| July 2009
Summer’s in full swing. Let’s focus on just a few items this month before we all rush to the beach.
- Big Picture Update: Why we think we’re not in the next Depression — yet
- Finding The Real Truth In Those “Green Shoots” (or what’s left of them)
- Stunning New Research About Investing in “Stocks for the Long Run”: Why you may need to change your investment strategy now
Why We Think We’re
Nowhere Near the Great Depression — Yet
Here’s a simple graph (courtesy of Donald Marron –http://dmarron.com/) that tells us we’re not in anything like the Great Depression:
 Note, however, that the -29.3% decline in GDP during the Great Depression occurred over 4 years, from 1929 — 1933. Our current recession is still in process.
You can see why it’s perfectly logical to think that we’re nowhere near the Great Depression — yet. The “yet” comes in because the facts tell us we could very well be heading that way. For that we turn to Barry Eichengreen and Kevin O’Rourke at voxeu.org. (http://www.voxeu.org/index.php?q=node/3421). Here’s the skinny:
The world’s economies are declining more and faster than they did in the Great Depression, over a similar period of time. The starting point for the statistics they present is June 1929 and April 2008, which were the peak months of world production prior to the two downturns — a fair starting point. That puts our current recession about 15 months from peak production, and heading down. Here are the basic facts:
- World industrial output has and continues to decline more than it did starting in 1929.
- Stock markets today are closely tracking their behavior in 1929 -1930 (including the recent ongoing rally).
- World trade has declined significantly more than in the Great Depression (at least so far). If you remember, people blame the decline in world trade for the ultimate disastrously long depression that developed in the 1930’s.
Before you get depressed or run off to join the French Foreign Legion (does that exist anymore?), there’s a possible bright side to this, and we’ll get to it shortly.
First, remember that the downturn is global. So when you read information based upon the U.S. only, you’re not getting the whole picture. The U.S. has somewhat better numbers compared to certain European countries. But in a global depression, that won’t mean much.
Now for the possible good news — and notice we say possible. Today’s central banks and most governments are acting much more quickly and aggressively than they did in 1929. Central banks have lowered their “discount rates” and increased the money supply quickly, even forcefully. Governments are willing to engage in deficit spending (spending more than the revenue they take in) much more than they did in the 1930’s.
So why only “possible” good news? We simply don’t know what difference these measures will make. They will make some difference. But will it be enough to hold off a worsening depression? Or will the current vicious rate of decline simply offset their attempts?
Even level-headed Jeremy Grantham, while arguing that it’s time to invest (albeit cautiously) in stocks, states in his recent quarterly letter www.gmo.com:
“No one really knows if generous bailouts are a good idea in the long run; and …no one really knows, if they are indeed a good idea, whether this current stimulus is enough.”
To sum up: Central banks and governments are doing what they believe they ought to do to counter the negative, deflationary forces that are dragging down world economies, throwing millions out of work and cutting off trade between nations (which feeds the economic decline worldwide). Now we wait to see what unfolds in the coming months.
Proceed with as much caution as you can muster. Don’t quit your job, don’t make risky investments, and don’t spend money you don’t have.
What’s the real truth behind these
“green shoots” (or what’s left of them)?
Housing starts recently became the latest “green shoots.” But it’s clear these housing statistics aren’t all that green…and they’re not shooting anywhere.
We don’t dispute the fact that housing starts were up 17%. It’s the deluge of “we’re out of the woods” commentary that we take issue with. It’s frustrating to read and hear some of this stuff. It’s just as bad as those calling for the end of the world. So we’re going to show you a simple chart. It illustrates housing starts since 2003, and clearly shows the whole downturn in real estate that began in late 2005.
(chart reprinted from hussmandfunds.com)Notice the little up-tail at the end. That’s the great “turnaround” we’re supposed to get excited about. Now look at the long slope down since late 2005. What do you see? Lots of little up-tails. In fact, that last little tail looks smaller than all the rest, doesn’t it?
So this is supposed to be an encouraging sign of a turnaround? Really? How about we just stick with the truth. When housing really turns up, we’ll know.
(If you want to know what we really think about the whole “green shoots” theme, please visitrickesposito@blogspot.com)
Shocking Research That Will Change
Everyone’s Assumptions About “Stocks For the Long Run”
Rob Arnott produces some of the best research about markets. A recent article in the Journal of Indexes shakes up a lot of the common assumptions people make about when and how much to invest in the stock market. There’s so much meat in this article, we’ll start today and continue our discussion in the next letter.
But for now, this simple fact will set the stage for what’s to come:if you had rolled over 20-year U.S. treasury bonds over the last 40 years, you’d have as much, if not more money, than if you’d invested in stocks.
Yes, we said 40 years. How is this possible? Aren’t stocks always the investment of choice over the long haul? (And we think 40 years qualifies as “long haul.”) Apparently not.
We’ve all heard how the recent great bull market in stocks (of happy memory) began around 1980 (or 1982). And we’ve all seen the statistics about how much your money would have grown had you invested your boodle in 1980 or 1982. (Of course, you would have had to put everything into the market back then to get the benefit of this supposed windfall.)
But, as you may have learned reading our letters, facts have a way of contradicting propaganda — in this case the propaganda of Wall Street stock hawkers. The facts are that starting any time between 1979 and 2008, the investor in 20-year treasuries wins over the stock investor — albeit by a nose.
Notice the phrase “starting at any time.” That means any year between 1979 and 2008 — a period of almost 30 years — had you invested in 20-year treasuries and rolled them over into new 20-year treasuries upon maturity, you’d be ahead of someone who had invested — again at any point during that period — in stocks.
As we continue analyzing this research next time, we’ll find out:
- How to know when stocks will absolutely hurt your long-term investing plans
- Why dividends should be your #1 consideration in deciding to invest in stocks
- When diversification is totally overrated when structuring your portfolio
- Why we could still see a return to 1929 levels in the stock market — yes, you read that right
Oh, and didn’t you think that most of the time stocks’ performance was positive vs. negative? The way it’s usually expressed is that over two thirds of the time we’re in a bull market, while we’re in a bear market only one third of the time. Or perhaps you’ve seen those “10-year” rolling periods where stocks end up higher at the end of virtually every 10-year period. Well, here’s a real shocker:
- Since 1802 — a period of 207 years — stocks have spent most of their time either faltering from a recent high, or struggling to get back to a past high. That’s 173 of the 207 years since 1802.
Our researcher, Rob Arnott, also manages money. So we approach what he writes with care. After all, we need to be sure he’s not just “talking his book” (promoting his own investment strategy). He’s not — at least not here. The numbers speak for themselves. This research represents a serious effort to provide true and useful data about investing in stocks — data that’s not funded and distributed solely by those who have an interest in investing your hard-earned savings in stocks anytime, anyplace, for any reason.
Well, we’re ready for the great outdoors — beach, barbecue, even a day or two of touring the local NYC sights. As we follow the sun and downshift into summer mode, we wanted to leave you with a final thought.
A Personal Note About the King of Pop:
The Michael Jackson story continues as sales of his music skyrockets. For a while it was all tears and tributes. Then the saint became the sinner, as the pendulum swung the other way and others weighed in on his faults. Finally comes the inevitable finger-pointing at those who corrupted him. Was he a demon, a gentle soul, a victim, a pervert?
Truth be told, I thought he was, at the very least, strange. Yet, something keeps gnawing at me. In the end, it has to do with the Beautiful.
In spite of his supreme talent as an entertainer, he also had a musician’s soul. I found a version of a simple song he recorded, “She’s Out of My Life,” on Youtube.com and it’s just Michael singing. No video effects or glitzy live special effects. And it’s pre-nose job/weirdness too. Take a few minutes to listen.
http://www.youtube.com/watch?v=qF0o-W5uu8oOK, so it’s sentimental. But, as the expression goes, he put his heart and soul into it. And with that soul he touches the Beautiful. It reminds me of that other king, the King of Rock and Roll. Whatever you thought of Elvis Presley, his gospel songs (he recorded a bunch, if you didn’t know) came straight from the heart. (So now you know: I like Elvis.)
If Michael was merely an entertainer — if he was only glitz and splash — he wouldn’t be able to communicate this way. Frankly, I’d like to think that underneath all the plastic surgery, strange dress and those weird mannerisms of his later years, there really was, as his devoted fans keep reminding us, a beautiful soul beneath the surface.
I’m not making excuses for Michael Jackson. It’s hard for me to get over the weird behavior and disfiguring surgery. The accusations of pedophilia don’t help any. And, as with Elvis, no one forced him to take drugs. Even if certain doctors did illegally, even criminally, dispense drugs to him, it was Michael who sought them, bought them and used them.
But let’s get back to the soul. Unless you’re a living saint, I’m sure you know how bad decisions — and yes, sins — can lead us far from the place and the person we once hoped we’d be. You don’t have to be a self-mutilating drug addict to know you’re less than perfect.
It’s in that frame of mind I find myself saying a prayer for Michael, for Elvis and for all of us whose souls are wounded by our own choices as we grapple with the world, the flesh and the devil. And it’s in that frame of mind that I’m thinking it’s probably better to spend a bit more time taking responsibility for my own actions and taking account of the state of my own soul. Maybe I’ll just leave it to God to judge other souls.
So, in the end, for me Michael’s death is ultimately so sad. Isn’t it a shame we didn’t see more of that beautiful soul?
See you soon,
P.S. — Our next letter is already on the drawing board, but I hope I’ll see you before then at rickesposito@blogspot.com. Recent posts talk about an important lesson we all need to learn from theMadoff scandal, why and where gold coins are selling like chocolate bars, critical advice about 401k investing and our recent favorite “Personal Budgeting: can money really talk?” We hope you’ll take a moment to check it out.
Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952
Email: resposito@lighthousewm.com
|
