As we look at stock markets around the world that have become increasingly volatile it reminds this writer of the sport of basketball. Only basketball tends to be a lot more satisfying to watch.
When it comes to OPM, Other People’s Money, I must agree with Mark Cuban, businessman, investor, film producer, author, television personality, philanthropist, and owner of the Dallas Mavericks. As the owner of a basketball team, Cuban well understands offense and defense strategies.
He can well identify his players who are adept at scoring as well as those players who are outstanding at keeping the other team from scoring so that he can enjoy the game as the Mavericks do all things possible to not only stay in the game but win the game.
When it comes to investing, Cuban was asked about investing on Bloomberg on February 17, 2016. He asserted, “I’m always looking for a hedge.” Now that’s an informed point of view for the rest of us to take to heart. According to Forbes on February 29, 2016, Cuban’s net worth at age 57 is a genuine $3.2 billion. There are 2 take away points for you here: 1) define your defensive strategy and 2) determine how you can hedge your portfolio.
Rallies Based on Wishful Thinking
One of our clients who is an astute investor for three generations, her mother, herself, and her daughter, recently asked a great question, “With the market recent rebound, is now the time to be more aggressive?” My direct reply is, I don’t think so. Here’s why, while it does appear that stock prices are mirroring oil prices as dictated by the latest headline from Russia, Iran or Saudi Arabia, relying on that one relationship may mean we are missing several more significant signs.
As Keith Bliss a NYSE trader wrote on February 24, 2016, Yahoo Finance put it, “If you have been paying attention, you would have seen that this latest move up was not built on a solid foundation, but on the perpetual hope that crude oil would move back above $70 per barrel and make the world right again. The market is much more complicated than a simple cross-asset correlation.”
My interpretation for you is do not get comfortable and believe there is some magical mechanism to float on a cloud to financial heaven. Investors these days must instead stay cautious, agile, and adept. Or hire the professionals where you can see that is the job of keeping you and your money in the game is being done on your behalf. The economic view around the world, in my opinion, remains scary.
Yes, the price of oil has risen recently, but let’s do the math. If oil is up from $27/bbl to $33/bbl, to get back to $100/bbl, it would have to climb 270%. As Rodney Johnson with Dent Research said to subscribers on March 1, 2016, “As the shale revolution swept across America, many energy companies took out massive loans to fund their growth. With oil at $33/bbl, it’s not a question of ‘if’ some companies will go bankrupt, but ‘how many.’ As energy companies go under, they default on their loans and their bank debt.”
Johnson goes on to say, “Banks are earning less profit, and yet facing higher losses. That goes a long way in explaining why bank shares are tanking in 2016!”
The Affluent Market is Fading Fast
If you have been following my work you know starting in 1999 I have learned thanks to Dent Research that you may get a better handle on the economy by studying consumer spending habits based on age.
As has been shown here, according to the US Census Bureau, most Americans enter the workforce at age 20, move for a job opportunity at age 25, buy the most furniture at 39, and the average for peak earning and peak spending for most citizens occurs at 45- 46. It was 2007 when 45-46-year-olds peaked in this country. Then there was 2008. That was the first “demographic cliff” that many Americans have not recovered from, in spite of unprecedented government stimulus. Keep in mind that 70% of the economy rests on consumer spending, according to Henry Hazlitt, author of “Economics in One Lesson.” The data is provided by The Conference Board, which measures consumer confidence by conducting a survey of 5,000 households. Consumers respond to a few questions from which The Conference Board calculates consumer confidence.
If it is the case that 70% of the US economy relies on consumer spending, when spending slows, the economy slows down. As Harry Dent wrote, February 26, 2016, “While the peak number of baby boomers peaked in spending in 2007, the more affluent - the top 10%-20% - didn’t peak until late last year, 2015. In other words, up until now their spending has still been driving the economy. Going forward, that will be less and less the case.”
When we study Dent’s Generational Spending Wave, we see the affluent group peaks eight years later than average Americans because they tend to go to college instead of entering the workforce, so they get married later and have children later. “The affluent peak on about a 54 year lag, not 46 like the peak number of boomers,” Dent explains.
Dent goes on to say, “Don’t underestimate this group. We’re talking about the spending of the top 10% to 20% during a period of the highest income and wealth inequality since 1928 to 1929. They account for around 50% of income and spending. That gives them much more weight. And that means that as they cut back their spending as they’re already starting to, it’ll carve out a hole in the economy that’ll really kick off this global reset.”
Look at the S&P Global Luxury Index, which gives you an indication as to how this group is spending:
This index includes brands like Nike, Este Lauder, Mercedes, Moet Vuitton, BMW, Carnival Cruises, and VFCorporation. There are many brands that have also seen their stocks drop in recent times.
Dent Research submits, “The index peaked in mid-2015 and has fallen -26% as of February 11, 2016. It is down much more than the broad S&P 500, down about -15% from its high in May, 2015.” This information is a proxy for affluent spending. Observing current trends may help investors see better around the curves.
As Dent put it, “This is another monumental change in demographic trends and the final death knell for the economy. If the Fed thought it could fight the demographic decline and debt crisis since 2007 with endless QE and stimulus, I want to see them fight this trend. There’s no way. Gameover!” As I am fond of saying, “It’s not about the prediction, it’s all about the preparation.” Get ready.
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