The credit mess building was clear and present danger for the past several years. Any advisors or experts who did not see and prepare for its coming should be avoided now.
Most financial experts and media are paid to sell people products, not see risks. That is the bias which makes most financial commentators and “advisors” utterly useless to us. My Irish father has an appropriate saying for this, “you're a nice fella', but you're no use”.
The past 10 years have been one of the most high risk, high leverage periods in human history. Mindless, reckless speculation was widely touted as intelligent investing. The web of participants complicit in this demise, were virtually all inclusive: banks, investment firms, mortgage brokerages, real estate brokers, marketing firms, hedge funds, media and governments.
Human behaviour fulfilled its epic precedent of herd mentality and reckless deployment of easy credit.
In order to now repair the damage done and avoid making these same mistakes again, at least in our own lives, we need to study the evolution of the present mess and recognize the thinking or lack of thought that brought us here.
This documentary done by ABC's (Australian Broadcasting Company) investigation show “Four Corners: Mortgage Meltdown” is an excellent piece. It aired in Australia more than a year ago and a few months later on CBC's the Passionate Eye in Canada. It has interviews with Robert Schiller and Satyajit Das, warning viewers over a year ago that the world economy was going to have a meltdown.
Remember as you watch this, that the segment was done more than a year ago. Notice with interest the JP Morgan Economist (think chief sales guy) interviewed near the end of the piece acknowledging the mounting risks in 2007 and yet downplaying the need to be defensive or take steps to protect your capital.
Anyone who acknowledged the risks but did not recommend practical, defensive steps, like people selling assets and parking in cash like deposits was remiss, wilfully blind, deluded or dumb. In any event they should find a new job. They have no business giving people financial advice. They are just simply no use. Worse than netural they are actually harmful as they use their apparent “knowledge” to talk people into harm's way.
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It's sad how many “financial advisors” have said, “Don't worry, don't sell, it'll be okay.”
It was all about saving their own skins and management fees.
How many of these “financial advisors” have actually told their clients to sell?
This is officially my favorite blog right now.
I was thinking the same thing. Too many financial advisors are costing people a lot of money. It is really sad and many will have to put off retirement due to their losses.
A little over a month ago I saw Danielle on BNN and instantly was struck by the way her points made so much sense in comparison to others. This blog is a great service to the 'little guy' who is just trying to make some modest gains and navigate through these difficult markets.
Just received 'Juggling Dynamite' and looking forward to reading it this weekend.
Days like this – you got my sincere thanks Danielle. The advice you gave has saved me from what most likely would have been considerable losses.
MY GOODNESS. S&P 500 is getting close to 800. It might actually break right through to 10 year lows in the next couple months.
Danielle,
I am struck by the number of times the CNBC and BNN commentators have said this week that nobody saw this major market upheaval coming. I have to smack myself every time I hear that. I got my money out of the market, albeit a bit early, well over a year ago because of reading blogs like yours and the articles at Safehaven.com. My “rash” actions don't look so stupid now!
Thanks for confirming that there really was a storm ahead and for providing those of us who aren't able to invest with you (yet) the regular updates through this viscious bear.
P.
Hi Danielle,
To my financial advisor's vexation I begun to move our portfolio into cash and GICs almost two years ago as things begun to look a little unreal. The bankers I dealt with didn't think I was very smart then, either. Whenever I mentioned that the real estate market is overpriced and would tumble I was labeled a killjoy and a cynic. How things have changed.
Had I listened to the advice of the financial gurus our money would right now be in the proverbial toilet. I guess my experience during the dot com bubble paid off in the end.
I look forward to your future posts.
Marcus
LOL. They certainly were vexed because they would stop earning management fees. These “advisors” really don't seem to have their clients' best interests in mind.
Hello Danielle, I admire your knowledge & passion and thank you for sharing your knowledge and expertise. I got my 90 year mother out of her mutual funds over a year ago and had a difficult time with her advisor who was opposed. She is in T-Bills with them now but initially her advisor said she needed a larger balance to invest in T-bills and declined to do this (the balance was not insignificant). But when we said – send us a cheque, the company policy suddenly changed and these funds are now in Treasuries.
I was not so smart regarding myself however and I hold a large number of gold shares, the bulk in good companies, mostly in my RRSP. My belief was they would act differently to general equities. I've been reading your blog and I see you've sold your gold shares. My question is should I hold from here or sell. Their prices have dramatically declined. I am prepared to wait but I am not sure at what stage the gold cycle is at. I would greatly appreciate anything you would have to say regarding this. Heather
Heather, I think it is deflation and disinflation not inflation that will be the theme over the coming year. So far gold is still in a downtrend. When markets do recover to the next bull cycle, gold stocks are late cycle performers, so I would not expect them to perform well for some time. I think I would sell into strength. You may get an opportunity Tues. If you want to own gold shares in the future do it in an ETF rather than individual stocks. D
Danielle,
How can we have deflation when interest rates are so low and all these 'bailouts' are occurring (doesn't this suggest there is an increase in money supply)? I am really struggling to understand this and was wondering if you could recommend any reading on it? There are a lot of conflicting views on this and any insight you can offer is appreciated.
I should have checked Wikipedia first.
http://en.wikipedia.org/wiki/Deflation
“Studies of the Great Depression by Ben Bernanke have indicated that, in response to decreased demand, the Federal Reserve of the time decreased the money supply, hence contributing to deflation.
From a monetarist perspective deflation is caused primarily by a reduction in the velocity of money and/or the amount of money supply per person.[citation needed]
In modern credit-based economies, a deflationary spiral may be caused by the (central bank) initiating higher interest rates (i.e., to 'control' inflation), thereby possibly popping an asset bubble or the collapse of a command economy which has been run at a higher level of production than it could actually support. In a credit-based economy, a fall in money supply leads to markedly less lending, with a further sharp fall in money supply, and a consequent sharp fall-off in demand for goods. Demand falls, and with the falling of demand, there is a fall in prices as a supply glut develops. This becomes a deflationary spiral when prices fall below the costs of financing production. Businesses, unable to make enough profit no matter how low they set prices, are then liquidated. Banks get assets which have fallen dramatically in value since the (mortgage) loan was made, and if they sell those assets, they further glut supply, which only exacerbates the situation. To slow or halt the deflationary spiral, banks will often withhold collecting on non-performing loans (as in Japan, most recently). This is often no more than a stop-gap measure, because they must then restrict credit, since they do not have money to lend, which further reduces demand, and so on.
In unstable currency economies, barter and other alternate currency arrangements such as dollarization are common, and therefore when the 'official' money becomes scarce (or unusually unreliable), commerce can still continue (e.g., most recently in Russia and Argentina).[citation needed] Since in such economies the central government is often unable, even if it were willing, to adequately control the internal economy, there is no pressing need for individuals to acquire official currency except to pay for imported goods. In effect, barter acts as protective tariff in such economies, encouraging local consumption of local production.[citation needed] It also acts as a spur to mining and exploration, since one easy way to make money in such an economy is to dig it out of the ground.
When the central bank has lowered nominal interest rates all the way to zero, it can no longer further stimulate demand by lowering interest rates. This is the famous liquidity trap. When deflation takes hold, it requires “special arrangements” to “lend” money at a zero nominal rate of interest (which could still be a very high real rate of interest, due to the negative inflation rate) in order to (artificially) increase the money supply.
This cycle has been traced out on the broad scale during the Great Depression. International trade contracted sharply, severely reducing demand for goods, thereby idling a great deal of capacity, and setting off a string of bank failures. A similar situation in Japan, beginning with the stock and real estate market collapse in the early 1990s, was arrested by the Japanese government preventing the collapse of most banks and taking over direct control of several in the worst condition. These occurrences are the matter of intense debate. There are economists who argue that the post-2000 recession had a period where the US was at risk of severe deflation, and that therefore the Federal Reserve central bank was right in holding interest rates at an “accommodative” stance from 2001 on.”
Based on this, then if my understanding serves me correctly, the US economy has grown at a rate higher than it could actually support. Now that the housing bubble has burst, lenders are tightening credit (money supply) and that creates downward pressure on commodities etc (as we are witnessing now). So what areas can investors look to in such times?
Thanks again – perhaps you should start an online investment course? 🙂 I would be more than happy to pay!
Ray
Many people are not prepared that the recession will last for almost 9 consecutive months, and the result of this is that, more people are now having financial hardship due to the economic mess. The whole modern financial system is in a cash crunch and not just the US economy is in need of payday loans. Obama has put together a massive aid package, the largest ever assembled. It is working its way through the halls of congress, but not nearly as fast as an application goes through the average payday loan store. The largest world economies are affected, such as the UK, Japan, and Germany – all are experiencing a serious cash crunch.