so one would reasonably expect that after about five more years of investment purgatory, stock price trends will slant upwards again.
In the absence of catastrophic global warming, that is. :P
Gold feeds off stock market pessimism, so one would expect that maybe sometime between the next two Winter Olympics, it will spike upwards in a manner that dwarfs the frenzy that happened in August. I guess I’ll insert yesterday’s Dilbert cartoon here:
Gold has properly dropped for the past month, but past precedent has such hangovers lasting two. Too many enthusiasts are still humming “don’t stop believing”. ;)
The corporate locusts known as gold mining stocks didn’t go up much earlier this year, and as such are likely to enjoy a big run-up through next spring. [note from 2013: this totally didn’t happen. By which I mean, the absolute opposite happened.] The main reason is that companies’ profit margins have now gone through the roof, which means they’ll increase dividends, which in turn will attract pension funds and other big money pools.
It’s worth wondering why the stocks would rise with the metal in winter but not in summer. The most plausible explanation I’ve encountered, is that when a commodity price rises to unprecedented levels (as gold did in the summer) no one thinks they’ll stay there for long. After all, it’s unprecedented…!
A Tim Thomas tangent
Taking a hockey example, goalie Tim Thomas had a great year in 2008-2009. But since he was 35 at the time, and had never really shone before, a lot of people thought it was a fluke. Especially since he had a ho-hum year in 2009-2010, even losing the starting goalie position to Tukka Rask.
But if a commodity starts creeping upwards a second time to hitherto-unprecedented levels, stock analysts start revising their price assumptions upwards; companies get valued much more richly; and thanks to stock options, mediocre executives get valued most richly of all. ;)
Back to hockey, Tim Thomas did the impossible and put up better-than-Dominik-Hasek numbers in 2010-2011; what with his 2008-2009 performance, everyone now expects him to the best goalie in the league, and he was probably the first goalie picked in every hockey pool this fall. This, despite the fact that at 38, he can’t have that many good years left in him. Such are our human foibles.
On Expert Foxes and Hedgehogs
We recently covered a book (Future Babble) in our work book club about the uselessness of expert predictions for the future. The author argued that experts who present themselves (over)confidently — that is to say, expert “hedgehogs” — are more likely to be wrong than the ones who hedge their predictions (expert “foxes”). A good pairing here would be that of Dennis Gartman and Richard Russell. …and the argument holds!
Gartman, a bombastic investment newsletter writer, made the mistake of enabling skeptics (such as me) to follow his performance, by allowing an exchange-traded fund to follow his instructions. It was outperformed by 98% of mutual funds in 2009, and 82% of funds in 2010. I’m looking for a three-peat come December. :) [note from 2013: I think Gartman actually did above-average in 2011 among mutual funds. But not compared to the index, of course. :) ]
Richard Russell has been writing his financial newsletter writer almost as long as Elizabeth II has been the Queen of England. Apart from beating his drum about decadal trends, he doesn’t claim to know much about where things are going. But he takes subscribers’ money anyways. ;)
He’s credited with recommending buying stocks at the bottom in 1974, switching from gold to stocks in 1980, and then switching back in 1999, all of which were prescient. I remember reading something he wrote around 2003, suggesting that by the time gold finished rising, one ounce would almost buy the Dow. Emphasizing his reluctance to predict the number, he suggested that if absolutely forced to guess he’d say $3000, but that he wasn’t confident in it. (It was about $300/oz at the time.)
At the time I thought, “must be nice to have rich-person problems”. Actually, come to think of it, I still do… :)