One of those times when it's better to hold cash
16 DECEMBER 2010
We live in the immediate...the urgent...the here and now...with the noise of the headlines and the blustery winds of current opinion...
Yesterday, the Dow lost 19 points. Gold lost $18.
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But nobody cares what happened yesterday. People want to know what is happening right now. When they enter an elevator, they reach for their cellphones and Blackberries and check to see if they have messages...or if something important has happened.
Trouble is, when your eyes are bolted to a Blackberry, it's very hard to know where you are. When you are caught in the whirlwind of day-by-day activity, it's very hard to see where you are going. And if you only read the news, it is almost impossible to know what is going on.
So, where are we? And where are we going?
You wouldn't know it from reading the press or talking to neighbors, but we are still in funk.
We only bring it up because so many people seem to have forgotten. They see double-digit gains in stocks for 2010 and of a 'Santa Rally' on Wall Street. They see commodities at record prices and bond yields moving up. They read that retails sales are picking up and that small businessmen are more optimistic.
What are they supposed to think? The 'recovery' is real, they believe. The economy is getting back in gear. Everything is going to be okay. Heck, unemployment will be down to normal levels - 5% to 6% -- within a few years; Ben Bernanke said so himself.
And if this assessment were correct, what should an investor do? Well, buy a stock! Or buy a house! Or buy some copper! Buy something. You don't want to sit on cash...not when there are so many good investment opportunities. Get on board before this ship leaves the dock. After all, didn't stock market investors multiply their wealth 14 times by buying in 1982 and holding all the way to 2007? Didn't bonds go up, year after year, for the last 27 years?
You might think you are almost always better off fully invested in stocks and bonds. And maybe you are. But that's why it's important to step back and look at what is really going on. This could be one of the times when it is better to hold cash.
If bond yields have been going down (prices going up) since 1983, what are the chances that the trend will continue for another 27 years? Or how about stocks? If they went up from '82 to '07, how likely is it that another big bull market is underway?
Investors were encouraged recently because small businesses had turned optimistic. Yet the level of optimism is still lower than it was in the last 20 years. Hiring too was said to be picking up. But not in the last two decades have small businesses had fewer openings. The same could be said of other indicators - such as capital investment plans. Small business investment is improving, but is still way below the one prevailing since 1990.
Another thing that has been cited as a bullish indicator: retail sales are rising. The November report showed a healthy gain. At the same time, figures for October and September were revised upwards. But if you look beneath the hood you find that consumers were buying necessities at an increased rate. Sales of autos, furniture, building materials and other durables actually fell heavily. What this indicates is what we keep talking about - a 'back to basics' mentality, consistent with a period of private sector de-leveraging.
Households are saving money too - about 6% of their disposable incomes. They're paying down debt; they're not going on another spending spree. As we pointed out last week, there are reports that consumer credit is expanding. But take out federally-backed credit, and the trend is still definitely down.
Wages are rising too - but the percentage of workers getting increases is still only one quarter the level it was 10 years ago.
There's also a lot of talk about inflation increasing. Martin Wolf, top economist at the Financial Times maintains that inflation is warming - just as it should. It's a sign that the feds' monetary, fiscal, and unconventional policies are working, he says.
But look at the long term trend. Core inflation is running at 50-year lows. In October, it hit its lowest level ever - that is, since they began keeping track in the 1950s.
Housing, too, is still soft in the US. The latest Case-Shiller numbers show prices sinking nationwide. Apart from the '07-'09 crisis years, this is only the second time in the last 22 years that this has happened.
It looked like the trend in housing prices had turned positive after bottoming out in 2009. But the most recent figures show housing has gone into a 'double dip' with prices falling again.
More people are getting food stamps. More people are unemployed. More people are cutting back, rather than expanding their lifestyles.
In short, the long-term trends show a Great Correction - not another boom.
*** Hey, our old friend Ron Paul is in the news. The New York Times carried an article about him. Astonishingly, it wasn't negative. Yes, it mentioned that Ron was regarded as a 'crank.' But in context, that didn't seem so bad.
"I was with Ron just last week," said colleague Addison Wiggin. "He was just coming up for the chairmanship of the House subcommittee that oversees the Fed. He said he thought he had a 'snowball's chance in Hell' of getting the post.
"The last time he was in line for it, the Republican hierarchy blocked him. But that was then. This is now."
A few years ago, everyone hated Ron. The left hated him because he wanted to withdraw funding for its pet projects. The right hated him because he wanted to rein in the US military.
Now, things have turned around. The left likes Ron because he wants to bring the troops home from Iraq and Afghanistan. The right likes Ron because he is a consistent opponent of deficit spending.
The young are fascinated by him. What sort of Congressman votes no on his colleagues' boondoggles? What sort of conservative opposes the Pentagon and calls for an audit of the Fed? What sort of politician sticks to his principles, even when they are out of favor?
Most recently, the right-wingers have been howling for Julian Assange's blood. They say he's a 'traitor' - despite the fact that as an Australian, he has no loyalty to the US. Sarah Palin says he should be pursued like an Al Qaeda operative (though he has committed no crime, as far as we know). Rep. Peter King asked the Attorney General to name WikiLeaks as a terrorist organization.
But good ol' Ron keeps his head cool. He praises Assange for revealing the "delusional" nature of US foreign policy.
*** Poor Julian. Half the world wants to see him hang. And for what? He published some documents that US and foreign governments would rather keep secret. It may be a crime; politicians can make anything a crime. But since when was that a sin?
Even as to the crime, we have our doubts. If publishing is a crime, your editor is in trouble. If publishing 'sensitive' documents that make US officials look like fools is a crime, we're all in trouble.
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