Year to date the S&P 500 has returned -8.77%, but its average price-earnings ratio is still 19.3, which is unappetizing. My investable portfolio is down about 4.5% for the year (and down about 6% from its 2015 high versus the S&P 500's being down 14% from its 2015 high). I'm currently about 25% in stocks. My bet is that the market will continue to fall further this year, rebound this year, then fall again next year, so I will continue to keep much of my money out of the market until I see a correction closer to an average of S&P 15 times earnings (versus the current 19). That implies a fall of 21% from here unless earnings improve. If stocks fall another 15% or so, I'm probably at least partially back in. If the market does rebound from here, I will miss the rally, but better to be able to retire with my current portfolio than risk a 40% decline. With my current asset level I can retire, but I cannot retire if it falls by 40%.
The Fed seems to have painted itself into a corner: It is running out of ammunition. The world economic picture and aging boomers militate against a strong-demand economy. Because of its obsession with demand and with growth rates, the Fed may overstimulate. If it doesn't, there will be declining stock prices and a slow economy.
Moreover, we are at an ambiguous point in the commodity cycle. Both oil and gold may have touched bottom, but that's unclear. I had read that a bottom of $25 is likely for WTI crude price, and today's bounce to $29 seems to be consistent with that claim. Today's bounce was painful for my oil short, but overall my investable asset portfolio is down year to date less than the S&P 500 because I had removed much of my investment assets into cash. I'm not sure that I still believe that $25 is the bottom for oil.
One thing I've learned is that low p-e ratios are not indicative of short term positive returns. I didn't do better because of my poor timing on a couple of oil shorts and because my stock investment choices have been dismal. These included falling into a value trap whereby I bought financial stocks because their valuations were fairer than the market average, yet the low-priced stocks underperformed the market this year. Low valuation is not the only measure for short-term performance, and in today's market I'm not sure that low valuation doesn't signal poor momentum rather than the market's overlooking a good buy. It is probably true, as Morningstar points out, that in the long run the financial stocks will overcome their association with oil lending and outperform, but I don't believe that the market for oil or stocks will stabilize for the next couple of years.
Gold has taken me by surprise, but I'm not convinced that its positive performance will continue unabated. I am getting ready to go long again on gold, but I suspect that there will be renewed easing that will complicate commodities prices for a while longer.
Saturday, February 13, 2016
Friday, February 12, 2016
De Tocqueville on Progressivism and Presidential Power
I have been rereading Alexis de Tocqueville's Democracy in America; the translation is by Harvey C. Mansfield and Delba Winthrop. It isn't light reading, but it is accessible, and every American should read it. Following his 1831 visit to the United States, de Tocqueville published it in two volumes, which appeared in 1835 and 1840. Many of de Tocqueville's insights about America are accurate today, often eerily so.
On page 128 de Tocqueville questions whether the framers of the US Constitution were right or wrong to permit the president to be reelected. This is a fascinating question because I can think of a number of abuses that have occurred in connection with presidential reelection during my lifetime, especially during the administration of President Richard Nixon. Indeed, statistics show that the stock market routinely rises during presidential election years, for the party in power manipulates the Federal Reserve Bank in its favor. De Tocqueville points out that a president who seeks reelection views laws and negotiations as electoral schemes that redound to his or her, rather than to the nation's, benefit. "The principle of reelection therefore renders the corrupting influence of elective governments more extensive and more dangerous. It tends to degrade the political morality of the people and to replace patriotism with cleverness."
De Tocqueville adds that all forms of government are associated with a natural vice, and laws that enhance the vice are undesirable. The founding fathers limited the whims of the majority by state governments' electing senators and the electoral college's electing the president. De Tocqueville notes, "In introducing the principle of reelection [of the president], they destroyed their work in part. They granted a great power to the president and took away from him the will to make use of it."
Progressivism worsened this result because the Seventeenth Amendment, a 1912 product of Progressivism, made the election of senators direct. Moreover, the replacement of party conventions with primaries and the diminution of the influence of the electoral college have made the president ever more likely to be tempted to manipulate public policy to gain reelection.
De Tocqueville writes:
Each [form of] government brings with it a natural vice...the genius of the legislator consists in discerning it well...[E]very law whose effect is to develop this seed of death cannot fail in the long term to become fatal, although its bad effects may not be immediately perceived.
The effect of Progressivism was to pass a series of such laws that enhanced the majoritarian principle without concern for checks and balances. The power of banks and the Federal Reserve Bank interact with the tendency of the president to manipulate public opinion in his--and the banks'--short-term favor. The result has been misallocation of credit and other resources and resultant economic instability that, in turn, has resulted in increasing cries for government intervention and socialism. The public is unable to perceive that their economic insecurity is the direct result of governmental manipulation of credit to the short-term advantage of politicians and banking, real estate, business, and investment interests.
My thought is that the United States would be better with a president elected for one six-year or even four-year term rather than for two four-year terms.
On page 128 de Tocqueville questions whether the framers of the US Constitution were right or wrong to permit the president to be reelected. This is a fascinating question because I can think of a number of abuses that have occurred in connection with presidential reelection during my lifetime, especially during the administration of President Richard Nixon. Indeed, statistics show that the stock market routinely rises during presidential election years, for the party in power manipulates the Federal Reserve Bank in its favor. De Tocqueville points out that a president who seeks reelection views laws and negotiations as electoral schemes that redound to his or her, rather than to the nation's, benefit. "The principle of reelection therefore renders the corrupting influence of elective governments more extensive and more dangerous. It tends to degrade the political morality of the people and to replace patriotism with cleverness."
De Tocqueville adds that all forms of government are associated with a natural vice, and laws that enhance the vice are undesirable. The founding fathers limited the whims of the majority by state governments' electing senators and the electoral college's electing the president. De Tocqueville notes, "In introducing the principle of reelection [of the president], they destroyed their work in part. They granted a great power to the president and took away from him the will to make use of it."
Progressivism worsened this result because the Seventeenth Amendment, a 1912 product of Progressivism, made the election of senators direct. Moreover, the replacement of party conventions with primaries and the diminution of the influence of the electoral college have made the president ever more likely to be tempted to manipulate public policy to gain reelection.
De Tocqueville writes:
Each [form of] government brings with it a natural vice...the genius of the legislator consists in discerning it well...[E]very law whose effect is to develop this seed of death cannot fail in the long term to become fatal, although its bad effects may not be immediately perceived.
The effect of Progressivism was to pass a series of such laws that enhanced the majoritarian principle without concern for checks and balances. The power of banks and the Federal Reserve Bank interact with the tendency of the president to manipulate public opinion in his--and the banks'--short-term favor. The result has been misallocation of credit and other resources and resultant economic instability that, in turn, has resulted in increasing cries for government intervention and socialism. The public is unable to perceive that their economic insecurity is the direct result of governmental manipulation of credit to the short-term advantage of politicians and banking, real estate, business, and investment interests.
My thought is that the United States would be better with a president elected for one six-year or even four-year term rather than for two four-year terms.
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