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 Stop the Charade…
By Mike Minter, CFP®
The stock market continues to push higher so far in October.
My advice is to enjoy riding the trend while it lasts which could mean weeks or who knows, maybe even years, depending on how much longer we can make investors believe the economy is getting better.
Well, the good news is the stock market and economy don’t always move together.
The potential bad news is it is only a matter of time before they eventually do.
Rescue
We are in an environment where the worse the news, the better, as we expect someone to come to our rescue. Bad economic news, no problem, the Fed will print money and continue to ease. A rise in taxes, not an issue, we will vote in conservatives so the Bush tax cuts are extended.
Even though I was always told to avoid talking politics in this business, I can’t help myself. No, I’m not going to praise or bash either party, although if I had a choice it would be to bash both.
But I digress. My point is it doesn’t matter who is President or who controls Congress.
Both parties have contributed to where we are today and there are no silver bullets that will make everything ok.
Whether a concern is our future entitlement liabilities, enormous trade deficits, unemployment, the continual decline of the dollar, the housing mess, increased taxes or massive debt issues at the consumer, government and state level, change is coming, but not the kind President Obama had in mind.
Long Term vs. Short Term
To discuss a few of the issues above, we have a long term structural problem with promises we can’t keep (entitlements) and way too much debt. On the other hand, we have a short term problem of stimulating the economy and generating jobs. Unfortunately, the solutions to these problems are in direct conflict with each other and the more you try to fix one, it just makes the others worse.
In a perfect world, the Democrats would probably want to inject another massive stimulus package, but it isn’t a perfect world, and they have little chance of passing another one with Republicans and “Tea Party” reps getting more seats in the House and Senate. And we aren’t growing our way out of the deficits if the Republicans extend the Bush tax cuts for everyone as their recent track record at balancing budgets is not exactly stellar, and that was when times were good!
According to Andy Friedman at Merrill Lynch, 88% of Federal spending is already spent on interest obligations from our debt, entitlement programs and defense.
Well, whatever spending they cut sure won’t go over well for those affected. But don’t worry, once people get upset, they most likely won’t do it. The followers in Washington want votes and will continue doing whatever they think will keep them in office, but until we start making fiscally responsible decisions, like Chris Christie is trying to do in New Jersey, our problems will most likely be worse down the road. And that road continues to get shorter.
Country Club Analogy
It reminds me a little of mediocre to below average country clubs. The members elect a Board of Directors to run their club. Instead of really doing that, a lot of times these Boards ask their members what they want and try to please everyone. Essentially, they listen to unqualified members who don’t work in the country club industry and make decisions they feel will be popular in the short term without much regard for the long term. As a result, many of these private clubs are now in immense financial trouble, slashing initiation fees to try to attract new members and some of them may not be around much longer unless the economy improves.
On the other hand, the best and most prestigious clubs elect leaders to their Boards that do their due diligence and make decisions in the best interest of their clubs. Sometimes it isn’t always what each member of the club wants to hear, but year after year they always seem to stay in elite status. Even when members do leave, they always have potential members jumping at the chance to join when there is an opening.
Helicopter Ben
Ben Bernanke must really believe throwing money out of helicopters will stop the threat of deflation and fix the economy as he referenced in a speech he gave in 2002. Who knew it was that easy? A couple weeks ago, he talked about what the Fed would do if quantitative easing 2 were needed. With his history, it isn’t a question of if but when and how much.
To the Federal Reserve’s credit, they are in a difficult position.
The housing market continues to be horrendous and consumers, states and government are servicing huge amounts of fixed and variable debt. No wonder they are doing everything they can to keep interest rates low. The interest rates on option arm mortgages alone will be adjusting in massive quantities next year for many home owners who don’t have enough equity in their homes to refinance into low fixed rates. If mortgage rates increase on these loans, the already awful housing problems will just intensify.
On the other hand, you have baby boomers that might be in a position to retire if they could live off fixed income from their investments. Most of them worked hard, planned on when they would enjoy their golden years and are now being punished because of the irresponsible decisions from the groups the Fed is trying to save. Who knows, maybe the unemployment numbers wouldn’t be so bad after all if so many retirees didn’t have to go back to work.
High Yield
I cringe when I see that $170 billion has moved into high yield or junk bonds so far this year. It is an annual record and we still have a quarter to go. People are stretching for yield because they can’t get it anywhere else. I just hope they know the reason why these funds yield so much higher than the others. It is not an area I would currently recommend.
Bottom Line:
- Any additional government stimulus will be much smaller with additional Republican resistance come this November.
- At best, taxes will be the same although they will have to move higher at some point.
- With interest rates already so low, the Fed’s biggest weapon has been used.
The Big Guns are almost empty. Then what?
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