many others, I'm a daily visitor to LRC because of the many insights
I take away from often brilliant authors whose work Lew publishes.
of my studies on LRC and in other places are for the pure pleasure
of expanding my understanding of the world. Other times I'm prospecting
for information I think I can use in executing future plans. On
occasion I'm doing both. You probably do that, too.
von Mises' magnum opus is titled Human
Action for a good reason. Because each of us must take up
space and utilize resources, everything we do constitutes an action.
Even standing still is an action, because we're acting to take up
that particular space at that particular time instead of taking
up some other space.
figure that if I'm acting, I might as well have a plan. This concept
may not be obvious to others, because often their actions look,
to me, more like reactions. I tell my sons that the neighbors
sometimes look to me like balls in a pinball machine, being acted
upon by forces outside of themselves but making few moves that come
from thoughtful deliberation. Perhaps it's perverse, but even if
I misstep I'd rather it be from my own error than someone else's
impositions on me.
government's growth has usurped many decisions from me, there are
still a lot of choices left open, even if the environment in which
I make them is warped in many places by government action. For instance,
I had the freedom to invest in Lucent Technologies, Inc. in 1999.
I didn't. Its stock price is still down 93% from its peak, even
though it has more than doubled in the last half-year. I could have
sold my home, moved to the country, and built a bomb shelter. So
far, I'm glad I haven't. But that could change.
challenge is to figure out how to rationally plan for the future
at a time when lots of absurd things are occurring. The list of
absurdities is long, but the poster child is a commercial heard
on WBBM radio, the most listened-to AM station in America (or so
essence, a mortgage company will offer certain qualified persons
a home loan, a grant (from a front for home builders) to cover the
down payment, and another grant to cover the closing costs. The
ad literally says a prospective homeowner can show up with nothing
and leave with the keys to their new home. The only qualification
implicit in the commercial is that the home buyer be living too
close to the edge of their income to be able to save even a few
thousand dollars for a down payment. If this isn't the proverbial
last marginal buyer, I don't know who is.
smells, to me, suspiciously like tech stocks did back in 1999 and
early 2000. Then people were paying ever-increasing sums of money
for the common stock of firms that were producing no profits, even
under the fantasy accounting rules of the time, and (to me again)
showed no prospects for changing that condition. I'd get all set
to short-sell something but hesitate to execute the trade…and watch
the stock's price keep climbing like gravity had been repealed.
The few times I did short an index, usually via a short-selling
mutual fund, I just got
run over. I was left with two possibilities: Either I had lost my
mind, or the rest of the world had.
books being published had titles like Dow 36,000. Well, we
know how that turned out. You can buy a used
copy from $0.37 at Amazon.com.
the other hand, sometimes absurdities last a really long time. Nixon
dissolved the last vestiges of gold's connection to U.S. legal tender
back in 1971, but instead of gold finally winning against fiat currencies,
the period 1980 to 2000 saw disinflation. Gold remains to this day
down 50% in nominal terms. In 2004 dollars, gold's price peaked
in 1980 at about $1,952, so $425/oz gold today is actually down
78% after 24 years. This tells me that no matter how unassailable
my logic is, I can't rely on observations like this to dictate my
actions. Smart people who invested in gold during the past quarter
century got crushed while balls in the pinball machine who simply
followed the herd made a killing in stocks.
but this too is an illusion. The herd wasn't buying stock in 1982.
The herd didn't discover stocks until after 1995. Many made quite
a bundle in the five years prior to 2000, but a lot of that wealth
disappeared in 20002002. The rally from October of 2002 to
this past winter brought forth a sigh of relief from a lot of pinballs.
The few who sold when sentiment was most bearish, most certain the
future was lower, which ironically meant stocks were bottoming,
are deep in regret. Mostly, though, nothing has changed since the
late 1990's. Most people still are buying stock and holding, expecting
time to be their friend. Maybe they'll be right, but does following
the herd constitute a plan?
actions impact our wealth in big ways now, and that matters a lot.
After all, the only alternatives we have open to us are those whose
price we're willing and able to pay. People without money
have few choices open to them. The bumper sticker that proclaims,
"Freedom isn't Free" is most true in a sense probably
not intended by those who sell it.
figure that at all times some things are going up in value relation
to others, kind of like a lava
lamp. There are times to own some things, and times to jump
onto the next item that's low but rising (or about to). Sometimes
gold is cheap and rising, sometimes it's stocks, sometimes it's
cash, and other times it's real estate. The $64 question is what
time is it?
tells us that the dollar will be destroyed, that this is an historical
inevitability. But like "The Big One" in California, it
hasn't happened yet and waiting for it has been very costly.
estate seems like a house of cards right now, but it seemed so even
before the Fed discovered how to partner with Fannie Mae to allow
everyone to use his or her home equity like an ATM and buy a nice
shiny Harley Fat
Boy. It looked like a top in the housing market years ago yet
here we are, still in the ionosphere of mortgage finance availability
and low rates. Given that commercial I mentioned earlier, though,
it seems like the top has to be awfully close so investing in real
estate might be risky if the credit creation machine stops firing
on all cylinders. Imagine if houses had to sell for cash in hand…that's
the limit of how far down real estate could drop if lenders stop
lending and borrowers stop wanting to service endless debts.
does seem to be at least a psychological difference between bank
credit and Federal Reserve Notes. Another commercial on the radio
advertises for a company that claims to help people eliminate,
not refinance, their debt. If this is the leading edge of a new
fashion, and it may be, then the Fed can offer all the "credit
out of thin air" that it wants, there will be no expansion
of credit. That engine requires three things: A central bank willing
to create the credit, commercial banks (or their investors or customers)
willing to be responsible for the loans, and borrowers willing to
hang yet another straw on their monthly bill-camel's back. The latter
two of these are not givens, even though they may look permanent
after the last few years' experience.
people start to retire their debts, selling everything not nailed
down to accumulate cash to do it, then E-Bay will become a conduit
for amazingly rapid price decreases. Why buy a camera battery
at the store for $50 when someone on E-Bay will sell it for $19
(a real story). What will happen when even people's best assets
start turning up for auction and sell well below their established
prices in standard markets? What does it mean for gold if people
are selling their $25,000 Harley hogs for five grand? The online
auction could be the E-Bay-of-Pigs for the U.S. economy.
U.S. economy can't run on cash.
this sounds like a Bomb Shelter scenario, but it's not. The good
news is that even if these events occur (and that's not assured),
they'll end. Naturally, politicians would be ready to print
more cash once the troubles appeared permanent (like in the Weimar
Republic) and those wise enough to have held tight to their gold
will be like a boat with a large anchor, dropped before the storm.
Buffeted, yes, but not slammed onto the rocks like the rest of the
fleet by the gale force winds.
are ways to assess the likelihood of change. Though it seems like
Voodoo to many, the arcane branch of investing called Technical
Analysis can offer tools for forecasting. What doesn't work, unless
one has the patience of a saint and the lifespan of a tortoise,
is looking at the fundamentals using logic. Passion rules the tides
of these things, and passion does not heed logic, yours or mine.
A simple rule of thumb seems to be, if things look extreme, they
probably are. But only when extremes seem permanent are they likely
nearing a reversal in fortune.