*John Grace is not a doctor, nor has he obtained a PhD in any field of study*
In our most recent report from HS Dent Research, members were surprised to learn that International Monetary Fund Managing Director Christine Lagarde called for a fight against deflation! Notice how Ms. Lagarde is not worried about inflation, which is what many others are worried about. In fact, Ms. Lagarde warned against the US Fed and other central banks dialing back their easing efforts too soon. She pointed out that inflation is the measure of positive trends. Her exact quote is most interesting. "With inflation running below many central banks' targets, we see rising risks of deflation, which could prove disastrous for the real recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively." For a video description of what we can learn about the past, please visit:
Think about that for a minute. One of the most influential financial figures in the world is warning central banksnot to slow down money-printing or credit extension. In the history of the world, foreign leaders have always admonished countries for debasing their currency, noting the effect on those who held it. Now, everyone is being told to keep printing money, and many major economies are doing exactly the same thing, because we want inflation. It is a long, uncharted, economic winter season. A season that we are not at all convinced will end well.
As a refresher, with our data source the St Louis Federal Reserve, 2103 we see an eerie pattern in the stock market from July 2012 through December 2013 that is remarkably similar to what the DOW did from 1928 to 1929. Our research shows that the stock market dropped almost 90% from an its time high at the time. We wonder, could it happen again? We assert that it is not about getting the prediction right, it's all about nailing the preparation for what may happen.
It's never the bus you see when crossing the street that can disrupt your day. It's always the bus you don't see, and can't name or time. Here are, however, three areas that command our attention. The first is Debt Destruction. You remember the good old days when we saw license plate frames that read 'He who dies with the most toys wins!' That was during the time of easy credit, cheap financing, and greed. Let's not point fingers as consumers, businesses, and governments were all playing the same game. We all believed the road to riches was debt. None of those toys were bought with cash, they were all financed. Things have changed. In fact, we see the opposite taking place. Whether by design or by default there is suddenly no appetite for debt. While we focus on government debt, it is the consumer debt and corporate debt that has more impact. HS Dent Research suggests that there is $38 trillion of debt that is in the process of being eliminated via involuntary forces, like bankruptcies. According to the same source, 25% of businesses are on the verge of bankruptcy. Not a good sign.
Where it used to be "greed is good" many consumers and businesses have become abruptly much more conservative. While the stock market has been on a terror since 2009 consumers have moved about $9 trillion from investments and into savings in an extraordinary defensive move, in spite of the US government keeping interest rates at record lows, according to HS Dent Research. The government has pulled out all of the stops to encourage people to invest, but many investors are hoarding cash right now. In addition, according to the same source, we see that the business cash total is at an all time high of $1.5 trillion. Movements like these are not evidence of greed. Or even confidence.
The study of demographic spending helps us see the big picture as we look to see what ordinary people are doing. Just as the coasts did not decide the presidential election, it was Ohio for example or regular people, that provided the whole story. Our study of this data reveals that peak earning and peak spending in the US occurs in our mid 40s. 76 million Americans born between 1946-1964 drove the economy in ways that were unparalleled. From diapers, to hoola-hoops, to Mustang cars, to real estate Baby Boomers reshaped demand for everything. This year Boomers range from age 68 to 50. Without children for the first time, other than health care, what is causing this group to buy anything? Spending is suddenly optional for this huge group. It appears that 10,000 people will be reaching 65 every day for the next 19 years. Governments and companies may have $67 trillion in underfunded pension plans. HS Dent Research also helps us see that Boomers could be $4.3 trillion short for what they need to retire.
We begin a new year will all three of these factors in play. Simultaneously. So, with the stock market at all time highs it could be valuable to look at this recent pattern of the market from 2012-2013 that may mirror 1928-1929. Again, it's not about the prediction, it's all about the preparation for what may happen. Get ready now for what may be the worst hypothetical scenario. As the Dow nears 17,000, be proactive now and give your portfolio a stress test. For any strategy to work, it needs to be in place prior to an event. Take the time now to meet with your financial professional to see what can be learned from 1932-33, 2000-02, and 2007-08. If it is the case that investors experienced two times where equities dropped 50% before and those occurrences were a harbinger for the next time the markets are off 50% or, there is no time like the present to get ready. The next time might be when you need to spend that money.
Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
This information contained in this newsletter is general in nature and should not be construed as comprehensive financial, tax, or legal advice and the opinions expressed are not endorsed by NPC. As with any financial or legal matter, consult your qualified securities, tax, or legal representative before taking action.
While there are over 3,000 local financial advisers with many different opinions, it’s possible that not all firms in the Conejo Valley pay for independent research. This independent research is one of the features that helps investors see the larger picture and make appropriate, if not more informed decisions. The independent research has been used with investors in the workshops the firm conducts since1999 when John Grace became Master Certified and a Charter Member with the H S Dent Advisor’s Network.
“Master Certified” references those who pay a fee to learn about various economic trends and have demonstrated by passing tests the ability to effectively answer.
Investments are inherently risky and will fluctuate with changes in market conditions. Consideration should be given to the possible loss of a part or all of principal invested.