Risk/Reward Vol. 325
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREI
Barb and I (read Barb) spent the past several days caring for two of our grandchildren (ages 4 1/2 years and 6 months) while their parents vacationed in Italy. Hey, raising kids is hard work. Barb is exhausted (but happily so), and I have never logged more office hours at my hobby job. Indeed, demographic data suggests that child rearing may be too hard, or at least too inconvenient, for today's young adults. As noted in previous editions, the fertility rate in the US is below replacement levels. And the fertility rate in other developed countries is even worse. Japan is already suffering a net decrease in population, and Germany is on pace to lose up to 10% of its population by 2050. This demographic train wreck has finally caught the notice of the economists at the Federal Reserve. Earlier this month, the St. Louis Fed published a report entitled "Understanding the New Normal: The Role of Demographics." Therein, the authors conclude that the New Normal (slow growth and low interest rates) likely will persist for decades because of the economic downdraft associated with the aging baby boomers and a declining replacement population. Duh! The Fed could have saved some time and effort if it had just read Harry Dent Jr.'s book "The Demographic Cliff" about which I wrote in Vol. 218 (www.riskrewardblog.blogspot.com). As I noted at the time, this book contains some serious scholarship done by an author who historically has not been taken seriously.
So what does this mean to me? I don't see the return of 3+% domestic annual economic growth any time soon---if at all. And I am not alone. The International Monetary Fund has lowered its projections for US economic growth in the coming year from 2.2% to 1.6%. Slower growth means lower revenues which in time means lower profits. This maxim was on full display this week as the earnings season began. Mr. Market is expecting a fifth consecutive quarter of lower gross revenues and lower profits from our major corporations. This in combination with an expected interest rate increase come December caused both the Dow Jones Industrial Average and the S&P 500 to experience a 1% decline this week. Both are now up only 4% year to date.
I make these observations and draw these conclusions not to depress you. My purpose is simply to expose the obvious. Look--- my logic is simple. People drive demand. Demand drives growth. Growth drives profits. Profits drive stock prices. By definition, if the number of people shrinks, stock prices in time will decline. Moreover,that decline will accelerate if the easy money available to corporations at low interest rates disappears. Why? Because much of the appreciation that stocks have enjoyed these past few years has been a byproduct of corporations borrowing money cheaply and buying back their stock thereby propping up their stock's price. Apparently, that Ponzi scheme is nearing an end. In other words, one cannot embrace the New Normal and believe that the S&P 500 will appreciate on average 7% per annum as it has since 1960. If you agree and need or want a 6+% return, then you will need to adopt a strategy other than buy and hold. I have and Risk/Reward is my attempt to explain it.
As noted last week, I remain on the sidelines in regard interest rate sensitive securities (my favorites) until I conclude that the US Ten Year Bond fully reflects the impact of future increases. The likelihood of a 25 basis point increase in December is very high with 14 of 17 FOMC members of the mind that an increase will occur sometime in 2016. This information was gleaned from the FOMC's September meeting minutes released this past week. I may not have to wait until the increase is officially adopted. I will await investment in the oil patch (another favorite) until after the OPEC meeting in November.
No comments:
Post a Comment