How anyone is really surprised by the possibility of a further decline in economic activity is puzzling to me. Perhaps it is all the distortions in the data that is coming from the government supporting the economy. Maybe it is because their vested interest is to have you invest in their funds. Perhaps they just drank the Kool-Aid. No matter what it is almost a certainty, in terms of forecasting, that the economy will either stagnant here or decline.
The main indicator that has been telling us there were problems for some time now is the initial claims data and the lack of private payroll growth. Sure, we saw a bump up in payrolls with the 5%+ GDP print, thanks to inventory restocking, but 1Q10 GDP shows signs of significant weakness. What has held true is initial claims, first they got better with the big GDP print, but now they are soft with the constant downward revisions to 1Q10 GDP. The ECRI data also points to weakness in the economy as well which correlates with initial claims data. From my lens, employment is not a lagging indicator, I have been pounding the table on this for a year now, it is a leading indicator in a post credit collapse scenario.
Friday’s employment report is now being telegraphed by Bloomberg to be weak, -110K is the forecast, especially since the Census hiring is done and they are now laying off workers. All of this is not surprising if you track initial claims and use it as a leading indicator. To put the monthly initial claims data into perspective 1,850,000 are filing claims for the first time and that means there needs to be about 2M jobs created every month to offset the ones just lost and we also have to contend with population growth as well. To be blunt, full employment is a figment of one’s imagination at this point for at least the next 5-8 years. Unemployment will be our greatest problem for a long, long time and there is little the government can do since end demand is the issue.
There is simply no way the Fed can raise rates for the foreseeable future either since one of their mandates is full employment. Yes, I know they said they would raise rates before employment recovered, but they won’t for political reasons. Obviously, that might change depending on what happens in the future, but for right now there simply is no reason to raise interest rates, at all, from their perspective. Worse is the fact that the Senate did not extend unemployment insurance last week which means a million plus people will lose benefits very soon. After their drunken spending binge to bailout the banks after they created this it is beyond me how they would let a million people just wither and die. There are 6 people for every job opening out there so it is not like these people are actively NOT trying to find work, so enough with that whole theatrical display of utter idiocy. Keep in mind I am a deficit hawk, but there is a difference between government wasting money and government helping those who cannot find work.
The loss of those benefits will have a huge impact on the economy as a whole since that money will not be spent. Retail sales will continue to slide and foreclosures will continue to rise, how many of those million plus people are barely hanging on? I am not sure how so many people can claim that the unemployed are simply freeloaders looking to live the highlife on such a meager government stipend which is what you hear often on other blogs or by the ultra rightwing. Considering that there are so many people looking for work the competition for a job, any job, is extremely high which reduces the odds of a person actually getting a new job anytime soon. Not to mention that unemployment benefits are usually around $300 – $500 a week I find it hard to believe that anyone is living the highlife on such a low amount, but that is the case. I am sure that there are abuses, but this is one of those give me a break moments and I am definitely right of center.
The other reason many believe a double dip is out of the question is that companies have extraordinary amount f cash on their balance sheets. Well, all I have to say is how long has that cash been on their balance sheet and it has not gone to work yet? This is like the temporary employment is a bullish indicator, if it is not happened yet the odds of it happening anytime soon are dwindling. The cash on the balance sheet is also part of the deleveraging cycle as companies pay down debt and hoard cash. Perhaps the main reason that companies have so much cash on hand is they think that business is going to get very tough in the near future. After all, many of our best companies have roots going back beyond the Depression and they know the value of having cash on hand to make it through the storms. Of course, they could spend it all tomorrow, but I ask again, what are they waiting for and why hasn’t it happened yet?
The bottom line is that it is really shocking to see so many smart people caught off guard about a potential double dip recession. All of the signs have been around for a longtime that the thought should have entered their mind at some point in time in recent months. There is a chance that we could avoid it, but I do not see how. I should point out the fact that I never bought the idea that we actually made it out of the first one, other than a statistical recovery that is. Time will tell on this one, but if Friday’s report is worse than expectations we will be well on our way to S&P 900.
What no one wants to talk about, ever, in terms of retirement planning is the sequence of returns and the impact on retirement planning. I am bringing this up now as we wrap up the worst 10 year period ever in the S&P 500 we have ever had. In fact, technically, this is the only official 10 year period of time the S&P 500 has ever been negative. I say officially because the 10 year period is subject to interpretation, but regardless we are looking at a period of time wrapped by 2 of the worst periods ever to invest in the equity markets. In other words this decade had the mother of dumbbell negative returns ever.
What the impact of this 10 year period has had on retirees will be felt for the next couple of decades. Essentially, many retirees or pre-retirees have been wiped out or will have to drastically alter their lifestyles in order to make their money last. While I could easily blast the likes of Scott Burns, Suze Orman and a million other drive by financial advisor writers for dispensing horrible advice that they likely did not even follow themselves, I will not. They simply told people what they believed to be true because they used flawed logic and ridiculous assumptions that normal financial advisors would have dismissed as idiocy, not that they are innocent either, but they were the targets of these writers inept ridicule for long enough.
The simple fact is this, everything has a cycle whether we are talking about the Earth, the moon or the markets they all of a cycle. When we look at market returns sometimes the cycle shows an unmanaged index does substantially better than managed money while at other times managed money does better than the unmanaged index. Over the past 15 years we saw the unmanaged index do better than managed money, but will that trend continue? Unlikely. That cycle has run its course from my point of view, sure there will be stand out sectors, but that is it. If you go back in time to the 1970’s it is fair to say that this theory of mine pans out and managed accounts did better than the unmanaged indexes, but you know me, let’s not let the facts get in the way of what they pawn off as the truth.
The beginning of this decade should have been the warning sign for those following the advice of the financial rags who themselves have never ran money or witnessed what it is really like to lose someone money. Instead they blast brokers for making money and tell you to buy an index fund because over the long-term “nothing outperforms the S&P 500,” how’s that working out for you? Simply put, they did not know their history and they over simplified a very complex thing, your retirement planning. Retirement planning is complicated and deeply personal and no one, I really mean this by the way, should ever take their retirement planning advice from the TV or newspaper.
With hindsight on my side, unfortunately, it is now clear that these people did not know what they were talking about. Not only that, but their intentions are now out for everyone to see. One person mentioned already, who always advocated Vanguard index funds, opened an RIA firm and will gladly manage your money for a small fee, even though he said brokers were crooks before, unless he is the broker I guess. The other person sells binders for $50 or $100 that you can buy at Staples for $10 or $20, but since they are branded with their logo or some other nonsense they are worth more, I am still trying to figure out why that is. Either way, to their legions of devoted followers their betrayal means nothing or they will continue to mindlessly follow them, which is astounding to me, even though they destroyed their wealth. Here is what I mean.
The sequence of returns is the timing of returns, either good or bad, and the impact on your portfolio. This is the most important aspect of investing and the biggest ‘Black Swan’ there is because it is out of your control. This is why asset allocation is so important when you are talking about your serious retirement money. I have a larger portion of play money that I speculate with, but you better believe that my real money, my retirement money, is not in some E-Trade account with my finger on the buy/sell button all day long. I have a plan with my real money and I do tinker with it occasionally, but only when I feel the need to be more conservative or more aggressive, but it is professionally managed, not by me, to keep my emotions out of the game. However, the sequence of returns is always ignored by most gurus I read or listen to and it will devastate you if you are not careful.
If you invest and instantly lose 10% for the first couple of years it takes you a very long time to regain those losses or exceptionally high returns for a few years. It is even worse if you are taking income from your portfolio which is the case for many retirees, unfortunately. I am going to concentrate on those taking income from their portfolios in this example, just 5% income I might add, because many Boomers retired either in 2000 or in the last few years, either way you will get the point. I am not even going to show you the double whammy of the dumbbell negative returns because that is so depressing it is not even funny. In fact, this will be and is such a serious problem I am not sure what can be done about it because literally millions of Boomers are in serious trouble now.
Here we see someone who decides to retire and rolls over his 401K and listens to a buy and hold indexing guru. They decide to invest into a generic fund and let it all ride thinking that 5% withdrawals should suit them just fine, since he is told the market averages 10% over the long-term, another farce I might add. Unfortunately for this investor he got suckered into a bad time to invest and the market fell 10% for the first 2 years he owned his fund, but no problem writes the financial guru, just hold on and everything will be fine, really? Well, you tell me if everything looks fine to you.
Exhibit 1-1
Keep in mind, I am not showing any other negative returns, not even a negative 1%, and I am showing +8% returns for every other year in this illustration. I am also showing a straight 5% withdrawal rate, not ever a little more for the grand kids, to pay the taxes or medical bills, just 5%. This person runs out of money in about 20 years with 2 negative years right off the bat and they did not even look that bad, 10% market declines are, well, normal right? That is just one illustration of the sequence of returns and how they can impact the investor, not imagine if I put in the 2008 50% decline in there, there would not be anything left. I also ran this with 6% withdrawals, but the only difference is it gets uglier faster.
There is nothing you or I can do about the sequence of returns, but I have never seen something so important ignored before. While we are wrapping up the worst decade on record for stocks don’t you think we should talk about this stuff a little bit, especially since Boomers are about to retire in droves, well they were at least. Frankly, those bond funds everyone is slamming right now, do you know why they are so popular, not that I agree with it I might add, but they are so popular because they have positive returns on the 5 and 10 year benchmarks. Look at equity portfolios, most funds look horrible, except some managed funds I might add, but in comparison investors are saying, well sure this fund only did 5%, but it is better than the -3% I did over 10 years, so buy it.
I may sound bitter, but this is serious stuff that people just take so lightly and it drives me nuts. CNBC is now all about entertainment, not about serious news anymore which is a shame. The personal financial gurus are all about selling their latest book rather than helping people do real things, but maybe it is the peoples fault when you have to have a segment called can I afford this. People, if you have no money in the bank, in debt up to your eyes, make $50K a year, then no you cannot afford a $700K house, it is common sense. However, even though they are getting calls like this it does not justify giving out poor advice, ignoring history, not understanding the sequence of returns, the basics of asset allocation, vilifying brokers, picking on products – yes folks a variable annuity turned out to be the best product in the world to buy in 2000, and simply recommending index funds because they are index funds – a monkey could do that.
It is always fun to make forward looking statements or predictions even though no one knows what is really going to happen. I decided to write this piece because Dennis Kneale was bragging about his wonderfully generic and completely mindless 2009 predictions he wrote last year which he claims was 90% accurate, even though it was the equivalent of a John Edwards show accurate list of junk.
Sorry, but predicting ‘corporate smashup,’ which I am not even sure if that is an actual technical term or not, but regardless, is as pretty generic as you can get as the government was passing out bailout money like mad. My other favorite prediction was that the Big 3 would get bailout funds as they were begging Congress for, drum roll please, a bailout, I mean seriously. The mindlessness went on of course, but that is Dennis for you, so I figured I would actually go out on a limb and make real predictions, and not use general ‘corporate smashup’ terminology.
I am not picking on Dennis, ok I am, but its fun! In all fairness to Dennis 2009 was a tough year for him as CNBC teased him with his own show only to take it away from him. He clearly is putting all that weight back on again, hey we all face the battle of the bulge at one point or another though. He got smacked by multiple guests for being an idiot because, well, he’s an idiot. The real irony is his 2010 prediction of Twitter going under is already in the can as they just inked 2 deals worth millions, wrong again Dennis and it is not even 2010 I guess VC money is a lot smarter than you, go figure.
Here we go, 2010 predictions:
Sovereign debt issues will escalate in Eastern Europe, meaning defaults because no one cares about that area. Dubai will not receive more exceptional help because they will be “made an example of” by its neighbors. Greece will be bailed out by the EU, go figure. However, emerging market debt will be OK.
Unemployment does not improve and will reach 11.2%, unfortunately. U-6 unemployment/underemployment will reach 20%+.
A third party will be formed in the US, but not in time for the midterm elections.
Democrats will lose the majority in the Senate and the super majority in the House, but not the majority.
Obama’s approval ratings will mirror Bush’s as he pushes cap and trade which is unnecessary and punitive to the American people. He will learn that there is a price for over exposure, seriously, we do not need to see him every day and he is no FDR. Unfortunately, if we give anyone any credit for the BS growth we are witnessing it is the, I can’t believe I am going to say this, the Fed.
Bank failures will reach over 300 for the full year.
We will see a spectacularly large bank failure next year, obviously not a too big to fail, but a large institution. I actually would place the FHA in this category, but it could also be a large regional about the size of a Key Bank, I refuse to give my prediction because of legal reasons and Key Bank is for comparative purposes only, but they are not in great shape.
We will see inflation and the Fed will be unable to raise interest rates due to the unemployment picture. For the first time we will have a recession, or whatever we are calling it by then, with rising prices.
Health care premiums will go sky high because the biggest sham of “reform” just got past by our elected officials who do not understand how the system actually works.
Some nut job attempts to shoot investment bankers because of high bonuses they will receive. I am not advocating it, I think it is stupid and it will be senseless, but there is a high probability that some nut job will do it.
High frequency trading, dark pools and other questionable practices will be regulated or severely restricted by Congress through legislation. Whether or not this is a good thing remains to be seen, but I would suspect it is.
The market suffers a sharp and severe correction as people realize that stocks do not go straight up and the markets actions have deviated from the realities of the economic conditions. When this happens is anyone’s guess, but it will happen.
We may see a 5% GDP print, but those numbers will be severely revised down and we will see the weakest ‘recovery’ ever in the history of recoveries from recessions. After we had spent some $2T+ fighting this economic downturn which will astound the public. The average recovery in terms of GDP growth is well above 6%, but the latest revision for 3Q09 GDP is 2.2% which is appalling. Remove government spending, just forget it because you don’t want to know.
The dollar will have some strength before the Fed realizes that it must double its balance sheet again and we will then see new lows in the DXY by year end.
Gold will reach new nominal highs.
The debt ceiling will be raised again to $16T before they eliminate the debt ceiling completely. I am kind of kidding here, but seriously why have a ceiling when as soon as they hit it they just raise it?
Emergency tax hikes will be enacted by summer bringing top marginal rates to 40%. Capital gains tax rates will increase to 25% and dividends will revert to ordinary income. I would not be surprised to see a VAT enacted as well, just because.
Google takes over the world because Android is really a secret mind control device that when Eric Schmidt gives the secret command, I hear the word is ‘snicker doodle,’ everyone with an android phone will do Google’s bidding.
Obama will finally fess up and admit that he was born in Kenya followed up with the following statement; “what are you going to do about it?”
Mark Haines finally snaps on the air and starts babbling incoherently to himself while swatting at invisible bugs… wait he already does that.
There you have, Ray’s long list of predications for 2010. Some will happen, most won’t, but they are fun to guess at. I also have a wish list that involves people joining that 11.2% projected unemployment rate because they deserve it, but since its Christmas I will refrain from printing such a negative list. However, I am sure you have guessed that one of those wishes, projections, is that Dennis’s contract will expire at CNBC and we never see him again, I can dream. However, as we have seen from other failures like Ron Insana no matter how bad you screw up that network will always take you back. Man, how do I get a job there? Merry Christmas, yeah I am not politically correct.
I have been delinquent in really looking at some of the technicals, mostly because the economic data has just been so bad that I really never thought we would get to this level. Honestly, with the economy still shedding, depending on which numbers you want to look at I prefer the real numbers, but, 263K jobs a month and credit contracting at a record pace and a whole host of other nasty things I could rattle off who would have thought we would be sitting at Dow 10,000?
I think it is safe to assume no one thought we would be at this point, even just a few months ago very, very, few people thought we could see the market at this level. However, now we are right back at the levels where we were right before Hell was unleashed last year and the S&P 500 is about to hit major resistance right in this range and the Dow will have reached its 50% Fibonacci retracement at 10,300, or so. Therefore, we are right at the peak of where the technical equity rebound can take us on its own and the weak dollar is horrible for the US for anything longer than a short-term basis.
I would have to say that after the weak dollar rally and the retracement has hit its peak we will need real substance to sustain this rally and it is simply not there. Without government stimulus and government transfers we have horrible GDP growth. Intel, as I have repeatedly said, was a story about Asia and a weak dollar, not about a US recovery. This is confirmed by Dell saying the US PC demand is still weak, but the pundit dismissed Dell and refused to look under Dell’s press release, so you are left in the dark unless you are doing your own homework.
Clearly multinational firms are going to do well, but how well are they really going to do? Johnson and Johnson missed on the top line and they are a well diversified consumer defensive company. It is my belief that we will see more weak top line revenue growth, except from firms doing business in Asia or have international sales, thanks to Helicopter Ben. I firmly believe that Banks are still bad bets because of the lack of mark-to-market accounting rules. I know, JP Morgan had markup’s today, please, when you can mark securities to fantasy land of course you’re going to have markup’s. What surprised me is they only took $400M in markup’s and not $4B.
With real estate still in the tank, which is reflected in every piece of data shown by the government and even industry shill’s, there is no way banks are making money on their real estate holdings. With commercial real estate defaults up 7 fold YoY to $22B, from $7B last year (the really “bad” year), how in the world are things better? Not to mention junk bond defaults which are projected to hit 14% in the near-term. I simply do not buy a V shaped recovery or even a robust recovery for that matter and this is most evident in the employment numbers, which is a leading indicator for credit recessions.
Retail sales are a joke considering some 8,400 stores were closed over the past 12 months, many of which were the worst performing stores I might add. So, if you dump your losers and keep your winners do you think your sales comps will go up? Hmm, I am pretty sure they will. Of course, was this advertised on any of the media outlets this morning? Nope. Do you really think another 530-550K initial claims report tomorrow is going to be bullish? Either do I, but I am sure this cost cutting method will be embraced by CNBC as gross margins will improve.
As much as I want this to be over, believe me I do since I suffer as much as the next guy, there is no way that it is. Declining income, declining credit, increasing defaults, rising unemployment, declining spending and then throw in shrinking corporate revenue that pretty much proves there is not much of a recovery. I admit the data is getting better, but nowhere near where the talking heads claim we are at for a recovery. Sometimes I sound like a broken record, but a rising stock market is not a reflection of a healthy economy. The other major misconception that needs to be never, ever, mentioned again is how great the market is at forecasting the economy, it is not and never has been, it’s a myth. Otherwise, in 2007 the Dow would have been at 7,000, not 14,000 and there are about 100 other examples.
CNBC dislikes gold for the obvious reason, it doesn’t advertise on its station and is the anti stock play, for the most part. Every day you will hear a rant from someone on the station on why gold is a bad investment from the station. Mostly from Rick Santelli, who I respect immensely I might add, mostly because they say it is a poor investment against inflation, which is not true.
Typically, the argument goes like this, the inflation adjusted high price of gold is $2,044, or somewhere close to there, and it is at $1,040 currently. Clearly equities have outperformed gold because the S&P 500 has done so much better because it has appreciated so much more since the 1980’s. That is only somewhat true. The point I would first like to make is this, gold is the only investment that is ever inflation adjusted in order to be judged as a good investment. It is also the only investment that is judged from its all-time high to its current price and judged to whether or not it is a good investment or not.
Perhaps we should do that with the NASDAQ? No, that wouldn’t be fair not would it. Sorry, back to the facts. If we look at the price of gold from when Americans could legally buy the metal it has done very well, it started trading at about $35 an ounce and is now at $1040 an ounce, not too shabby. So, it is fair to say that it has kept up with inflation over that time period, but if you bought it at the absolute high and sold it at the absolute low you would have done poorly, just like with stocks. That is why, like with any investment, you need to have a strategy and a long-term time horizon.
Now, since everyone wants to inflation adjust gold to judge it as a good or bad investment I figured that what is good for the goose must be good for the gander. So, I looked far and wide for an inflation adjusted chart of the S&P 500 over the long-term. Well, I found one and you may be surprised by what you see. Actually, what makes it even worse is it does not include the 2008 crash or taxes which would have significantly impacted the rate of return, much lower I might add.
It might be kind of tough to see, so I apologize, but I was shocked and if you don’t believe what you see, Google it yourself. However here is what it says. The S&P 500 from 1966 to the present (2007 when this was made) had a nominal annual rate of return of 6.9%, but your real rate of return was only a mere 2.2%. The most bullish period of time, 1982 to 2007, for the S&P 500 would have a nominal return of 11.4%, but your real return was only 8%.
Again, minus taxes from this equation and the picture gets even worse. So why is it that inflation only seems to impact gold, but not equities? It makes no sense at all that we do not look at the impact that inflation has on all of our investments and not just a select few investment options. Not to mention that it is clear that the Fed is clearly pushing investors into riskier assets in order to keep up with the rate of inflation which should begin to worry everyone, especially since the value of the dollar is being questioned more and more every day.
So, the next time someone says gold is a bad hedge against inflation, tell them they do not have the facts. Even with all of today’s new investment options available that supposedly fight inflation at the end of the day they mean nothing if the value of the dollar is being called into question or if they do not have a real track record during inflationary times. Gold works, it has worked for thousands of years and while the value will fluctuate it is safe to assume all asset values fluctuate, but it is one of those investments that will certainly never go to zero and will always have value.
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