The Big D?
With world financia markets collapsing the idea that there might not be a recession will is out the window. Now my question is, do you think we are headed towards a depression? if so, how long will it last? And where do you expect the first signs of recovery/opportunity to arise?
Comments
My belief for this is due to the fact that the credit bubble of the last 20 years has created completely unprecedented weakness in both the financial system and consumer balance sheets. The explosion of loans requiring little or no equity have resulted in the most fragile real-estate environment that's ever been seen. A higher portion of home-owners in the US have little or no equity than has ever been seen in the past. This makes them particularly vulnerable to defaults if they run into trouble.
As far as the financial industry goes, we are seeing institutions all over the globe pull back on lending as defaults increase and they struggle to raise capital to compensate for write-downs. This has created a feedback loop, where write-downs and losses in one place lead to further losses and write-downs elsewhere. When a bank pulls a line of credit from a hedge fund, the fund is then forced to sell whatever assets it has to pay down the debt. This causes a fall in the prices for that class of assets, which then hurts other funds that own those assets, which leads lenders to make margin calls on them to reduce their debt...
We aren't even CLOSE to seeing a bottom here. Last week Fannie Mae and Freddie Mac needed to be bailed out. This week it is Lehman brothers. But people are already talking about how WaMu is on its deathbed too. You don't have to look to far to see other lenders also in trouble (Merrill Lynch, CitiGroup and Wachovia jump to mind).
Look at it this way: there are MANY large US financial institutions that would already be insolvent if they were forced to value all the assets on their books to actual market values. CitiGroup (just to pick one example, has hundreds of billions of dollars in assets that it currently claims have only lost 20% of their value, yet those some assets are only selling for 10 cents on the dollar in the actual market place.
This is why we see more and more write-downs, quarter after quarter, as financial institutions SLOWLY downgrade their toxic assets one chunk at a time.
This is a GLOBAL phenomena, hurting every region and economy. We are already seeing severe economic head-winds showing up everywhere from Ireland and Holland to China and India. Heck, just look at how the Shanghai stock market is down some 60% this year!
What's really worrying is that all the chaos in the global financial industry has only NOW begun to play out in the real economies. Once we see out-and-out economic contractions occur in the world's biggest economies, things are going to be really bad indeed.
All this is just to pain the broader macro-economic picture (which isn't good). But if you want to just discuss real-estate prices, homes in the US (and the Puget Sound in particular) have been priced way out beyond any rational basis. Whether you look at median incomes or rent vs ownership costs Puget Sound homes have no basis in reality. Prices will have fall significantly just to bring ownership costs in-line with renting.
In the end, however, I am more bearish than most because I believe the over-all global macro-economic state is in such a terrible condition. We experienced a global boom of unprecedented proportions (e.g. homes booming in price from South Africa and Canada to China and the Ukraine) and we are now going to see a recession of unprecedented proportions.
Don't forget that major price declines are not some freak phenomena. Many places in Asia saw their real-estate prices drop more than 50% in the '90s, and still haven't fully recovered. There is no reason similar things can't happen in the US.
I definitely expect the Dow to drop below 5000 before we hit a bottom in this recession, but that might not be for a couple years. My best guess on when this will all end is maybe 2012, give or take a year. We will know we've hit bottom when we've gone about 2 years without any more declines. Any swift recoveries (in stocks, real-estate, or otherwise) will be nothing more than bear market rallies to be sold into. You just don't have fast recoveries from the types of downturn we are heading into (but the biggest, and swiftest, rallies always occur in bear markets). I even expect we could see 8 or 10 months where things seem to be getting better, only to have things crash even further.
The key thing for people to be concerned about is capital preservation. Don't put any money into stocks, commodities, precious metals, or any kind of debt instrument (e.g. bond) that isn't officially backed by the government of a developed nation (e.g. don't touch munis, corporate bonds, etc).
Sure, the yields on t-bills might be attrocious, but if stock and real-estate prices are falling by 20% a year, you are making out like a bandit collecting 2% on a treasury bond.
The way I see it, the bulk of this mess is caused by the combination of two things: the US Constitution allows endless needless federal borrowing, and foolish American voters putting foxes in the hen house. This has contaminated the global economy and caused all sorts of other problems.
The worst part of being a bear, is being right.
I would continue to put money into your 401k. Let's say the DOW does head to 5000 pts. You'll lose half of what you put in now, but when it's low you'll do really well on that money as things recover. Since 401k money is for 30 years out, you can take a long term view even in the most dire of economies.
Just don't put everything in your 401k into stocks...
Absolutely. Don't stop putting money into your 401K. Just make sure you direct that 401K money into treasury bond funds (i.e. DON'T put them in broad bond funds like PIMCO).
If you are REALLY adventurous you can direct your 401K investments to inverse funds. I have put virtually my whole portfolio into inverse funds (my double-inverse China fund is going gang-busters).
Of course, this all depends on what options your 401K offers. My 401K plan allows self directed investments into any fund or stock I choose.
NOTE: I am NOT advising people to go short the market. It is very easy to lose money that way. You have to have a cast-iron stomach to play short.
RCC, you may want to revise your advice. A "long term view" is appropriate for a 30 year old but certainly not for someone approaching retirement. The rules for "gardening" are different in every season.
Another problem with 401Ks is that the sheer amount of money involved means that the popular things they are directed towards become bubblicious.
I think the point is that 6% growth over a long period of time in the stock market is not supposed to be a high risk proposition. In fact, that sounds kind of low when you hear the whole 10% thing that everyone seems to quote, which I personally think it probably not a good long-term bet either. I'm guessing somewhere in the 6-8% range myself....
Also, if you assume inflation is, ummm, 3% then you're actually comparing 1% real growth in the CD against 3% real growth in the stock market. When you add inflation into the mix, the difference is huge. If, however, you think that inflation long-term is going to be 4% then that CD is not doing anything for you at all!
You must be thinking of VERY long time frames. Investors would have made oodles more money putting their into t-bills or CDs over the last 10 years than the stock market indexes. The stock indexes are at the same place they were a decade ago (lower on many indexes, in fact), so it doesn't seem to do a very good job of keeping up with inflation.
If we are going to be facing deflation in the years ahead (which I believe to be the case), then even a lousy 2% return on a CD is going to be marvelous if stocks and real-estate are falling 20%.
I doubt the average of the US stock market will be 6+% annually over the next 30 years. There were 20-year time periods in the past where the Dow returned 0% annually. How would that feel when you're retiring at year 20?
Well, it's absorbing the inflation at low risk.
Most investors expect gains in the future, over 30-year time spans, to look a lot like gains during 30-year time spans in the past. There's no guarantee of that, and, looking around, I'd say it's a bad bet. The industrialized world has been greatly borrowing against its future during the whole record of the Dow. It's impossible for that to last indefinitely.
Well, in this case the rules are the same, but the crops in the garden might change. Like Sniglet pointed out, most 401ks have several options depending on your level of risk.
If your company is matching you contributions, that's free money right away. Uncle Sam also gives you a break on your 401k contributions. So, if you are concerned, put your money into T-Bills, bonds, or something like that in your 401k.
Also, a 30 year outlook is actually not as gross an overstatement as you might think. If you are 55, you have about even odds of living another 25 years. So yes, even those nearing retirement age are in the market for the long haul. If you're 75...well, different story. But honestly, how many retirees are spending time on this board?
That was my dilemma for a while. The carrot of matching money plus the slick brochures my employer's 401K company kept sending me made me suspicious. Why did they want to "help me" so badly? The outrageous management fees were one obvious reason. I found out another reason when the market-timing mutual fund skimming scandal broke.
I think there's a risk that one's taxes will be higher when they withdraw from a 401K, even if they're not working. Taxpayers are going to have to pay down the national debt at some point, and it looks like keeping the Earth's average air temperature from soaring is going to cost a lot of taxes too.
I guess it depends a lot on how much is matched. If they match 25%, then maybe not. If your employer matches 100% then yeah I think it is still probably worth doing. We tested Dow 6,XXX pts at the end of the dotcom bust. This looks to be worse, so it's not impossible you could lose half of what's in there.
Your point about tax deferment being a gambit is valid as well. That part really depends on how you're doing now compared to how you expect to be doing in the future. But the tricky part is that tax deferred money grows so much faster than taxed gains. Of course, if you are a true buy and holder (like Warren Buffet), you won't be paying tax on the gains very often anyways.
That last sentence may have the local chapter of the gray panthers wheezing and shaking their digits at you
People who were approaching retirement in the late 1990's who made the mistake of thinking that they were "in the market for the long haul" found out that the only "long haul" was having to keep working much longer than they had planned. If they had been financially prudent they would have eased out of risk into more traditional "safe" retirement instruments.
You have a young man's perspective and I understand that. But there are those of us who are close to retirement who have seen what actually happens to our friends who didn't "act their age" with respect to both the type and term of their nest egg investments.
I agree completely that older people need to alter their investments accordingly. I'm not disagreeing over that point. But, even if your plan is to put everything in T-Bills, you are still planning ahead for the long haul. It's just the mix of stocks, bonds, and other assets that changes. I don't quite understand what's controversial here.