Risk/Reward Vol. 317
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I do not blame Barack Obama any more than I blame Xi Jinping, Shinzo Abe, David Cameron, Angela Merkel, Mario Renzi or Francois Hollande for what I discuss below.
The disappointing gross domestic product (GDP) numbers reported last week guarantee that Barack Obama will be the first president in history to fail to have even one year of 3% growth in GDP. For context, between 1948 and 2007, the GDP grew at an average of 3.5%. The anemic performance over the past eight years occurred despite doubling the national debt, deploying $800 billion in stimulus, and the Federal Reserve purchasing $4.5 trillion of Treasury bonds and mortgages (QE) and maintaining interest rates at historic lows. The result of all of this stimulus has been to inflate bond and stock prices to record highs. (Remember record low bond yields mean record high bond prices.) However, it has done little to spur the "real" economy which struggles to grow more than 1-2% per year. Without growth, wages stagnate. And one wonders why those with financial assets ("the rich") get richer, and the working class gets poorer?
So why not blame Barack Obama and the others? Because not even they can fight demographics. The population of those who actively participate in the economies of the developed world (including the United States) is aging and shrinking. And their birthrate is well below replacement levels. One need look only at Japan to see our future. For more than 20 years, Japan has had low interest rates, economic stimulus, quantitative easing, in short, all of the "goodies" we have deployed since 2008. And still Japan cannot spur its economy. Why? There is an ever shrinking demand for goods and services. This is hardly surprising given that its citizens purchase more adult than baby diapers, and that by 2060 it will have 1/3rd fewer people than it does today. It does not take an economist to comprehend that no economy can grow with a shrinking population of earners and consumers.
And yet the central bankers here and elsewhere cling to the belief that more and more monetary stimulus (low rates, bond buying, etc.) will somehow spur growth in the real economy. They believe this (or at least profess that they do) despite proven failure these past several years and despite the fact that low rates are a major contributor to wealth inequality. Indeed, just last Thursday, the Bank of England lowered interest rates once again and launched another round of bond buying (quantitative easing) ostensibly to spur growth. Japan is even contemplating distributing "helicopter money". Google that term and it will shock you. Yes, Japan is thinking about giving every man, woman and child some extra cash with no obligation other than to spend it---figuratively dropping cash out of a helicopter. So I ask you, given our poor economic performance and given that other central bankers are doubling down on "easy money", how can the Federal Reserve raise interest rates in September or December, Friday's speculation that it will notwithstanding? It can't---pure and simple. If it did it would send shock waves through the markets. Take a look at what happened this week in Japan when its central bank did not lower rates further into the negative. Bondholders got clobbered, as Mr. Market-san, feared that the bond bubble was beginning to burst.
So what does this mean to investors? As I wrote last week, I see the Federal Reserve continuing to prop up financial assets with low interest rates. Clearly, Mr. Market is on edge so more volatility can be expected. That said, absent a black swan, I do not foresee a major collapse . As indicated by Friday's jobs report, our economy will continue to plod along. But do not expect significant growth here or anywhere in the world. The building boom in China which spurred economic growth in commodity rich emerging markets (Remember the BRIC's?) back in 2008-2010 will not be repeated. Due to its disastrous one child policy, China faces its own demographic cliff. For me, the state of things means the following. In the short run, with spreads on some assets (e.g. preferred stock closed end funds, a few real estate investment trusts, and a smattering of other dividend payers) still priced as if a rate increase is likely this year, I may pick up some on the cheap. Longer term I see the current oversupply of oil balancing, an event which may present another opportunity to garner profits.
I write this edition not as a commentary on social issues, but to explain why we are in for a prolonged period of "more of the same." In sum, I do not see a turn around in the real economy. The reason is simple, but rarely discussed because there is no quick fix. A decrease in buyers means a decrease in demand which equates to slow to no growth---no matter how cheap or plentiful the available credit. The simple truth is that no matter how well-to-do one may be or how much one may be able to borrow, one neither needs nor wants a house or to shop at Krogers or to buy onesies, trikes or birthday cakes if one does not have children. And that is the circumstance for a large percentage of the child-producing-age population in the developed world---including the United States. So if you are like me and rely upon investments for a living, you need a market strategy that takes into account a prolonged period of slow to no growth. As explained previously, mine involves correlating interest rates and income producing securities, locating mispriced assets and taking profits frequently. In addition, I mitigate against the downside by maintaining a large cash position and cutting losses early. Welcome to secular stagnation.
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