"Those who have knowledge, don't predict. Those who predict, don't have knowledge. " - Lao TzuI have no real idea of what the hell is going on, or what will be going on, in the financial markets. There's such a mix of fundamental market dynamics and behavioral market dynamics that it's pretty much impossible to wrap your head around fully.
"The investor's chief problem - and even his worst enemy - is likely to be himself" - Benjamin Graham
"The four most dangerous words in investing are This time it's different" - Sir John Templeton
Here's an odd scenario. Vanguard has a Tax Exempt Money Market whose yield should be, and usually is, extremely minimal (between 1-2%). It's currently running at 5.05%. It's producing a higher return than their taxable prime MM. Now, the market is acting accordingly. Folks are fleeing muni's into treasuries thinking that municipalities are going to get nailed with reduced revenue from falling property taxes. I guess it's just a crazy scenerio when muni's are seen as having significantly higher risk than corporate bonds (close to double right now). I have to wonder how much of that is from researched and factual information vs. gut feelings and emotion. Given how quickly it happened, I'm inclined to believe the latter. And if it's the result of a behavioral market decision, couldn't it be somewhat self fullfilling and more widespread than this simple example? It's got that run on the bank feel to it.
So many interesting aspects to all this that make me a little uncomfortable with political solutions. Obviously, I'm predisposed to being against bailouts and other interferences, I just don't feel like I'm necessarily against it right now. It's hard to know what the other side of the coin is, which is tough because I don't particularly trust politicians using this situation to improve their own standings and agendas. I watched Nancy Pelosi's press conference today. She was quick to preach bipartisanship in an attempt to reduce her parties risk of failure on this, but also quick to roll Republicans under the bus whenever she could. Hardly bipartisan, and reeked of the whole "let us save you" attitude one might expect 37 days before an election (if you honestly think that this is a result of anything other than decades of curious fiscal and monetary policy from both parties, then I have a bridge to sell. And since your HELOC is probably maxed, feel free to use that shiny new credit card you got in the mail.). And no, it's not just Pelsoi and her crew. I don't think any of us are comfortable giving another blank check with no oversight to the executive branch. I get that.
What I do know though, is that I'm not panicking. I'm not changing my asset allocation or my contributions. In every economic downturn, the populace has been told that "this time its different." There is some truth to that as each downturn is defined by unique circumstances. What's not different though is that each cycle has been the birthplace of the next boom. Sometime over the next year, the next great 'thing' will be created. Smart people start doing really genious things when faced with economic adversity, and we're due for some. Markets have a tendancy to "revert to the mean", and looking at logorithmic graphs of the s&p seems to suggest we're due for that reversion. Historically speaking, the correct play is to continue accumulating and rebalancing annually all the way to the other side of the cycle.
Very interested to see how the markets react this week. We've been trading sideways all year, will it be more or less the same even with the bailout plans? Will it fall down to 7 or 8 like it was supposedly going to do before the gub'ment stepped in, or will it soar back to 12-13? Should be educational no matter what.
