The Past as a Portal to the Future - Part 2

In my continuing quest for "Truth" where the economy and markets are concerned, I have been reading up on some of the more pessemistic points of view. I have never been a very good pessemist, even though I can talk a good game. By definition, the pessemistic perspective is extreme, and therefore less likely than some middle-of-the-bell-curve scenario. I am inherently a pragmatist and live in the middle of that bell curve. But even if I have a hard time following with actions the completely negative point of view, knowing it helps harden me against the possibility of it coming true. So, it is worth knowing and understanding.

I have read books by super-Bears, Robert Prechter and articles by David Tice. I am even willing to listen to or read Marc Faber, Bill Fleckenstein, Doug Kass and Jeremy Grantham, all of whom have been right to this point in time about the depth and severity of the financial crisis. But most of these guys have been calling for the 2008 market since the mid-1990s or earlier. Had I gone to cash when they first recommended it back then, I would still be down today from where I am. I find timing the market to be very difficult because of my optimism about the future. The only time I can bring myself to sell is when stocks or funds are obviously overvalued as the Techs were in 2000 at 50 or 100 PEs, or when gold was at $1000 earlier this year.

But after weighting my portfolio to large cap, low P/E, high dividend payers, I have mostly held on through this firestorm knowing that even in the deepest depressions (1930s) a consistent program of reinvesting to average down cost will eventually get one back to even. But being out of the market and getting left behind leaves almost no chance of ever catching up. As they say, "there is no bell ringing at the bottom". If the market were to rebound 25% to 11,000 in February, how many people would then invest. How many more would consider that to be a "dead cat bounce" and continue staying on the side line, perhaps as the market went higher? This is the danger of getting in and out of the market. (for readers in retirement without the requisite 10-15 year time frame to absorb the worst possible scenarios and rebuild a portfolio, cash and Treasuries should already be the game plan and hopefully is).

Here is an article that makes the case for "the worst is yet to come". The comparison, which I respect very much and might end up being true, is that we are at 1937 but with the 1930-32 plunge of 90% from top to bottom to come. The author makes the case that since so far a complete crash has been forestalled by government intervention, it must still be in our future. Of course, in the 1930-32 period, Hoover did try hard to stop the market and economic plunge, but his advisors had little historical insight to work with and none of the Federal and State social safety nets we have today. History has shown us the Hoover administration did much too little, too late to stop the plunge. Because the market and economy fell so far and so hard, it took 10 years to rebuild.

I take on faith (we don't really know if it will work) that the Feds can backstop the economic decline. It is one grand experiment we are all living. But the naysayers don't know any better that the decline can't be stopped. They are no more believable in their claims. And haven't most of the people that should go to cash already done so? The rest of us should wait it out, if we can afford to do so. Pulling out enmasse will just make problems worse as it would further collapse the capital base in the economic system. This is one of the logical fallacies of the Bears. They make the case everyone should get out because the market is about to fall. But it is the panic selling that drives the markets lower. If everyone stays put, becomes more optimistic and holds on, the market CAN'T fall. We will see if Obama and his team can change mass psychology and eliminate the panic impulse that creates Depressions. My bet is they can. But if they can't, I will wait patiently for the fever to run its course.

Here is the article with its accompanying charts.

http://www.howestreet.com/articles/index.php?article_id=8243