Risk/Reward Vol. 218
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You may be right/I may be crazy
But it just may be a lunatic/You're looking for."---lyrics from "You May Be Right" sung by Billy Joel
"People who need people
Are the luckiest people in the world
Children needing other children"---lyrics from "People" sung by Barbra Streisand
"A room is still a room
Even when there's nothing there but gloom
But a room is not a house
And a house is not a home."---lyrics from "A House Is Not a Home" sung by Dionne Warwick
Busch's Postulate: Interest rates will not increase in the foreseeable future.
In so postulating, I posit two premises: 1) economies in countries with aging and shrinking populations do not grow; and 2) the above notwithstanding, central bankers and the economists that they employ believe they can spur economic growth by maintaining low interest rates. I lit on these two premises while reading Harry Dent Jr.'s new book "The Demographic Cliff". If you google Mr. Dent, you may conclude that he is a crackpot. "You may be right/He may be crazy/But it just may be a lunatic (as opposed to an economist) that we are looking for." And before dismissing premise number one, take a gander at Japan's experience over the past 15 years and keep an eye on present day Europe. One has long suffered from economic stagnation, even deflation and the other is on the verge. (Indeed , my concern is such that I am currently spending several days on the French Riviera helping its economy.) The US is not far behind. All three have aging/shrinking populations. Dent is not alone in his thinking. Read the musings of Stephen Conwill who as president of Milliman of Japan has witnessed deflation first hand and who has issued the following challenge: "Find in history an example of an economy that has combined solid growth with a declining population."
It is Mr. Dent's further contention that a person's peak age of consumption is 46--- a larger abode, college tuition, a second home, a nicer car, etc. With the post World War II Baby Boom ending in 1961, simple math led Dent to conclude that Baby Boomer consumption crested in 2007. The offspring of the Boomers have heretofore reproduced at less than the population replacement rate (1.84 births per woman vs. 2.1 needed to simply replace a population) and even that rate is trending down. Apparently, they do not believe that "People who need people/Are the luckiest people in the world." Or that "children need other children." As Harry puts it, in the US the dyers are outnumbering the buyers. (N.B. In 2012 deaths outnumbered births in the US non-Hispanic white population for the first time in history.) The birth rate in Europe and Japan is even lower, and if you think that China will help spur demand, think of the impact of the "one child rule". Hence, Dent sees years of lessening demand world wide and slow to no growth.
So how does this impact my investing? As noted in premise two above, central bankers have unlimited hubris, but limited tools to combat slow growth. They can keep short term interest rates low by fiat (e.g. via the Fed fund rate) and longer term ones low by quantitative easing (e.g. buying bonds and mortgages). Both may have a short term positive impact on the stock market but neither has proven to spur economic growth. As reported this week, despite spending hundreds of billions of dollars to suppress mortgage rates (QE3), new home sales for March were at an annualized rate of 384,000 down from February and downright puny when compared to the 1,400,000 new homes sold in 2005. Last week, the number of existing home sales was reported at an annualized rate of 4.6million compared to 7.25million in 2005. Talk about "nothing there but gloom." I guess Dionne is right, "a room is not a house/And a house is not a home"--- if no one buys it, that is. Yet, despite demonstrated ineffectiveness, we can expect the Fed to keep interest rates low. And as long as interest rates stay low (especially on the 10Year US Treasury Bond) my high yielding, income securities remain a good investment. Holding pat with preferred stocks, utilities, real estate investment trusts and leveraged close end funds seems the right thing to do.
The mediocre performance of the stock market year to date (as of Friday the Dow Jones Industrial Average is down 1% and the S&P is up less than 1%) reflects mounting concern over the prospects for solid economic growth despite low interest rates. Some, like Dent, believe that slow growth could become no growth or even deflation. I'm not saying that any day soon you, like Ms. Warwick, will be able to "put $100 down and buy a car", but the deflationary impact of an aging/shrinking population is disconcerting. And as for Janet Yellen, like all central bankers,
"The moment she wakes up
Before she puts on her make up
She says a little prayer"
that low interest rates will spur growth. Bonne chance, Janet!
Au revoir from Nice.
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