By John Reizner |
I intend to depart in this blog entry from my usual style of investment commentary that has previously appeared on this website and make some brief personal comments. It has been quite a while since I have written for my website.
The last two and a half years were difficult for my family: the result of two relocations in a short period of time. We sold our condominium in Northern California at the “bottom” of the real estate market in 2011 before real estate prices in the area where we used to reside strongly rebounded (rather “exploded”) during a housing sector recovery. After an initial temporary relocation we purchased a home in the suburbs a few months after we closed the sale of our condo.
We enjoy a quieter and more pleasant life in our new home in suburbia. Certainly we have more space to move around and we harvest our fruit trees yearly and witness a very active ecosystem right in our backyard. Getting used to a new environment is not as easy as when I was much younger, however pleasant it is.
Like most folks, we did not emerge from the financial crisis completely unscathed, but we certainly have a sense of gratitude for each day and the roof over our heads. The poet, William Blake said, “Gratitude is heaven itself.” I am trying to practice gratitude in my own life. We have much to be thankful for.
Many individuals are currently out of work or are underemployed or have lost their homes due to foreclosure. The economic malaise still lingers by some measures, though our leaders have pulled out all the stops to reverse the tide. Formerly, I criticized the “bailout” of the banks in numerous articles on this website; but in reality we as a country might have been reduced to barter as a means of exchanging goods and services without the extraordinary measures taken by Bernanke’s Federal Reserve.
However, it is also quite conceivable that the financial crisis might have unwound on its own without interference from a Federal Reserve Bank which goosed the economy’s path into the crisis in the first place. In that scenario, some overleveraged banks would have been affected negatively, though the pain might have extended to the man on the street. It is incredulous and a travesty that our money was donated to the affected banks without accountability or assurance of accurate record keeping regarding how the funds were used.
Grown children living at home with their parents, the disaffected unemployed and those working for reduced wages are evidence that the economy is not back on its feet. The President‘s main concern seems to be how much he can jawbone the economy while not really doing anything about it.
Aspiring young graduates are burdened with obscene dollar amounts of student debts magnified by a system where the colleges charge more than what the market will bear as the students are force fed loans by Uncle Sam sufficient to bury them in debt for a good long time. The problem is that college tuitions are going up as fast as the government is willing to shovel barrels of money at the student body. It’s really a scam, and the poor students are the bag holders.
In my mind, the biggest help the President could provide the country is to downsize a federal government that has become oppressive in its reach into all our lives and which serves to perpetuate and grow old and new bureaucracies that never die.
Over 30% of Americans in 2014 are on some sort of assistance – incentivized by the Obama administration and legions of Federal bureaucrats encouraging folks to go on disability and or to accept much needed food and rent assistance, etc. In fact, that seems to be an aim of the administration forced on us by the difficult economy– but really results in quasi-permanent underclass who are dependants of the government without hope or opportunity.
What these folks may not realize, and this is relevant for anyone (including me) who might be in the position of receiving aid now or in the future - that those benefits are contingent on the government’s ability to pay them. The zero interest rate policy of the Fed has kept federal borrowing costs low – but should interest rates for whatever reason start to climb – the interest spending on the federal debt may in time crowd out other spending. In other words, the government may not be able in that situation to pay its bills – and the money for food stamps, rent assistance and welfare will vanish like the funny money they’re printing now.
Most in government may not take lasting actions to prevent this potential scenario from occurring and most may not admit under any circumstances that this scenario is a possibility. Barack Obama and his predecessor demonstrated little will to reverse the tide of growing spending and debt. If the s**t hits the fan, we should be the last to know and it may be too late at that juncture to do anything about it.
Switzerland recently voted down a guaranteed minimum income for all its citizens, an idea that I think has merit. If a President merely sent all Americans a monthly guaranteed check, a swath of aid distributing agencies and programs that in many cases confuse and frustrate people with trails of spaghetti letters and balls of red tape could be happily terminated. There could be a net savings and we would all be better off in our lives with cold cash in our pockets rather than hiring lawyers to obtain benefits or visiting agency satellite offices that are crowded and dirty to ask Uncle Sam to help out. It is doubtful that the government trusts us with our own cash (remember it is our money which support a spider web of federal agencies and programs whose unelected employees’ main job is to carve up our tax money).
There is in the tax code a dearth of new innovative incentives for small and large business to create jobs. In fact there is an air of hostility between the administration and owners of businesses. If there has been almost no tax incentives for businesses to grow and create jobs except for the dubious efforts of the Federal Reserve monetizing the federal debt, then will the tens of millions of Americans added to the food stamp and disability rolls during this administration ever experience real prosperity for their families; or are they permanent dependants of the government’s largess? – Aren’t they entitled to regain their dignity by being hired by a vibrant business community? What’s their future?
The President cannot create jobs – government doesn’t create jobs – but entrepreneurs and small and large businesses do. And they have operated under an uncertain pattern of regulation and without encouragement from public policy. President Obama talks the talk but can you count on two hands the number of substantial tax incentives designed to encourage businesses to hire people? Does increasing taxes create jobs? The answer to that question is resoundingly “No!”
Former President Clinton successfully employed “targeted tax cuts” to stimulate the growth of the economy as a means of incentives for businesses to grow and hire folks. Recent job creation has emerged as a result of the Fed’s easy monetary policy. When that winds down, there may be nothing left to keep the economy going if “escape velocity” is not achieved. For now the Fed buoys a long in the tooth stock market rally.
The zero interest rate policy practiced by the Fed since the crisis, has propelled the stock market for many years – though the winding down of bond buying in process now by Chair Yellen may unwind the market in time, unless the policy is not terminated. The current rising bond market thinks that the economy is not strong enough to propel the market forward if and when the Fed stops buying bonds. If rates should rise later in a measured fashion and the economy muddles through, the stock market could continue to rise up to the point when monetary policy becomes restrictive (remember Edson Gould’s Three Step and Stumble Rule).
Importantly, the velocity of money is near an all time low – Without increased bank lending and more rapid circulation of money throughout the economy – the “recovery” will not embrace the most vulnerable. If the velocity of money does increase, price inflation may become a threat.
On the usual topic of this blog, investing remains a worthy endeavor that I still enjoy and potentially a profitable way to participate in a potential economic rebound and equities bull market.
If you remain a long-term investor such as I am “to an extent” – then it is simply best to invest during secular and cyclical bull markets in equities. The big question is whether we are experiencing a long term bull market now, or whether there have been structural changes to the economy and too much accumulation of debt to support the continuation of the bull market from here and even economic “growth.” We are now in unprecedented territory in the stock market and the economy. The Fed has created a new financial reality where interest rates are held down for years at a time with uncertain results, and the balance sheet of the Fed and the public debt which our young people must pay off are enormous indeed. Deleveraging of American families’ finances continues.
The stock market appears to have lost a generation of investors due to the economic crisis from a sense that Wall Street can’t be trusted. It is my personal experience that that sentiment has a degree of truth in it - but it depends which firm or who you are dealing with. There remain banks and brokerage firms that were not bailed out, that did not act egregeously prior to the crash, and who were and are good financial institutions. I think the investor might ponder taking personal responsibility for his or her investments.
Did the latest secular bear market that started in 2000 end during what was at the time a once in a lifetime financial and stock market meltdown in March 2009? Normally long term bear markets endure for more than nine years.
The low of the 1966- 1982 bear cycle bottomed eight years after the start of that trend in 1974, some eight years after the prior top and lifted off in a powerful bull market in 1982. The current bear trend; at least until proven otherwise, hit its low in March 2009, some nine years after the 2000 top, similar in form to the earlier bear. We have enjoyed a vigorous bull market since then. March 2009 may very well have been the bottom. No one knows how this story will end.
I have written on possible scenarios for future inflation and potential strategies for weathering economic storms that might happen in the future for a long time on this website. I was utterly and completely off the mark for predicting a potential rise in inflation during the past several years due to the Fed’s monetary ease. Perhaps I am not alone in this mistake in sticking to such an inaccurate theory.
The banks have refrained from making loans to business owners and individuals and credit remains fairly tight for the most part. Inflation has not been a threat and currently is low, at least according to official measures. Inflation may not remain low indefinitely in the future. Debt deflation is still a possibility with more rounds of Fed easing. We will see. Parts of Europe seem to be in or near recession. We will see if the European central bank employs quantitative easing.
Managing one’s risk (especially in secular bear markets as we have experienced most of 2000-2009 is crucial. In my opinion, it may be best to have an exit strategy for every stock you buy, though choose each holding carefully and plan to potentially hold for at least one market cycle. Trailing stops help. I successfully practiced the method described in the past in my book (available on Kindle here). The investor may experience completely different results than I did and there is never a guarantee in investing, but I feel the book may be worth a look.
It is within our power to be as prepared as financially possible for our futures. I am not permitted to render personalized investment advice since I am not an investment advisor, but you may find more resources to help you potentially manage the markets by clicking on the links below.
Why I sold Part of My Gold Position after a Six Year Hold
Are Stocks Still Worthwhile Investments? A Reconsideration: The Odds of a Panic
The Stock Market and the Power of Contrary Opinion