AAA and going down

[Herman]

Even in a downturn profits are to be made, in a cynical  fashion.

[mc ukrneal]

Rather, I am pointing out the glaringly obvious: worst case scenarios do not occur

...Market actors often act irrationally, and that's the best time to take advantage them.  There is no reason to panic, but I wouldn't doubt if some people do.

Irrational reactions on financial markets might be irrational indeed, but the results can be rather disastrous and cause a giant domino effect. And we haven't even survived the last crisis yet...

Here's my - of course ignorant - advice: right now, save your cash and earnings.
This is no longer the time for opportunistic and coincidental buying and consumption. And if you really want to buy: buy gold (or silver).

That is actually the exact opposite of what you should do. Todd' strategy is the right play.

A couple comments:
1. As to worst case scenarios - they do occur and often they are often worse than anyone ever imagined. The events of 2008 are an example of that, as markets dove far worse than most anyone predicted. This is also more true outside the US, where markets, currencies, etc. have a liklihood to overshoot - meaning instead of 20-30% declines (for example) you will get  50-100% changes (or worse in the case of currencies for example). There are examples littered through history. I just don't like saying 'never' as there are lots of people who said 'x' could never happen and they did (except much worse than thought possible), though they are admittedly unlikely to happen. Think the housing bubble, where most (even some of the smartest) were saying that housing prices would never go down.  What I think particularly worrying is that if we were to repeat September 2008 in 2011, I don't think this Congress comes to the rescue, so focused are they on debt (which is ironically exactly the opposite of where they need to be).

2. We need to be careful about advice. What is good for one is not good for all. It depends on each individual's adversity to risk, current cash flow needs, existing portfolio, time horizon, etc.  So while this could be a good investing opportunity for some, it is not necessarily so for all. As an investor, though, the worst thing you can do is panic.

[mc ukrneal]

So it's good to invest high?

Ah - but what is high? You can only know what is high in retrospect. And it depends on your strategy. Just two years ago, gold was at a high. Was it a bad time to buy? Gold is at another high. Is it a bad time to buy? I'd say it really depends on your strategy and time horizon. People have been trying to time markets since forever. Very few, if any, manage to do so on a regular basis.

[mc ukrneal]

Really?

Really.

[Marc]

We need to be careful about advice.

You're right.
I thought it to be best to give a careful advice.
It's slightly different, I agree.

What is good for one is not good for all. It depends on each individual's adversity to risk, current cash flow needs, existing portfolio, time horizon, etc.  So while this could be a good investing opportunity for some, it is not necessarily so for all. As an investor, though, the worst thing you can do is panic.

Yes. And I'm far from a connaisseur of economics, but I've never been taught at school that opportunistic benefiting from panic is the best thing to do to avoid a possible crisis. (Not to mention the cynical notion by Herman.)

CRISIS? WHAT CRISIS?

[Herman]

A couple comments:
1. As to worst case scenarios - they do occur and often they are often worse than anyone ever imagined.

Need a couple other recent ones?

The way the war in Iraq has gone. It was going to be a cakewalk, strewn with flowers.

It would earn itself back.

Another one: the nuclear disaster in Japan. Nuclear energy was going to be so much cheaper than the other options. Until you factor in the costs.

[Todd]

Since then the domestic polical situation has worsened into a kind of permanent gridlock

Another chestnut.  American politics are mired in gridlock.  Nothing will get done.  America will stall because of it.  A little problem with this is that US politics has a long history of gridlock.  One can choose many instances.  One of my favorites comes from the Wilson years, when the British ambassador reported back to his superiors that the US was completely paralyzed politically and no action with respect to the situation in Europe could ever be reached.  Didn't quite turn out that way.  One can look to many other situations.  For me, I'd much rather be facing a situation like we face now than the one the US faced during its nullification crises early in the history of the nation. 

Americans prefer putting off tough choices.  As Alan Simpson wrote in the most recent BusinessWeek: "We know what we have to do.  We just aren't desperate enough yet to do it."  I find it amusing that so many netizens, with no real responsibility, somehow think that elected leaders really don't know what's happening or what the choices are.

Check the newspapers and read what's going on in the world (and not just in the US of A, and not just in a pure financial-economical way, and not just the oneliner articles).

Goodness gracious, you certainly are presumptuous.  Tell me, Marc, what should I read?  Currently I rely on the NY Times, the Washington Post, the Economist, BusinessWeek, Bloomberg, The Guardian, and the BBC for my news about the world in various areas, with occasional snippets from other sources, including from the non-English speaking world.  Pray tell, what are the reliable sources you use?   

As to opportunistic investing, if the market falls, it is indeed a good time to go long in stocks.  My time horizon is still long and at this point I buy and don't sell.  Precisely contrary to what you write, gold is the speculative investment, and one that is high right now.  The basics on investing are buy low, sell high, not buy high, sell higher.  A cursory review, let alone an in-depth one, will reveal that gold is a poor long-term investment.  If one is interested in commodities now, industrial commodities make a better choice.  I certainly hope no one relies on you for investing advice.

You'd do better to look at all the international developments with a less short term vision.

Again, pray tell, what is the long term vision I should adopt?  Here's the one that I've adopted, please tell me if it meets your high falutin' standards:

The US has been in relative economic decline since 1946.  It's share of global GDP will continue to shrink until at the end of the 21st Century it will be the third largest economy, behind China and India, with Brazil nipping at its heels, while sclerotic Europe (meaning an expanded EU) will fall to fourth or fifth position.  The strategic position of the US will deteriorate so that it must rely extensively on partnerships with Asian powers to assert its interests in Asia, particularly with India, Vietnam, South Korea, and, if at all possible, Central Asian nations.  All the while, "emerging" economies will grow stronger.  (A brief aside, on a PPP basis, aggregate GDP among developing countries exceeded that of developed countries in 2008; in absolute terms the emerging world could surpass the developed world in less than a decade.)  The West is toast.

But it's not.  This long term, international vision also includes an increase in the standard of living for everyone.  Literally hundreds of millions of people have been lifted out of absolute poverty in the last 30 years, a giant chunk of them in China.  This is one of the greatest developments in human history.  It will continue.  Innovation and economic activity in the land of dark skinned peoples is good for the rest of the world.  There will be more consumer choice, a greater exposure to competing ideas and culture, and, despite gloom and doomers, innovation that will both reduce environmental harm is some areas and mitigate it in others.  This does not preclude the probability that there will be more wars – there will be, and I would not be surprised if there were a nuclear exchange in the sub-continent, the true worst case scenario  – or that there will not be economic and population displacements due to environmental problems – there will be – but rather, I view people as more adaptable and creative than some like to think, especially in down times.

Now what does this mean from a selfish investment standpoint?  It means Americans should be more open to international portfolio investment, though with the understanding that there is greater correlation in market movements now than before.  I've been increasing my exposure in to foreign markets for the past decade.  Of course, not everyone should, because some people have no risk tolerance, but they will lose out.  There will be market gyrations, to be sure, but that is the nature of the markets.  There is indeed more in this world than the US.  I embrace that reality wholeheartedly.

Now, Marc, what is your particularly broad, well-informed vision?

1. As to worst case scenarios - they do occur and often they are often worse than anyone ever imagined. The events of 2008 are an example of that, as markets dove far worse than most anyone predicted.

Only problem here is that the worst case scenario did not happen.  It appears that people's memories are short.  TARP, though hardly the greatest plan ever, did in fact help prevent things from getting worse and did, along with Fed actions, get the short term credit markets going again.  Worst case scenarios had even more large scale banks going down, and worst case market scenarios predicted a Dow of around 4000 (and this is discounting some of the doomsaying flakes who have predicted for years that the Dow would return to it's pre-80s numbers). 

The mention of a worst case scenarios in Iraq is also wrong.  I'm not quite sure who ever bought into the Iraq-will-be-easy scenario, but prior to the surge, there were prognostications of even greater problems in Iraq than have occurred.  That's not to say that he results in Iraq have been good, or that the US should pursue similar policies in the future, but it could have been worse, and many predicted it would be.

I will concede that Fukushima is pretty bad, though even that had even worse predictions.  (Of course, the long term consequences are not know, so it will probably get worse.)

I suppose I should be a bit clearer and narrower here: economic worst case scenarios don't happen.  The structure of developed economies is such that the worst problems of the 1930s and before would be essentially impossible to duplicate.

[Marc]

Hey Todd, apologies: you read the right papers and you're doing just fine. 0:)

I myself do not have a vision at all. Somehow my crystal ball got blurred.
But it's good to see that at least you know how the game has to be played.

I have to admit though that I still believe that hoping for panic at the financial markets is a way of neglecting problems in the old-fashioned way. In fact, I believe that this selfish way of thinking is part of the returning problems of the last, say, three decades.
I lost my job during the last crisis, and had enough troubles to fight myself back as a lower payed temporary employee. I've seen this happening to others, too.

So, if you don't mind: whilst you keep your fingers crossed for panic on Monday, I'll cross them for more sanity on the various market floors. Personally, I'm getting quite sick of this egocentric playing with millions and millions of dollars, euro's, yuans or whatever.

Still, I might investigate some of my money in music this week. One disc and one concert, that'll be just fine.

[Todd]

So, if you don't mind: whilst you keep your fingers crossed for panic on Monday, I'll cross them for more sanity on the various market floors.

Sounds fine to me.  I just want another long-term buying opportunity, and people often overreact to bad news.  My preferred scenario is some panic early in the week, with the ECB coming out later in the week with a viable plan to assist (not bail out, no way) Italy and Spain without pushing France over the edge due to its commitments - which can apparently reach 13% of GDP under the wrong circumstances! - to soothe markets.  (The ECB can at least wait until Tuesday, sheesh.)  The US has a while to sort things out.  I, for one, want to see who's going to be on the super committee.  Should odds be put on whether Ron Paul is selected?  And will Congress decide it doesn't like the self-imposed strictures and change them?

I must admit that I did enoy the official Chinese response to the downgrade.  The US should cut entitlements and its gigantic military budget.  Nothing self serving in that response.

[drogulus]

     It's a vote of no confidence in the leadership. Obama could not convince Republicans to compromise, and instead caved on revenues. So an economic judgment (you can't shrink your way to growth) is factored with a political judgment (the players can't do what everyone knows must be done, a tax and spend package with revenues and cuts).

[The new erato]

If noone buys when the market crashes, it would crash even more.

[drogulus]

If noone buys when the market crashes, it would crash even more.

     Ah! That's right. And if the government shrinks at the same time, what happens then? A small stimulus was used to recover from a big meltdown, and  the recovery stalled. Now we are going to reverse gears and, with our eyes wide open, deliberately make it worse! We are destimulating the economy with 9% unemployment and low inflation! We are afraid to borrow money at historically low rates to rebuild infrastructure and boost employment while boosting productivity.....why? What good does cutting GDP growth by 1% do? Are we growing too fast?

[eyeresist]

the nuclear disaster in Japan. Nuclear energy was going to be so much cheaper than the other options. Until you factor in the costs.

To be fair, building a nuclear reactor next to the sea IN A TSUNAMI ZONE was not the wisest move.

[The new erato]

     Ah! That's right. And if the government shrinks at the same time, what happens then? A small stimulus was used to recover from a big meltdown, and  the recovery stalled. Now we are going to reverse gears and, with our eyes wide open, deliberately make it worse! We are destimulating the economy with 9% unemployment and low inflation! We are afraid to borrow money at historically low rates to rebuild infrastructure and boost employment while boosting productivity.....why? What good does cutting GDP growth by 1% do? Are we growing too fast?

You should ask the Republicans, and particularly the Tea Party movement, that question.

[mc ukrneal]

Only problem here is that the worst case scenario did not happen.  It appears that people's memories are short.  TARP, though hardly the greatest plan ever, did in fact help prevent things from getting worse and did, along with Fed actions, get the short term credit markets going again.  Worst case scenarios had even more large scale banks going down, and worst case market scenarios predicted a Dow of around 4000 (and this is discounting some of the doomsaying flakes who have predicted for years that the Dow would return to it's pre-80s numbers). 

I suppose I should be a bit clearer and narrower here: economic worst case scenarios don't happen.  The structure of developed economies is such that the worst problems of the 1930s and before would be essentially impossible to duplicate.

In this sense, I would agree, economic worst cases don't generally happen. In this case, it also depends when we start from. After all, worst case scenario is that the Dow/S&P goes to zero, the US economy hits the skids big time, and the the world plunges into economic disaster (which leads to war, famine, etc.). Yes - this is highly unlikely. But as I said earlier, if things get bad and there is a call for stimulus or other recovery packages that require more money to be spent and for debt to increase - well, I don't think the current Congress will approve that. And if all that happens (unlikely as it may be), then the worst-case scenarios that most people disregard at least become possible, something we thought would never happen. Admittedly, a lot of 'ifs' there, but there have been a lot of changes over the past 3 years.

[Bogey]

Well actually no.  In an interview on cnn a representative of s&p made it clear that it was due to the poor handling of the dept over the past two administrations, and the decision was made largely due to their forecast of the increase in the ratio of debt to gdp in the long term.  The recent crisis was merely the feather that broke the camel's back.

I think this is much ado about nothing though, US dollar is still the best form of currency and the US will keep trading at low interest rates.

http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=139046367&m=139046348

At about the 2:35 mark, David, but give the full a listen.

[Todd]

But as I said earlier, if things get bad and there is a call for stimulus or other recovery packages that require more money to be spent and for debt to increase - well, I don't think the current Congress will approve that.

Not in an overt way.  But the deal that was reached last week, at least per Bob Rubin's analysis, has minimal cuts in spending in 2011 and 2012, indicating that people passing laws actually do grasp what is happening, and that cuts in spending are not the way to go.  It would be possible to get another stimulus through if it takes the form of cuts in tax rates or increased (or new) tax credits.  The latter would be the way to go in such a scenario.  Fortunately, the Fed still has some room to move, and apparently there are increasing calls for a third round of bond buying.  We're not to the Friedman helicopter drop of money quite yet, but there are still a few options on the table. 

Alas, early trading doesn't seem to be bringing panic.  Markets have dropped in Europe and here, but not by panic levels.  I can still buy, though.  And treasuries are up, at least in early trading.  It will be interesting to watch just how much impact the downgrade has. 

[Brahmsian]

Are there any countries left in the world that don't actually owe money?  Seriously?!?!   

Canada has a major debt load as well.

[Todd]

Are there any countries left in the world that don't actually owe money?  Seriously?!?!

Pretty much all national governments have debt, and in fact for proper functioning of some government actions they must (eg, monetary policy).  Debt is not bad in itself, and in fact it's very good and necessary for growth, as Alexander Hamilton pointed out many moons ago, it's just that governments, particularly in the developed world, have overextended themselves.  That can't last forever.  The US has had debt for its entire history except for a short period in 1835, and for obvious reasons, during WWII, the debt to GDP ratio reached its historic peak.  The current level is too high and must be brought down over time.   

[The new erato]

Are there any countries left in the world that don't actually owe money?  Seriously?!?!   

Canada has a major debt load as well.

Norway. We have a debt at 50% of BNP (like Switzerland), but larger assets so we're net lenders, not borrowers.