Disclaimer: This is NOT about politics. This is not to be construed as
a pro or a con for the Democrats or Republicans. This is strictly about
economic reality. It is not about blame. Nor is it about proposing solutions.
Facts can
so easily be construed to fit an intended audience that we often walk away
questioning whether what we have just been told is lies, damn lies, or
statistics.
Listening
to the President's most recent state of the union address, made me feel that he
and his administration should be treated as heroes. He reported that over his
six year reign the stock market has soared, home prices have greatly recovered,
the economy's gross domestic production has increased, industrial production is
up, and above all else, the total number of jobs lost during the recession has
been restored. I questioned how anybody hearing those statistics could possibly
dismiss his accomplishments. I wondered why he is not getting the economic
kudos that Clinton did. I pondered how anyone in his right mind could criticize
this president. After all, this record is quite impressive.
Our
President was conveying to us that economically everything is good, actually
better than good, and that we have crossed the mountain, and that our troubles
are behind us. Working with clients who are small business owners,
professionals, and retirees, I had a hard time coming to grips with his
message. There was such a disconnect.
My
clients in each of these demographics are stressed. They are concerned about
business growth and retention. They feel like the economy is resting upon a
very precarious footing and that another correction could easily pop at any
time, putting at risk their life savings. They also feel that the economy has
been goosed and the market is rigged to make us feel better so that we spend
more in order to lift the economy. They feel like a pawn in a chess game. And,
furthermore, they feel that we could much more readily fall into recession,
particularly if the punch bowl of monetary stimulus is removed, than we are likely
to see another boom period like the 1980s.
So, who's
right? And, is the economy half full or half empty? Are the statistics being
mined to paint a picture that's prettier than reality? To help you answer these
important questions, I would like to present some additional facts.
While
what the President outlined was one-hundred percent true, there was some other
objective data that was not revealed that might put things in better context.
Again, this is intended strictly as a fact check and deeper overview. This is
not an indictment on the President or the Democratic Party. Nonetheless, let's
address those areas of the economy for which he takes credit.
President
Obama took office literally at the depths of the financial meltdown and at a
time where the stock market had lost 50% of its value. It is certainly a fact
that the stock market is significantly higher today than when he was sworn into
office. It is also true that monetary policies of historical significance have
been enacted to depress interest rates to a point where money is virtually
free. The government creates money by issuing debt. The federal debt since
President Obama has been in office has increased roughly 70%. Most of the debt
that has been issued has been absorbed by the Fed. How convenient. The issuer
and the buyer are related entities.
Through
the process of buying massive amounts of federal debt, The Fed has created a
market and demand for those securities which would not otherwise exist in the
market. This results in low interest rates. Low interest rates flood the market
with cash. And, cash needs to find a home. More cash chasing the same number of
shares of stocks results in stock prices surging. Low interest rates have also
led to the stock surge because for very little amounts of money companies have
been able to buy back massive amounts of their own stock, resulting in even
fewer shares in circulation. When a greater supply of dollars chases fewer
numbers of shares, guess what- share prices escalate. The Federal Reserve headed
by Ben Bernanke and now Janet Yellen are most responsible for the rise in the
stock market, not the President.
Any time
you manipulate a market, inevitably there are unintended consequences. I
believe that easy money helped get us out of the financial crisis. But, I also
believe that it has been harnessed to an extreme and has not developed a solid
foundation that will lead to on-going productivity. A house without a solid
foundation eventually falls. And when the economy begins to tailspin after the zero
fed funds rate policy is withdrawn, I wonder if President Obama will also take
credit for the destruction since he certainly takes credit for the creation.
There are
many other objective signs of weakness which might impact your view with
respect to just how full is the glass. For one thing, the percent of the
civilian work force age 25-54 currently employed is still significantly lower
than January 2009. The number of Americans on Food Stamps is at a near all-time
high, and significantly above the number on President Obama's original
inauguration day. President Obama correctly stated that since he has been
president, roughly two million jobs have been filled. What was omitted was the
fact that the population has grown by approximately sixteen million over the
same number of years.
Small
businesses have always been the backbone of the American economy and the
fulfillment and embodiment of the American dream. The Gallup Group reported
that in the last six years, there have been more businesses going out of
business than those being formed. In fact, there has been a net loss of some
70,000 businesses that have been laid to rest.
As
reported in the September 27, 2014 issue of The Economist, which cited the
Census Bureau and Sentier Research, under the Obama administration, GDP is up
8% and median household income is down 4%. In contrast, during Reagan's first
six years in office GDP grew 22% and median income grew 6%. Clinton's first six
years were even more impressive with GDP growth of 24% and median income rising
11%.
I don't
quite understand how the standards for collecting Social Security disability
benefits have apparently relaxed so much over the last six years, but a high
and unsettling number of Americans are now not only working, but they are
depleting funds from Social Security due to disability benefits.
Facts
just now being released about the details of the final quarter of 2014 create a
lot to mull over. Two for me were most impactful. The first is the huge and
disproportionate percentage of personal spending that went to healthcare, which
is not exactly productive or able to create a multiplying effect. The second is
the Apple effect. Apple stock did so fantastically well in the fourth quarter
due to its launch of the I Phone 6, and it is such a large component of the
S&P 500 that fourth quarter earnings for the entire S&P 500 index would
have been zero if Apple's earnings had been excluded. In other words, all the
earnings growth for the entire index was attributable to just one single
company, and its blow-put launch.
Is the
economy half full or half empty? Everyone is entitled to his or her own
opinion, and is free to use or excuse whatever data points he or she wishes.
Regardless of one's choice data points, there are a few indisputable truths.
They are that most of Europe is either flat lining or in recession. China is
slowing. Argentina, Brazil, and Russia are on the ropes. Geopolitical risks in
the Middle East could almost not be greater. Interest rates around the world
are plunging to a point where are a large number of countries are literally
charging for the privilege of lending to them, which is an indication of fear
and a flight to safety. Greece might be forced to make a "Grexit" by
being forced to leave the Eurozone. And, what happens to Greece has direct
relevance for their cousins in France, Spain, and Italy. Yet, as ominous as all
these truths are, the proverbial can just might continue to get kicked and
kicked and kicked further down the road. And the market might just ignore the
risks for a while. And, investors might scuff off anyone who speaks the truth
as unknowing or negative or viewing the glass as half empty, and dismiss all
the warnings that are flashing in big neon lights. They always do. And, then
they say, "everyone with half a brain could see it coming". Except,
they were part of the "everyone" who wasn't protected.
No one
can predict the future with certainty. I have no idea where the market will
close tomorrow or the next day or the day after that. However, I am confident
that if interest rates don't elevate over the next 5-7 years, we will be in the
midst of a deep global recession of significant magnitude.
Since the
process of lowering rates has jacked up stocks and bonds, what has been a
tremendous tailwind for these two assets will become a headwind once rates
rise. So, over the next 5-7 years, we will either have higher interest rates or
we will be in the depths of another 2008 type recession. In either scenario,
stocks and bonds are not the assets on which you would want much of your
retirement to rely. Investments whose performance depends on the underlying
market moving north should carry a huge warning sign. The can might be kicked
and kicked and kicked down the road, but at some point every road ends. These
are not normal times. Therefore, they require alternative strategies and
investments typically associated with institutions, pensions, and endowments,
but where retail investors are seldom exposed. Betting aggressively over the
last six years that the glass is half full has prevailed, and big time. I am
not willing to bet that it is half empty, but I am clearly not willing to bet
my future or our clients' futures that it is half full and that it will remain
that way over the next critical 5-7 years.
No one
person has a monopoly on all the good ideas. Plus, it never hurts to get a
second opinion. If you would like sound "out of the box" investment
ideas or a second opinion from a seasoned financial advisor who has survived
numerous booms and busts, consider this my invitation for a personal consult
either in person or phone.
All the
best,
Greg Gann
The
opinions voiced in this material are for general information only and are not
intended to provide specific advice or recommendations for any individual. The
opinions expressed in this material do not necessarily reflect the views of LPL
Financial. There is no assurance the trends mentioned will continue or that the
forecasts discussed will be realized. Past performance may not be indicative of
future results.
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offered through LPL Financial, Member FINRA/SIPC.
