As the first month of the new year comes to a close, promoters in the financial media continue to look for the bottom in stock prices, hoping to motivate investors not only to buy stocks but also to preclude their selling what they currently own. I hope investors are not holding their breath waiting for the bottom; it could be a long time coming!
As readers of this column know, my opinion has been that domestic stock markets are enduring a well entrenched, secular bear market. Such bear market phases have always lasted far longer than anyone on Wall Street would like us to remember. The current secular bear market may well set records — not only for length but also for the damage it will do to investor portfolios.
Those who consider themselves stock market historians may reflect on the secular bear market that began in 1929. While that may seem an extreme case, some argue that the fundamental condition of our economy is worse today than it was then.
The biggest difference now lies in the condition of the balance sheets of both the federal government and the average consumer. In a recent opinion piece in the Financial Times, one of the great investors of our time, George Soros, warns that this will be â€˜â€™ the worst market crisis in 60 years.â€™â€™
While many in the financial media attribute the current stock market downturn to an unraveling of the recent housing boom, Soros sees a much larger issue. In the article, Soros says, â€˜â€™The current crisis is the culmination of a super boom that has lasted for more than 60 years.â€™â€™ The â€œsuper boomâ€ he mentions refers to the governmentâ€™s steady, long-term attempts to manipulate our economy, using excessive money printing, credit creation and other economic stimuli.
You can probably find a great illustration of his premise by looking no further than your local newspapers from this past week. No doubt you have seen articles about efforts of our leaders in Washington, DC to promote an economic stimulus package. What they are arguing over is the size of the package, determining how much money they will either print or borrow and then send out to consumers. Their hope is that recipients of this money — created out of thin air — will rush to the nearest shopping mall to spend it.
Many proponents of governmental efforts to keep our economy from falling into recession argue that this move is precisely what the famed economist John Maynard Keynes would consider the appropriate response. Yes, Keynes always said that stimulating the economy during down times was the right thing to do, but when the economy is growing, that stimulus should be removed.
The trouble is, the U.S. never removes it! What we have now is American style capitalism — an economic system that we call superior to any other. Actually, it is possibly the greatest hoax ever perpetrated.
I am not saying that capitalism is a bad thing. I consider myself a capitalist and benefit personally from capitalism in ways that would be difficult in any other economic system. However, in order to maintain the illusion that our form of capitalism is superior, we have gone so deeply into debt that we will never dig our way out.
Soros also says that, â€˜â€™ every time the credit expansion ran into trouble, the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as the moral hazard, which encouraged ever greater credit expansion.â€™â€™
The result of our reliance on artificial economic stimulus during both good and bad times is a $14 trillion economy — but one made possible by overspending so massively that most people cannot imagine the size of the hole we have dug for ourselves. Our so-called economic miracle was made possible, in large part, because we have overspent our means and productive capacity by well over $20 trillion during the past 50 years. That figure includes the national debt, now over $9 trillion; about $10 trillion in mortgage debt held by homeowners; and about $2.5 trillion in revolving debt in the form of car loans and credit cards.
Am I alone in wondering how our economy would have performed had we not overspent by this whopping amount of money? Oh, and letâ€™s not forget to add to this the federal governmentâ€™s unfunded Social Security and Medicare liabilities, now estimated at close to $50 trillion. Now we have a total debt picture of close to $70 trillion!
Anyone who follows closely knows that a fair chunk of the 50 trillion social programs shortfall has been a result of our leadersâ€™ decision to spend excess contributions workers have made into Social Security. That spending practice continues today. Again, I wonder where would we be economically had that money been saved as it should have been? This is yet another stunning example of spending beyond our means.
Of course, we will always have apologists for Wall Street interests, purporting that none of the gaping holes in our collective balance sheets are cause for concern. The easy fix for the $50 trillion shortfall in the two retirement programs is simply not to pay what was promised. Does anyone truly believe that drastically cutting Social Security and Medicare benefits will help our economy?
Others will tell you that $10 trillion in mortgage debt is not a big deal, since it is offset by $20 trillion in real estate value. They assume, of course, that real estate values never fall. How robust is that argument right now? The homebuilder Lennar has just disclosed another massive quarterly loss, due, in part, to offering sales incentives averaging about $59,000 per home sold during the last quarter! What does that suggest about the durability of the $20 trillion estimate for real estate values in this country?
What we have is an economy that has been supported by massive spending beyond our means. Meanwhile, the U.S. savings rate has been zero — or lower — for the past few quarters. Recently, I saw a report showing that the average 55-year-old U.S. worker has a balance in his retirement savings plan of about $60,000.
Where is the discretionary income and savings to support spending in the absence of ever increasing debt and credit creation? Of course, none exists! What has kept this game going so long is ever-increasing debt creation. Does anyone truly think that we can grow our debt and collective liabilities at a compound rate forever?
I, for one, do not. At some point, the game will come to an end — just as it does for any pyramid or Ponzi scheme. Eventually, the debt and liabilities will grow so large that any hope of managing them becomes impossible. But nobody really knows for sure when that point is reached. For that matter, does anybody know if we have already passed that point?
The potential does exist that we may have already gone well beyond that point. Ask yourselves a simple question: how will consumers pay off $2.5 trillion in revolving debt with little or no savings and with wages falling in real terms over the past few years?
How will a federal government honor $50 trillion in promises to pay — with absolutely no money whatsoever in reserve to pay them? If any of you have ready answers for these questions, contact your elected representatives immediately! They desperately need answers and have obviously hit a wall. Their only answer at this point comes in the form of bailouts: borrowing billions of dollars daily from foreigners and printing money without restraint. Each of these efforts only exacerbates the problem, but kicking the can down the road appears to be their best hope. But, at some point, they will simply be unable to kick the can any further!
If we have not reached that critical point already, we must be awfully close. Considering the state of our overall economy, looking for a bottom of the stock market or economy is a foolâ€™s errand, and I say that charitably.
This is not to say that we are without hope of making a profit from the stock markets. It is to say, however, that any investor who stands to profit will do so holding a very unconventional portfolio. Let me warn emphatically that the successful portfolio will look nothing like those advocated by promoters in the financial media, who believe â€œthe bottom is near.â€
Have a great week. Bob
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.