By Jon Nadler
Oil at a 22-month low. Loses
$3.43 on the day. Best Buy turns into Worst Buy.
GM stock at $3 and labeled 'too big to fail.'
The Dow drops more than 360 points. The US
Treasury pulls away from buying illiquid
mortgages and cozies up to supporting auto,
student, and credit-card debt. Get the picture?
Sure you do. The dollar takes off to near 87.50
on the index, and gold skids to near the $700
level on resurrecting fund liquidations. We even
got an explanation of why gold is not at the
$2,200 level - from none other than Steve
Forbes. Speaking on CNBC this morning, Mr.
Forbes pointed out that practically every dollar
being dropped from the Bennycopters in the US
skies is quickly being taken off the scene
through the back door. The Fed is doing a
simultaneous giveth and taketh act.
All of this is starting to look like a replay of
Japan circa the 90's. Our good friend Simon
Constable, over at Dow Jones took a page (okay,
only the title) from our October 30 commentary
and came up with a fascinating little
documentary on the Nipponization of America:
Excellent educational bit, Simon.
World market conditions remained glum as little
in the way of positive catalysts emerged
overnight to help buyers jump in with cash. A
Bloomberg global user survey reveals that
confidence levels about the planet's economy are
at basement levels. Disinflation (or worse) has
gripped the collective psyche and is still
squeezing it hard. Witness the BoE whose
Governor, Mervyn King, said he and his team are
prepared to apply the rate scalpel as often and
as deep as needed to avoid you-know-what. The
threat of an outright default by Russia now
looms larger, as capital is leaving the country
faster than you can say "Do svidaniya!" Finally,
the International Energy Agency took the fears
of "peak oil by 2030" and threw them where they
belong: on the trash heap of failed theories.
That said, oil is within ten bucks of having
lost $100 off its former...peak.
Gold prices remained under pressure in NY all
day, and aside from one feeble attempt to
gaining lost ground, it instead gave various
stubborn perma-bulls yet another chance to send
'imminent turnaround' comments urging the
backing up of trucks again, to the financial
media. Spot prices were off by $22 in the
afternoon hours at $709.50 and the morning's
chatter among participants that fund selling
could reignite proved to be valid. Thus, the
risk of a fall to the $680's in the near-term
has revived again. Silver lost 46 cents to drop
to $9.29 at last check. Platinum was the lone
gunman today, advancing $8 to $822 and palladium
was off $4 at $211 per ounce. The greenback
first fell under 87 on the index, but made a
midday u-turn and decided that 87.50 looked more
attractive. The euro was cowering near $1.25.
Not far behind oil prognosticators are doomsday
scenario script writers. Why, some of them have
been calling for this year's developments to
have taken place in....1981. Also in 1987, 1991,
1999, 2001, and 2006. The 'prefect storm' was
knocking on the door each and every time. Only
it never rang the bell. As a result, some
interesting investment results came about.
Marketwatch's Mark Hulbert fills us in on the
details (and dangers) of calling the End of Days
one time too often:
Sometimes you can't win for losing.
Just ask Harry Schultz. Or Howard Ruff. Or Jim
All three advisers, each of whom has been
editing an investment newsletter at least since
the 1970s, have built their investment careers
by questioning conventional wisdom's trust in
the soundness of the financial system. Not
surprisingly, all three have been vociferous
champions of gold and other precious metals.
You'd think that they would have cleaned up over
the last year, since the disintegration of the
financial system in recent months is almost
exactly what they have been warning us about for
But you'd be wrong.
Of the 181 newsletters on the Hulbert Financial
Digest's monitored list, these three advisers'
newsletters are in 173rd, 175th, and 176th
places for year-to-date performances through
October 31, with losses ranging from minus 64.9%
to minus 70.0%.
How can this be?
The easy answer is that these advisers didn't
put into their model portfolios the securities
that would benefit from the financial collapse
that they envisioned. But that's not a very
satisfying answer. Why didn't they construct
their model portfolios around investments that
would rise when the rest of the financial world
was going down?
The answer, as I see it, has to do with how
difficult it is to forecast when a collapse will
actually take place. It's one thing to know that
the financial system is shaky, and quite another
to forecast when it actually will crumble. And
these advisers would have lost even more over
the last several decades had they bet
aggressively on a collapse every time they
thought that one was imminent.
In essence, these advisers came face to face
with John Maynard Keynes' famous pronouncement
that "the market can remain irrational longer
than you can remain solvent."
In fact, it turns out to be surprisingly tricky
to construct a portfolio to profit from an
anticipated collapse. You can't just own
securities that will skyrocket during such a
collapse, for example, since they will lose huge
amounts during the months and years you wait
around for that collapse to occur.
As a result, advisers who worry about a collapse
sometimes end up constructing portfolios that
are not all that different from those of other
advisers who are more sanguine about the health
of the financial system.
The ironies are many.
Researchers refer to the consequences of these
dynamics as the "limits to arbitrage." One
famous study conducted in the mid 1990s by
Harvard economist Andrei Schleifer and
University of Chicago professor Robert Vishny,
for example, found that arbitrageurs more often
become momentum players rather than hedgers:
Rather than betting against an apparently
obvious mispricing, they often will bet that a
mispricing will continue and become even more
That's the theory, at least. And it only
partially applies in individual cases such as
the letters edited by Schultz, Dines and Ruff.
But, clearly, these three advisers would have
constructed far more profitable model portfolios
this year if they had known that the financial
collapse they have so long warned us about would
happen in 2008."
One could easily add some other familiar names
to the trio, but let's not dwell on the obvious.
More importantly, the lesson from the
above-mentioned dynamic is that anyone telling
you today that "this is the turning point" has
about as much of a chance of getting it right as
the three wise men in question. Just accept the
market. You might miss the bottom by as much as
you likely missed the top (on average, 5 to 10
percent, if you are lucky) but you won't be
blindsided by missing it altogether by
stubbornly sticking to shopworn predictions.