By: Joe Taylor | January 4, 2009
(bettertrades) - The opinions and ideas of Mike "Mish" Shedlock are shared on this blog. Shedlock is a registered investment advisor for SitkaPacific Capital Management, which aims for strong performance and low volatility.
Shedlock brings daily news items to the surface and writes a daily commentary on global economics. The topic can range from the ongoing banking crisis to the situation with crude oil. Shedlock also has a weekly podcast on Howe Street and a weekly segment on a Vancouver radio station. Several audio offerings are archived and available on the site.
(interview with Global Economic Analysis) -
Mish: Thanks. I was honored to make the front page front page of their 25 Best Financial Blogs review. The list is stated to be not in any particular order but I was pleased to be selected for the lead.
1. Mish's Global Economic Trend Analysis (7,903 links). Although Mish (aka Mike Shedlock) is not an economist by training, he adroitly gets into the thick of economic data. Mish uses observations made by those in major media, so-called experts and government officials and serves up analysis based on his impression of their relevance and validity. The author is not afraid to attack conventional wisdom.
Mish: I wrote my first article on March 5, 2005. I have written over 2,200 articles since then.
Mish: Calculated Risk, the top economic blogger in the country was a poster on a stock message board I run on Silicon Investor. He started a blog and asked if he could help anyone setup theirs. Calculated Risk actually created my first template. Now, in terms of traffic as ranked by Gongol, Calculated Risk and The Big Picture by Barry Ritholtz are numbers 1 and 2 (the order sometimes flips) and I am number 3.
Mish: I have a very Austrian economics point of view. The credit bubble has been my main focus. I believe credit bubbles are inherently deflationary. I was one of very few who called for a deflationary crash. Most thought I was crazy when I proposed new all-time low yields on the long bond and the entire yield curve. Most believed we were in some sort of stagflationary replay of the 1970s and interest rates would soar. But I held my ground. In 2008 treasury yields crashed along with the stock market.
Mish: Mainstream media simply has it wrong. Inflation and deflation are not about prices but about the expansion and contraction of money supply and credit. I have discussed these issues many times and I encourage everyone to read Inflation: What the heck is it? and a post that is one of my favorites, Humpty Dumpty On Inflation.
Mish: Yes, I am particularly fond of the Fed Uncertainty Principle where I discuss how the Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg's Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately. I do not believe anyone else has proposed such a thing.
The Fed Uncertainty Principle also has 4 interesting corollaries. Here is a recap.
Fed Uncertainty Principle: The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.
Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three: Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
I wrote that on April 3, 2008 before the Fed started those massive bailout programs. It has been one power grab after another ever since. I am quite proud of that prediction, but I would rather have been wrong.
Mish: I try and teach solid economic thinking. That thinking is interspersed with comments on the economic news of the days, from housing, to bailouts, to interest rates, and anything else in the news. The overall approach is from a macro point of view. Although I discuss individual companies, it is generally the news that is the driver.
Mish: Yes, gold is important in Austrian economic theory. Gold has been considered money all throughout history and government decree cannot change that. I surmised that gold would decline in the initial stages of deflation as leverage was washed out, then bounce back later. That is what happened. Gold, being money, rates to outperform in deflation. In real terms (what gold can buy), gold is now soaring vs. the stock market and other commodities.
Mish: Sure. Everyone does. Miners got hammered more than I thought, and I was early on oil. When crude was $100 a barrel, I called for a pullback to $60. Crude first went to $140. Hyperinflationists were really pouring it on with taunts. However, not a peep was heard from most of them when oil crashed in spectacular fashion to $35 a barrel. It is very difficult to get both timeframe and price correct.
Mish: There is no need for me to be "edgy". By nature I say what I feel. Since my viewpoints are often contrary in nature, there is always a lot of discussion that follows in the comment section on my blog, and indeed all over the internet. Last year every country in the world but 10 visited my blog.
Mish: I am a professor (an honorary title) on Minyanville and I am proud of that. Todd Harrison's crew is the best around. I highly recommend reading Kevin Depew, John Succo, Bennet Sedacca, Mr. Practical, and Minyan Peter. There are many other Minyanvile professors worth reading as well.
Mish: I am a life master at bridge but I gave that up years ago. I golf with my wife Joanne and here is an interesting tidbit about that. We had an agreement that she would not have to play bridge if I did not have to play golf; you see who came out on top of that agreement don't you? Actually I enjoy the game. I am also a photographer and have over 80 magazine cover credits. You can see some of my images at MichaelShedlock.Com. I also like to fish and kayak. Joanne is on the cover of Paddling Southern Wisconsin. I took the cover shot from my kayak.
Mish: Impatience, not waiting for a good setup, over trading, too much leverage, staying in a trade too long. I do not know anyone who has not made those mistakes. In a bull market it's easy to look like a genius. Bear markets are another thing indeed. The current market is very difficult. The average hedge fund lost well over 20% last year, and that includes dedicated short sellers.
Mish: Sitka Pacific had a very good year. Our Hedged Growth strategy was +13.7% for 2008, and Absolute Return finished the year +6.9%. Given the S&P 500 was down 38.5% on the year, I think those are pretty good numbers.
Mish: Absolute Return is a global strategy that can invest in domestic stocks, foreign stocks, gold, and currencies, hedged at times with inverse index ETFs.
Hedged Growth is a long-short strategy. Hedged Growth achieves its performance by picking a basket of stocks long and a basket of stocks short. Market direction, inflation-deflation debates, interest rates, etc., simply are not a concern for this strategy. The idea is to pick a winning basket of good stocks vs. poor stocks on a relative basis. The correlation to the S&P 500 is .17. That is very low. Many hedge funds claim they do not care which way the market goes, we proved it.
The most we ever put on a short position is 1.7%, and we only take a position in liquid issues. We never add to short positions. This is for risk management purposes. Finally, the strategy ranges from market neutral to net long. We were +13.7% without going net short.
Mish: Ah, the magic question. The truth is, no one really knows. However, we see no real value here. Fundamentally stocks are not cheap. Earnings are sinking, unemployment is rising, and this was the biggest debt bubble in history. Logic dictates the biggest bubble should be followed by the biggest crash.
To pick a range for a bottom something like 450-600 on the S&P 500 would seem about right. If so, that is quite a drop from here, and one would certainly want to be hedged if that happens. I have some additional thoughts in Reflections On 2008, Themes For 2009
Mish: You are welcome. This was fun. I enjoyed it.
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