Five Things You Need to Know: Doomsday Is the Next Speculative Bubble
These are nervous times in America, and nothing quiets the intensity of our fear quite like a good Doomsday tale.
1. Doomsday, the Next Speculative Bubble
These are nervous, harrowing times in America. And when Americans get nervous we tend to make poor decisions. Very poor decisions. We elect movie actors as governor, sometimes even president. We rally behind opportunistic nut jobs and freaks espousing dubious, ridiculous causes and blindly fall into random picket lines. We change around all the rules in professional sports for no good reason. We dress like carnival barkers and gypsies, make strange films, listen to terrible music, start eating like astronauts, and believing in Doomsday. It's fun. Also highly profitable, especially Doomsday. After all, like a furniture liquidation sale, Doomsday only comes around once. "I warned ye's all!" It's the ultimate told-ya-so. Who wants to miss out on that?
Certainly not Harold Camping, purveyor of the May 21, 2011 Doomsday End-of-the-World Scenario and other fine furnishings, from books to radio broadcasts.
Not Robert Fitzpatrick, author of the Doomsday Code, which warns of a final end for the earth's existence this coming October.
Not the History Channel. You know, the History Channel? That cable TV channel about "history?" Students of the History Channel, but more important, advertisers, get sold a vast array of Doomsday programming ranging from more than one special on Armageddon (why more than one?), Nostradamus' end-of-the-world predictions, the 2012 Mayan prophecy of ultimate extinction, and much, much more! (Media buyer pro tip: Do not contract for advertising campaigns beyond 2012.)
Not even the Discovery Channel could resist cashing in on Doomsday with a 2009 special, 2012 Apocalypse.
It's not just media. There are the technology Doomsday dealers, the environmental disaster Doomsday vendors, superbug Doomsday theorists, peddlers of gas masks, body suits, and injectable disinfectants, Dirty War Doomsday hucksters, and on and on and on... and we haven't even gotten to the Financial Doomsday peddlers.
"Why, yes sir, we have a wide selection of Financial Doomsday products. Follow me. Here in aisle 12 we have Hyperinflation... actually, we have quite a few Hyperinflations in a variety of different sizes. Are you looking for Dollar Collapse with your Hyperinflation? Most customers buy them as a set. What about Sovereign Debt Meltdown? You can choose an individual country or go with the very popular, ultra-premium Global Sovereign Debt Default and Meltdown. Municipal Default? We have a few Deflations left, but they're mostly last season. Wait, check this out. You will love this. Food Scarcity. This is hot right now. Food Scarcity with Farmland and City Collapse. Well, my name is Kevin, just look around and let me know if you want to try something on."
Unemployment may be high, manufacturing may have declined, service industry jobs may pay for crap, but by God there's a booming business in selling Doomsday. And we love it. God, how we love it. Yes, these are nervous, harrowing times in America, and nothing quiets the intensity and immediacy of our real life fear quite like a good Doomsday tale.
2. Do Not Buy Farmland
So, you're going with Food Scarcity and Farmland? Good choice.
"It may seem a little odd that in 2011 anyone's thinking of putting money into assets that would have seemed attractive in 1911, but there's something in the air-namely, fear. The hedge fund manager and others like him envision a doomsday scenario catalyzed by a weak dollar, higher-than-you-think inflation and an uncertain political climate here and abroad."
- NY Observer, "Hedge Farm! The Doomsday Food Price Scenario Turning Hedgies into Survivalists"
The gist of this article in which The Observer interviews a very fearful hedge fund manager is that the most attractive asset class these days... you know, to stave off the looming doomsday scenario of hyperinflation and food scarcity... is farmland.
It's true, food prices are rising... for now. But is that a reason to buy farmland? Apparently. The chart below shows the Federal Reserve Bank of Chicago index comprised of farmland in Illinois, Indiana, Iowa, Michigan, and Wisconsin, both in nominal terms top, and adjusted for inflation.
Yes, farmland prices are rising. But in evaluating the potential of farmland as an investment it helps to have some historical background. In 1988, Peter Lindert, a professor of economics at UC Davis and director of Agricultural History Center, presented a very detailed paper on farmland prices called, Long-Run Trends in American Farmland Values. I'd link to it, but the paper is for sale via JSTOR. I spent time this morning reading the paper and here are a few key conclusions Lindert reached that are quite relevant today. See if any of this sounds familiar.
"[T]he ratio between farmland rents and prices has not been a constant. In each of our three data periods (1900-1920,1930-1954, and 1961-1986) the rent/value ratio gyrated in a way suggesting a systematic pattern in forecast errors: the further the real price of farm land is above (below) its previous longrun trend, the greater the likely overoptimism (overpessimism) about the subsequent price trend."
Sound familiar? Lindert is simply describing classic herding behavior in financial markets and financial assets. The more something goes up above its long-term trend, the more likely we are to overestimate its future value. Now, look at the chart above again.
Right. I know. Food prices are going up permanently because of population growth, China consumption, emerging markets consumption, commodities speculation, excessive monetary stimulus and a decrease in suitable farmland. Those are all excellent fundamental reasons for why this time it will be different and farmland values will continue to rise.
Except this has all happened before, and with unexpected outcomes. As Lindert notes: "The fall of the rent/value ratio early in this century, for example, cannot be explained by interest rates, or taxes or government subsidies, or any good reason why the risk of landholding should have seemed to drop... The dramatic capital gains on U.S. farm land between 1945 and 1972 reflected the progressive realization that the future of government farm supports would be more generous and secure than investors had believed in the gloom of the Great Depression and in World War II. After 1973 farm land prices took on their own dynamic, due to some mixture of an endogenous speculative bubble and a misreading of the post-1973 inflation shocks."
Endogenous speculative bubble? Let me explain briefly what that means. It means that in that observation there were no outside (exogenous) events or drivers of farmland prices. That is precisely the causality theorized by Socinomics, that unconscious herding behavior, often post-rationalized using fundamental data, such as population growth, monetary policy, demographics, etc., functions as an endogenous driver of speculative asset bubbles.
The bottom line is that, as Lindert shows, history of farmland prices from Colonial America to the 1980s is littered with cyclical farmland price behavior... sometimes it goes up, sometimes it goes down, and sometimes it goes up and down a lot. Referring back to the chart above, in real terms it looks like, yes, maybe we'll overshoot a bit on the top side and farmland values will go up a bit more, but good luck unwinding that trade when prices return to normal, which is the main point here: they will return to normal. The other point: whenever someone tells you that buying farmland is a good idea? It's a bad idea.
Believe it or not, there was a time in financial markets (many times, actually) when asset classes didn't rise and fall together. No, listen, this is true. In the 1990s, for example, some asset classes and sectors dramatically outperformed others. Even within the stock market, there was a time when stocks, even stocks within the same sector, did not move as a monolithic asset class. I'm completely serious.
Bizarre, right? Not really. It's more bizarre, and a hallmark of bear markets, for correlations to merge to 1.0 and for all assets to lurch to and fro together. As I've tried to show for more than a year now, we are returning to a more normalized environment where dispersion is taking place again, where even within individual sectors, stocks are showing different levels of performance.
Consider the Retail sector. Yes, I know, consumer debt burden will constrain consumption, retailers face margin pressures and are struggling with inventories, etc. etc. But that is the economy. The stock market is not the economy. There are two quick & dirty ways to look at Retail using Exchange Traded Funds, ETFs: the S&P SPDR Retail ETF (XRT) or the Retail HOLDRs Trust (RTH).
The chart below shows the performance difference year-to-date between the S&P 500 Index, XRT and RTH.
CLICK TO ENLARGE
The SPX is up 5.6 percent year-to-date, although you wouldn't know that from all the people telling you to buy farmland and build underground bunkers, while the XRT is up nearly 10 percent. But wait, the RTH is up a more modest 5.9 percent, still outperforming SPX, but only barely. What gives? Composition. These ETFs are comprised of individual stocks, remember, and the performance of those individual stocks determines the performance of the ETFs obviously.
So what's the difference in composition? And why does this have to do with dispersion? Let's take a look.
The top 5 holdings of the XRT are:
SUPERVALU (SVU) 1.4%
Shutterfly (SFLY) 1.4%
GameStop (GME) 1.4%
Abercrombie & Fitch (ANF) 1.4%
Ltd Brands (LTD) 1.3%
The top 5 holdings of RTH are:
Wal-Mart (WMT) 17.7%
Home Depot (HD) 13.2%
Amazon.com (AMZN) 12.1%
Walgreen (WAG) 7.4%
Target (TGT) 7.2%
The XRT is a broad Retail ETF, giving more equal-weight to stocks in the sector. and has 92 individual holdings, while the RTH has a mere 18 components. There is your dispersion. Individual stock component outperformance within the Retail sector is counter-balancing the concentration of the RTH. Make not mistake, this will not always be the case. There are times, especially when large capitalization stocks are in favor, when owning the RTH makes more sense than the XRT, but this is clearly not one of those times and, longer-term, is evidence of a bullish bias building within the structure of the market.
Having said that, note that there are DeMark exhaustion signals in place on the DAILY and WEEKLY XRT, so expect a corrective move over the next few weeks as shorter-term tactical asset allocators take profits in the outperforming sector and rotate into underperforming sectors. This is called "sector rotation" and is investor behavior more typical of hidden bull markets than overt bear markets.
4. Is Apple a Religion? Why, Yes. Yes It Is.
From creation myths to converts, Apple's (AAPL) narrative is eerily similar to religious ones. Is Apple a religion? It's a question we considered a couple months ago in a series of articles and a mini-documentary on The Mythology of Apple. As it happens, real-life actual scientists have been considering this question too. And not just scientist scientists, but brain scientists!
An upcoming BBC 3 series on Secrets of the Superbrands, a documentary about our relationship with brands that shape our behavior, reveals that there are neurological similarities between devotion to Apple products and devotion to religions. Series creator Alex Riley explains: "The Bishop of Buckingham -- who reads his Bible on an iPad -- explained to me the similarities between Apple and a religion. And when a team of neuroscientists with an MRI scanner took a look inside the brain of an Apple fanatic it seemed the bishop was on to something. The results suggested that Apple was actually stimulating the same parts of the brain as religious imagery does in people of faith."
5. Web 3.0 = Data Utility
Reid Hoffman, chairman, CEO and co-founder of LinkedIn.com. The company raised the projected price of its initial public offering from $35 a share to $45 a share, which according to the Financial Times is the largest one-off increase in an IPO since... 2000. The company is now expecting to raise as much as $406 million and its value could be as much as $4.25 billion.
Below is a talk given by Hoffman at SXSWi earlier this spring. It's a fascinating look at the data economy and data utility as a defining characteristic of Web 3.0.
Web 1.0 was a really low bandwidth environment driven by search for files "out there" in cyberspace, an alternative reality. Web 2.0, what Hoffman calls the central part of the information revolution, was where boundaries between physical space and cyberspace began to breakdown. The applications and uses of Web 2.0 allow us to use the online world to help us navigate the physical world. Put another way, Web 1.0 was about the search for data and the creation of an online virtual identity. Web 2.0 was about creating data applications and integrating our virtual identity/relationships with our real world or physical identity/relationships. What is Web 3.0 about? Finding a way to utilize the massive amount of data we are generating.
The video is a bit choppy, but visuals aren't necessary and the audio is reasonably good.. It's fine to just have it on in the background and listen to it.
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