SUMMARY - "PIG":
The Contrarian's View is published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. Material in this publication may be freely quoted provided proper attribution is given to its source. Subscription rate: Free on the Internet through the World-Wide Web service at Assumption College. Using your favorite Web-browsing program, Open URL http://nick.assumption.edu. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! Phone: (508) 757-2881
Whenever I get tempted by the lure of easy stock-market riches, I whip out my trusty calculator and crank in a few numbers. Let's begin with that 34%-per-year figure: After inflation, that's about 31% per year, compounded, in constant (1997) dollars.
My trusty calculator tells me that if a young investor began putting $2000 per year into a 401(k) or its equivalent, matched by $2000 from his or her employer, this year, and continues to add $4000 (in 1997 dollars) for 45 years until retirement at age 67, at a 31%-per-year rate he or she will retire with a nice little kitty of about $3.2 billion. Gee, I wish I'd started sooner.... I could get by quite nicely on that.
I have read about "everybody can be wealthy" articles appearing in the popular press near the peak of the 1929 stock-market mania. I can recall similar stories myself at the late-1960s peak and, of course, we're seeing a repeat of the syndrome today.... with "promises" of Dow 100,000 only a decade or so away. Financial writers do not translate this magic number into the impact on one's portfolio, otherwise it would be seen for what it is, totally ridiculous. You don't suppose that investors are, perhaps, being just a mite overoptimistic?
Well, Nick, you might say, perhaps expectations are too high, but it's a lot better than the garbage you've been feeding us for the past several years. If we had paid attention to you, we'd be so far behind by now that we'd never be able to catch up. (I have, indeed, received e-mails of which this message is the substance, frequently accompanied by invective.)
So I again returned to my trusty calculator. My retirement funds have essentially been in cash since 1992, except for a brief stab at stocks in early 1995 and a very recent foray with some of the money into bonds. Let's assume that our young investor was a part of the "new money" (85% of stock market value) that's been poured into stocks since 1992. He or she had decided I have rocks for brains, and began his or her stock market investment plan in 1993, just as I was diving into the safety of cash.
The actual return would have varied according to just when the periodic payments were made, but as a rough estimate the $20,000 contributed over the five years would have appreciated to about $33,200. If I similarly had been setting aside $4000 over the same five years, my contributions to a good money-market fund would now total about $23,275.
My being more than $9900 behind doesn't look very good, does it? But, let's not forget that my hypothetical young investor has been buying stocks at persistent levels of overvalue, during the past three years at the most overvalued levels in history. Now, suppose that early 1998 brings a mild bear market of the kind we saw many of during the 1950s to 1970s... and the stock market declines to where its value is 40% of GDP. (A decline to 40% from the 125% of GDP the market reached last October might not be your idea of a "mild" bear market - indeed, it would be catastrophic - but from a historical perspective, stocks which trade on average at 48% of GDP declining to 40% of GDP would not be a big deal.)
My young investor's portfolio would rapidly decline in value to about $10,625. At this point, I decide it is safe to return to the stock market, and both the young investor.... who, surprisingly, has not chickened out of stocks... and I continue to contribute $4000 per year (1997 dollars) to our plans for another 40 years, earning over this long haul an average (compounded) real (inflation-adjusted) return of 8% per year, until he/she retires and I am in the running to become the oldest employee in the world.
My retirement kitty will have grown to about $1.69 million; his/hers, to $1.35 million. The $340,000 difference is attributable entirely to his/her having bought badly-overpriced stocks, which then returned to reasonable levels of valuation, in his/her tender years.... even though (since that time) we both adopted and hewed to a buy--and-hold-for-the-long-term strategy.
Is there a moral to this tale? Of course.... it is: That which can be very good advice during "normal" times can become very bad advice in a mania. Today, after sixteen years of an unrelenting bull market in stocks, every "expert" is advising you to "buy and hold for the long term" without telling you to pay attention to historical norms of value when you purchase. I, on the contrary, continue to remind you of my first rule of investing: Never overpay for the merchandise. If your stocks were good bargains or fairly priced when you bought them, then it makes sense to hold onto them for the long term, as long as Western civilization as we know it does not come to an end.... although I think there are times when it will prove prudent to step aside from stocks and put your funds elsewhere. But if you buy stocks that are ridiculously overpriced, over time the law of averages will catch up with you; you will always have gotten a bad deal and your rate of return over time will always suffer. (Just ask the Japanese.)
At least my hypothetical investor has the advantage of youth, and time on his or her side. Imagine if this
person had been within a few years of retirement, had seen the retirement portfolio more than double since
1992, and had decided to take early retirement.... just before a "mild" bear market shrank the portfolio's
value to a third of its pre-retirement size!
I think the chances of a 1930s-style deflation are trivial. You can only have that kind of deflation if you have a bad monetary policy. Deflation is the easiest thing in the world to avoid; you just print more money. - Milton Friedman
Government bonds do not represent wealth! They represent a financial promise of a future generation. The ability or willingness of the future generation to repay these promises is at best uncertain, especially since the obligation was undertaken by the current generation. Given that the present generation is unwilling to pay for its present services, it does not necessarily follow that the next generation will be willing to pay for its own services, plus the debt including interest of the prior generation. - John Kutyn
In Richard Russell's humble opinion, the bureaucrats who are running the world's central banks have finally swallowed their own nonsense, and they've been swapping their nations' gold reserves for paper. Gold, mined by the sweat of human labor, is being swapped for manufactured, printed paper - paper, that by government edict, is pronounced to be money. I predict that in time, this swapping of gold for paper will be labeled as one of the biggest mistakes, one of the biggest swindles, in financial history. But certain investors, and I'm talking about the "big money", are getting what they want - gold at super-bargain prices, prices driven down by the bureaucrats who run the world's central banks. Thus, as I see it, gold is moving from the vaults of the world's central banks to strong hands in the private sector. - Richard Russell
Contrarianism works except in a mania, and then it gets bulldozed. Even so, you must be a contrarian because to go with the crowd means you will suffer the consequences, which will be worse than those suffered by contrarians. - Robert Prechter
C:\CLINTON\TRUTH.COM not found. Abort, Retry, Impeach? - found on the Internet
...[I]n the days following the TWA 800 crash, the current administration labeled the cause a terrorist attack/sabotage, and quickly introduced draconian anti-terrorist measures that will now cost airlines $2 billion, affect air traffic, and subject Americans to a change in basic civil liberties with the creation of detailed travel profile databases. Another result of this hysteria is that you can't mail a package over 16 oz. without going to the post office and must sign sworn statements as to the contents if the letter is to leave the country. Government law enforcement investigators now say this wasn't a terrorist attack. It was a faulty fuel tank. So we're biting the bullet on a $2 billion airline surcharge, creating a new government profile database of every air traveler replete with.... criminal background checks and computerized tracking, and revamping a centuries-old postal system because of a faulty fuel tank? - Janie Angus
With Y2K, the dilemma is not the two characters that represent the century in dates stored in computers. The problem is that we as an economy and a society have become totally dependent on millions of unseen computer systems. Our standard of living and in some cases our very well being have become dependent on complex computer systems operating, within limited margins for error, reliably and accurately, without human intervention and with very limited human oversight. We have allowed our digital slaves to become essential to our well being. We have been lulled into believing that they will always be there doing our bidding. We are in for a very painful surprise in less than eight hundred days. - Ed Meagher
The problem here.... is that the "system dynamics" nature of Y2K is SO complex that none of us really knows with a high degree of certainty what's going to happen. I barely trust the TV weather forecaster when he tells me it's gonna rain tomorrow; and I certainly wouldn't put much trust in his prediction for rain or sunshine on 1/1/2000. A professional weather forecaster has a much deeper understanding of the dynamics of weather than us laymen, but that doesn't mean his long-range forecast is very detailed or accurate. Seems to me that the same situation holds when forecasting the aggregate effects of several billion embedded chips, PCs, mainframes, and interlocking components of the socio-economic inframumblestructure all hiccuping at more-or less the same time. Anyone who reads between the lines in my forthcoming "Time Bomb" book will get an overall sense of how concerned and pessimistic I am about the situation.... sooner or later, we're all gonna have to make some hard personal choices.... since Y2K threatens the safety and continuity of almost everything about the lifestyle we've grown up with, and which we take for granted at an almost unconscious level. - Ed Yourdon
I'm in Washington DC. The HQ of a large corporation, you may have heard about it, the U.S. Government.
We know from reports in the Washington Post.... that this corporation's accounts receivable system will
not be Y2K compliant and will fail. This system is called the IRS. Further, we know that the pension system,
Social Security, has been stretching the truth when they say, "we're almost done." Yeah - right, 6 million
lines of 30 million is almost done. Next they say, "Oopsie, we found another 35 million lines, but don't
worry, we'll get it done in less than one year so we can test for a full year." Oh, and the guard force is
completely cross-eyed and flummoxed, they'll be done in 2012. Their mission-critical systems will be back
online in 14 years. In the case of Y2K, panic NOW! Get it out of your system. Panic and take this seriously.
It will be too late to panic next summer. - Cory Hamasaki
"They" say that nobody rings a bell at a stock-market top. I think recent events prove the contrary axiom: Bells are ringing loud and clear, but everybody chooses to be deaf. Consider what's recently happened worldwide that is clearly out of the ordinary compared to more stable times, but is being ignored:
¶ Asian economies are in a freefall as their bloated debt structures collapse. The promised "bailouts" from the International Monetary Fund have not (yet) stanched the decline. Even Japan, which has been deflating for eight years, is in renewed economic decline.
¶ The primary purpose of the bailouts is to make whole the banks which made the now-bad loans to those Asian countries, thereby maintining confidence in the global banking system. The countries being "bailed out" will actually suffer terribly for their past sins of overindebtedness.
¶ The indicators I follow seem to say (even before the "Asian flu" struck) that the U.S. will be in recession by mid-1998.
¶ It is not normal for the stock market to suffer a sudden drying-up of liquidity such as we saw on October 27. Rather, what we saw was "systemic risk"... the occasional momentary collapse of confidence in overpriced paper supported by massive debt financed by a fractional-reserve banking system unbacked by real assets. Only massive futures-buying intervention by our central bank (in my opinion) averted a full-scale panic and meltdown.... yet people plow on as if nothing had happened.
¶ The majority of stocks are considerably weaker than the big-cap stocks in the popular indexes, which frequently are the refuge of last resort. It increasingly looks as if events will confirm my opinion, which is that the stock market finally topped out in mid-October, and we've been in a bear market since then.
¶ "New" money into mutual funds is slowing down.
Even with all of these negatives, I think the first two or three weeks of 1998 may well be bullish for stocks. There is usually a rush of year-end money into financial assets (from bonuses and such), and the mutual-fund managers are expected to invest it. Also, the new Roth IRAs, which allow you you to compound and withdraw your earnings free of Federal income tax, will become available, and they are a really good deal. I expect the financial industry to hype them to the max, and they will probably suck up more money than might otherwise be committed to stocks early in the new year.
But somewhere around the third week of January.... or maybe a little later.... I expect the dominant bearish trend to reassert itself as the economy heads toward recession, and the odds of a market meltdown will again jump to 100%. Once the Dow declines to the vicinity of 7000, a meltdown is likely imminent.... especially since most stocks have essentially gone nowhere since last August. We may see another rerun or two of last October, where massive futures intervention by the Federal Reserve stabilizes the market and creates a humongous rally. But as the Asian crisis spreads, and the ongoing worldwide asset deflation and debt collapse pick up steam, eventually the Fed's efforts will fail.
Long-time readers know that for some time I've been speculating just how far an asset mania could expand before it implodes. In 1929 our stock market peaked just shy of 80% of GDP before going into a tailspin. That 80% figure appears to be the practical limit in a monetary system where gold circulates in tandem with paper, and where the paper is ostensibly backed by hard assets. In 1989, the Japanese stock market peaked at about 130% of Japan's GDP before entering its prolonged bear market; and last October our market reached 125% of GDP. So the region of 125%-130% of GDP appears to be the practical limit for asset inflation for a major economy in a world that runs on rubber money. When the fraudulent nature of the current government-debt based monetary system is exposed and it crashes and burns (not tomorrow!.... don't panic!.... probably decades away) and is replaced by something else.... perhaps some sort of cyber-money.... what do you suppose the limits of the next asset inflation will be? Maybe 400% of GDP? That, I guess, will be left to a sharp analyst in a future generation to deduce.
I've also received many comments over my "surprise" shift of part of my retirement funds into the bond market. Why would I want to do this when I have repeatedly badmouthed excessive government debt? Especially, why would I do it when the Feds are minting volumes of fresh money to be shipped to the Asian countries via the IMF? Printing more money always leads to inflation.
To which I reply: Yes.... but not always right away. In the initial stages, the asset deflation and debt collapse can overwhelm any efforts by governments to money-print their way out of difficulties. Look at the 1930s.... Roosevelt confiscated gold, devalued the dollar and started printing away, but confidence had sunk so low that the inflationary impact of all of that printing did not arrive until the late 1940s. The Japanese government stepped up yen production in the wake of Japan's stock-market collapse, but so far the increased supply of yen has not overcome the psychology of "price destruction" among the Japanese public. (It did, of course, send the yen tumbling on international currency markets.) You have to print an enormous amount of money nonstop, as the German Weimar Republic did, and in an overall world inflationary environment, for a price inflation to appear right away.
So, when our stock market "cracked" on October 27 and revealed itself as a deflationary bear-market-in-the-making, I needed only an appropriate opening to commit part of my retirement funds to the bond market. (The
rest of the funds await the meltdown.) The bond rally may last for only a few months.... perhaps the debt
collapse will arrive at our shores that quickly.... or it may persist for several years. Indeed, with Year 2000
problems approaching, inflation-indexed government bonds may be the only place to hide in a retirement
portfolio where precious-metals investments are not an option. At any rate, for the moment it appears to be the
right thing to do.
Original cost: $ 8,090.45
Present value: $ 7,432.00
Increase: $- 658.45 [-8.14%]
The performance of this portfolio and its predecessors ("Hedger's Delight", "Present and Future Income", "Crapshooter's Folly") from January 1987 to the present is +4.17%, for a compound annual rate of return of +0.38%. COMMENT on "Phoenix": There is no change from the last issue.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $ 7,580.00
Present value: $ 7,341.90
Increase: $- 238.10 [-3.41%]
COMMENT on "PIG": The PIGs have directed me to buy 200 shares of Alpha-Beta Technology (ABTI) at 2-5/8 or better, and 20 shares of a Y2K firm, Ciber (CBR), at a reasonable market price. The PIGs' Web page is at
http://www.assumption.edu/HTML/Faculty/Kantar/WPigs.html
C. Fidelity IRA - real portfolio, includes commissions:
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $14,227.08
Increase: $ 5,900.89 [70.87%]
The performance of this portfolio (including its predecessors) from January 1, 1987 to the present is +29.72%, for a compound annual rate of return of 2.39%.
D. CREF Pension plan; I switch between indexed stock/bond/money funds:
Date Sold Bought
13Mar92 stock @ 56.65 MM @ 13.41
29Apr92 MM @ 13.48 bond @ 31.19
19Jun92 bond @ 32.14 MM @ 13.55
29Jun92 MM @ 13.57 stock @ 56.74
24Jul92 stock @ 56.76 MM @ 13.61
29Oct92 MM @ 13.72 stock @ 58.61
23Dec92 stock @ 61.48 MM @ 13.78
16Jan95 MM @ 14.83 equity-index @ 26.44
20Jan95 eq-index @ 26.19 MM @ 14.84
30Oct97 MM@ 17.24 bond@47.56 (27.17%)
30Oct97 MM@ 17.24 i-i bond@26.12 (27.17%)
Values, 23Dec97: stock, 133.74; MM, 17.38; bond, 48.21; inflation-indexed bond, 26.17
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993: 3.08%; 1994: 4.07%; 1995: 4.80%; 1996: 5.28%
Gain, January 1 through September 30, 1997: 4.01% (5.45% annual rate of return)
Total gain since January 1, 1988 (9.75 years): 156.02%
Compound annual rate of return: 10.12% (My long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash contributions.
Buying CREF stock on January 1, 1988 and holding it gained 338.17%, for a compound annual rate of return of 16.37%.
E. Current unfilled portfolio good-til-cancelled orders: None.
COMMENT on "Timer's Trend": During December, we've seen mostly whipsaws, the last being a buy-sell back-to-back pair on December 17 and 18. These whipsaws have been mostly money-losing. Currently, we'reon the December 18 SELL signal.
______________________________ TIMER'S TREND _________________________________
Thu 9 Oct 97 . | .# | 8061.42 *|~.~~+~~~~~~~~~~~~~~~~~~~~~~
Fri 10 Oct 97 . | .# | 8045.21 |~.~+*~~~~~~~~~~~~~~~~~~~~~~~
Mon 13 Oct 97 . | . # | 8072.22 | . + *
Tue 14 Oct 97 . | . # | 8096.29 | . + *
Wed 15 Oct 97 . | # | 8057.98 | . + *
Thu 16 Oct 97 . |# . * | 7938.88 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 17 Oct 97 . & . |*7847.03 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 20 Oct 97 . I .# | 7921.44 | + *
Tue 21 Oct 97 . | . # | 8060.44 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 22 Oct 97 . I # | 8034.65 | .+ *
Thu 23 Oct 97 # . I *. | 7847.77 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 24 Oct 97 . & .* | 7715.41 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~
Mon 27 Oct 97 # . I| . {| 7161.15 |*-.~~~~~~~~~~~~~~~~~~~~~~~~~
Tue 28 Oct 97 . #I . | 7498.32 |~.-~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 29 Oct 97 . I #. | 7506.67 | .- *
Thu 30 Oct 97 #. I . | 7381.67*|~.-~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 31 Oct 97 . I . # | 7442.08 | - *
Mon 3 Nov 97 . | . # }| 7674.67 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Tue 4 Nov 97 . | . # | 7689.13 | .+ *
Wed 5 Nov 97 . | . # | 7692.57 | . + *
Thu 6 Nov 97 . | #. | 7683.24 | . + *
Fri 7 Nov 97 # . I . {| 7581.32 |~.+*~~~~~~~~~~~~~~~~~~~~~~~~
Mon 10 Nov 97 . & . | 7552.59 |+.*~~~~~~~~~~~~~~~~~~~~~~~~~~
Tue 11 Nov 97 . & . | 7558.73 + . *
Wed 12 Nov 97 # . I . | 7401.32 |~-~~~~~~~~~~~~~~~~~~~~~~~~~~
Thu 13 Nov 97 . & . | 7487.76 | - *
Fri 14 Nov 97 . I #. | 7572.48 |-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 17 Nov 97 . | #. }| 7698.22 |-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 18 Nov 97 . & . {| 7650.81 |-. *
Wed 19 Nov 97 . I #. | 7724.74 |+. *
Thu 20 Nov 97 . | . # }| 7826.61 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 21 Nov 97 . | . # | 7881.07 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 24 Nov 97 .# I . {| 7767.92 *~+~~~~~~~~~~~~~~~~~~~~~~~~~~
Tue 25 Nov 97 . I #. | 7808.95 | + *
Wed 26 Nov 97 . |# . }| 7794.78 | + *
Fri 28 Nov 97 . | .# | 7823.13 | + *
Mon 1 Dec 97 . | . # | 8013.11 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 2 Dec 97 . | # | 8018.83 | .+ *
Wed 3 Dec 97 . | .# | 8032.01 | .+ *
Thu 4 Dec 97 . | # | 8050.16 | .+ *
Fri 5 Dec 97 . | . # | 8149.13 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 8 Dec 97 . | .# | 8110.84 | .+ *
Tue 9 Dec 97 . |# . | 8049.66 |~.*~~~~~~~~~~~~~~~~~~~~~~~~~~
Wed 10 Dec 97 . #| . | 7978.79 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~
Thu 11 Dec 97 #. I . * {| 7848.99 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 12 Dec 97 . #I . | 7838.80 |-. *
Mon 15 Dec 97 . I #. | 7922.59 |-. *
Tue 16 Dec 97 . I # ]| 7976.31 |-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 17 Dec 97 . | # }| 7957.41 + . *
Thu 18 Dec 97 . #I . {| 7846.50 |+.~~~~~~~~~~~~~~~~~~~~~~~~~~
Fri 19 Dec 97 # I . | 7756.29* |+.~~~~~~~~~~~~~~~~~~~~
Mon 22 Dec 97 . I # | 7819.31 |+. *
Tue 23 Dec 97 . I# . | 7691.77 *|+.~~~~~~~~~~~~~~~~~~~~~
========================================================================
{, } = "Timer's Trend" (4% and 10% exponential) SELL ({) or BUY (}) signal
NEXT ISSUE - will appear about January 28.
/Nick Chase