Yes they promised us the world (in Squanderville)
And like fools we believed every last word they said (in Squanderville).
The citizens of Squanderville, as Warren Buffett calls the U.S. in his Fortune article, are a happy race. They believe happy things; it doesn't bother them that the things they believe are impossible.
After twenty years of mostly falling interest rates... mostly falling inflation rates... and mostly rising asset prices (stocks and real estate), people have come to
believe that this is the way the world works in Squanderville. And since interest rates mostly go down, and house prices mostly go up, they figure they have little to worry about.
Even the professionals in Squanderville have never been more certain: a recent poll of economists working for major brokerage houses found that 100% of them expected rising
stock prices over the next 12 months. And real estate? Who believes house prices will fall?
Well, John Talbott, for one. He's the author of "The Coming Crash in the Housing Markets."Mr. Talbott expects the housing market to collapse when interest rates rise. Higher rates mean higher monthly payments. Since few people have much extra capacity in
their monthly budgets, higher mortgage payments will make it difficult to pay high prices... forcing down the general level of prices, just as low interest rates drove them up.
Curiously, the same economists who expect higher stock prices also expect the Fed to raise rates by the middle of next year. Australia and Britain have already begun tightening interest rates; it is only a matter of time, they think, before the U.S. follows suit. In their simple minds, the Fed's low rates have produced a 'recovery' as good as any other. It will be followed, they believe, by the usual pattern of trends: higher employment, higher prices, and higher interest rates.
Nor are they especially worried. For the economists of Squanderville expect the recovery to produce more jobs and higher real incomes, with enough extra earning power to offset the rise in interest rates.
On this last point, we suspect they will be met with some disappointment. For, while it is all very well to think happy thoughts and spend happy money, it is savings and
investment that produce real jobs and real earnings. But when Squandervillians refinance their homes so they can continue spending, much of the money now makes its way over
to Thriftville (Warren Buffett's term, perhaps with China in mind).
As the years go by, Squandervillians make less and less... and consume more and more. So, when they spend money... much of it goes to buy products from the Thriftvillians. These industrious people use the money to hire more workers, build more factories, import more
technology, and improve their products. Thus do the authorities in Squanderville find themselves in a remarkable position: they can still use monetary and fiscal policy to create a boom, but the boom happens in Thriftville!
After the close on Thursday, the Fed released its weekly money supply
report. The M2 money supply declined for the eight consecutive week and M3
posted its sixth weekly decline. This is in sharp contrast to the more narrow M1
money supply measure which is up 1.3% in just 2 weeks. Increased currency in
circulation and demand deposits are not yet multiplying into the broader
measures, such as savings deposits, money market funds or time deposits (small
or large denomination). Institutional money funds showed a small gain in the
week ended October 27. While the money supply measures are volatile, shrinking
supplies during a robust economy are contrary to a healthy investment
I think you assume rather more than you should. I have been long the market most of the year (up until three weeks ago to be precise) and have only recently turned to being short. The smart people already have taken profits (grin!!!)...only the goons remain. Margin debt is now higher than in Feb 2000...Only the fall awaits.
While you were trying to figure things out, other people already cashed in big amount of money. In the stock market, the important thing is trend, supply and demand, understand. Stock market does not care what you like or dislike. Try to learn how to determine the line of least resistance, and the price per se has nothing to do with it. Market will give clues and tell smart people when to take profits.
Let me put it simple, what should you do if you don't like the market action, fight with it or take advantage of it?
They said the streets were paved with Silver and Gold (in Squanderville)
But the happy residents of Squanderville hardly know or care. The latest job numbers are celebrated; who bothers to notice that the new jobs were not quite as nice as the old
ones? While companies lay off relatively highly paid people in the manufacturing sector, other companies hire
relatively more cheap employees in the service sector.
Interest rates are likely to rise in Squanderville, but not coincident with a boom in real jobs and real wealth. Instead, rates will likely rise as the happy country's currency falls. Desperate for foreign financing, it will be forced to increase the rate of return on its bonds.
This will not help Squanderville's homeowners. They are counting on low rates... and higher prices. Instead, they will likely get higher rates and low prices. And lower real
incomes too. Foreclosure rates are already setting all-time records.
What would happen if real estate prices actually started to go down while interest rates rose? They would switch to adjustable rate mortgages to ease the monthly pain,
figuring that rates would return to lower levels. But as rates continued to rise... and house prices fell... every adjustment would go against them.
Soon, the homeowners of Squanderville might be faced with a brief interval of horrible sanity... and they may discover that things didn't really work the way they thought, after
all. They may be unhappy.
Indeed, we have many good writers on this board.
Fortunately, you don't have to be a great politician or economist to win big in the stock market. Every piece of information is in the market itself. Personal opinions are usually faulty, no matter how well written. You don't need a PhD to win big in the stock market, since there is nothing new in Wall Street and you don't have to create something new in order to get your PhD degree. Things which happened 100 years ago will happen again and again. Simply read, reread and understand some classical books written by historic great traders, you don't have to go to the library to search for the current literature to find the latest ideas about going things, like what a PhD candidate does.