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 The Crying Game…
By Mike Minter, CFP®
Recently, if you opened up a financial publication or watched financial television shows, you probably noticed that just about everyone feels stocks are the place to be this year. In Barron’s Outlook 2011 edition that came out the week of December 20th, all 10 strategists and investment managers from the major Wall Street firms disclosed their predictions and all see the market going up 10%-20% this year. So far, it looks like they could be correct and should be, right? For them to achieve these positions, they have to be some of the smartest people on Wall Street, if not the world.
Then again, let me include a couple of lines from Barron’s Outlook 2008:
“Wall Street strategists remain bullish about stocks, despite their tepid forecasts for the US economy”.
“Indeed, the dozen seers we’ve surveyed all have penciled in higher stock prices in 2008, although their estimated gains vary widely, from 3% to 18%. On average, the group sees the Standard and Poor’s 500 at 1,640 by the end of the year, or about 10% higher than the recent 1486”.
The S&P 500 closed 2008 at 903. If you include the average 10% prediction, they were only off about 47%.
You can argue that conditions are different now, but from the example above, it is no wonder that the retail client or “average Joe” is always the last one to the party before it ends as they repeatedly get fooled by the excessive optimism from the people who are supposed to know.
Sadly, after an over 90% recovery from the lows in March 2009 and bullish sentiment currently near record highs, fund flow statistics that track individual investors, have been reporting that they are moving into equities again.
Maybe these people should sit back and ask themselves the following, “if everyone is so bullish, who is left to buy?”
Legendary strategist Bob Farrell, who was with Merrill Lynch during all of the 70’s and 80’s, was well respected by everyone on Wall Street and published his 10 rules to investing. Many of his followers (I put myself in that camp) still use them today. Below is Rule #9:
When all the experts and forecasts agree
— something else is going to happen
If you remember one thing, remember this…
As I have been telling clients for a while now, most of the problems we face moving forward will be debt related and won’t go away anytime soon (here and abroad). This is what happens when governments, states, municipalities and consumers live beyond their means for decades while piling on debt. In the early stages of an economic cycle it is fun for everyone as we are in an expansionary period, but when you get to high debt levels and the expansion ends, the result is deleveraging and the joy stops. In case you didn’t know, we are already a couple years into this.
What do you think happened in the mortgage/credit crisis of 2008?
It resulted from people buying houses, which in return added debt to a level where they could not afford to make their payments. The result was the economy hitting a wall to put it nicely. Then Congress and the Fed flew in with their capes, credit cards and printing machines to save the day. Isn’t it amazing how much better things can feel and look when you throw a couple trillion dollars into the economy? Unfortunately, our debt problems go way beyond the housing market and at this point the Fed is the only one left, as the credit card Congress holds has been maxed out.
My concern, which Ben Bernanke even admits, is his attempt to raise the stock market with Fed policies and create a wealth affect so American’s can feel wealthier and spend. A quote from him recently at a speech to the National Press Club was he is “trying to get consumers more confident so they spend more”.
Spend more? Huh, is that really what we need to be doing right now in this country with wages stagnant, unemployment at 9% and household debt as a percentage of disposable income at 120%? In the 58.8 years Ned Davis Research has kept track, the mean for this statistic is 75.2%. The only other time this ratio was higher was right before 2008 at 130%.
Another way of explaining the severity of household debt is showing it relative to Gross Domestic Product (GDP). Over the last 25 years, household debt has gone from under 50% of GDP to just under 100% (roughly $13 trillion currently). Total Credit Market Debt, which includes Government Debt, Household Debt & Corporate Debt, is at $52 Trillion or over 350% of GDP and much higher than at any other time in history. Even right after the Great Depression when GDP or the denominator in this equation collapsed, it still only got to 260%. (Keep in mind that just before the Great Depression was the roaring 20’s and everyone was buying stocks on margin. The debt remained but the assets were gone following 1932).
FYI - Margin debt is currently at $276B. Since 1970, as far back as the statistics go, it is higher than any previous time besides the years 2000 and 2008. Can you see a pattern here? Only time will tell.
Also, remember that these are all current debt percentages and don’t factor in the trillions of unfunded promises we have made to Social Security, Medicare, Medicaid and public pensions.
Essentially, the Fed’s policies are to print money, monetize our debt and drive up stock prices giving our spendthrift consumer false security that everything is fine so they can go out and dig themselves a deeper hole. This is exactly one of the reasons why “helicopter Ben” will be the scapegoat when the next credit crisis arrives.
Remember his predecessor, Alan Greenspan, who also kept interest rates artificially low and encouraged home owners to take out adjustable rate mortgages in 2004. Times were good back then, until all of a sudden they weren’t. Ben Bernanke, who was under Greenspan’s tutelage at the time, also didn’t see a bubble in housing. And this is the man everyone’s counting on?
Liar, Liar
Also, in his speech to the National Press Club, Bernanke gives himself credit for the stock market appreciating, but denies his low interest rate and money printing policies have anything to do with commodity price increases in this country or around the world. Marc Faber, who is part of the Barron’s Roundtable and author of the “Gloom, Boom & Doom Report”, went on CNBC and stated “he is a liar” when talking about inflation and our Fed Chairman.
On the Kudlow Report Texas Congressman Ron Paul, who was appointed Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy and will have frequent communication with Ben Bernanke, said the following in his interview:
"It's positively baffling that we as a country who brag about the free enterprise system have accepted the fact that one individual basically can control the economy through that one issue [monetary policy]”.
“It is delusional to think that one person could know what the money supply should be and what interest rates should be”.
“I’d just like to get the monopoly power away from this cartel [Federal Reserve] that pretends they know how to run the entire economy”.
When asked about Ben Bernanke saying his policies have a 100% chance of succeeding, Ron Paul said “I hope I’m wrong and maybe he [Bernanke] could be right just because I don’t like to see the pain and suffering coming. But if he accomplishes that, he’s repealed so many economic laws it would be absolutely baffling”.
Bottom Line:
I don’t have all the answers, but I do know this - trying to manipulate the stock market so our consumer will continue to spend money they don’t have isn’t the solution to our problems.
Unfortunately, it will probably end in tears.
(To be clear, we are not a hedge fund and our clients will most likely lose money if another credit crisis occurs since we do own equities. We remain cautious and if another crisis does occur, our objective is to minimize losses and take advantage of opportunities for the long term if and when we believe they exist).
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