Unemployment in Europe is at an all time high.
Inflation has fallen to 1.2%
Will Europe cut rates and cause a stimulus?
I think they will.
How does this help us? It hopefully will slow the decline that is Europe, even if it’s not going to turn everything around long term until Europe gets the relationship between their debt relative to their GDP in order.
The first quarter was a strong quarter, particularly for the unmanaged US stock market indexes.
But what is going on in Europe? What might the unintended consequences be of the Cypriot banking issues?
I talk about all of this in my video, so I highly encourage you to take a few minutes and listen to my thoughts.
Graphs referenced in the video: Full Graphs
Transcript:
Good morning. Mike Brady with Generosity Wealth Management, a comprehensive full service wealth management firm here in Boulder, Colorado, and I am so pleased to talk with you this morning because we’re going to talk a little bit about the first quarter of 2013. We’re going to talk about the rest of the year. We’re also going to talk about unintended consequences, and I’ll talk about what I mean by unintended consequences in just a little bit.
First quarter of 2013, very good quarter, particularly if you’re 100% invested in the S&P 500 (which you probably shouldn’t be), and very disappointing for you if you’re 100% invested in wheat futures (which you probably shouldn’t be). Realistically you hopefully have a well diversified portfolio of stocks and bonds and cash in US and international, something that fits well with you with your risk tolerance level. If you’re my client, of course I’ve talked with you about that. If you’re not my client, well gosh darnit, you should call me so I can work with you on that.
I’m going to put up on the chart there something that might be a little difficult so I’m going to put a link to it so you can grab the high definition JPEG of it, but you’re going to see across the gamut there, from on the left you’re going to see the S&P 500 all the way to the wheat futures there on the right, all kinds of ranges from – from very good double digits in the positive to for the unmanaged stock impact indexes to double digit negatives for those – those evil wheat futures.
I’m always reminded that like predicting the weather, predicting the economy and predicting the markets, et cetera, is a very complicated proposal. No one is absolutely right, and there’s many different variables that go into it. The older I get, the more humble I become, and at the beginning of the year I said that I thought that this was going to be an up and down couple of years, that it’s going to be a trading range, and I was asked by a client last week if I was surprised by the first quarter strength and the answer is I was surprised but one quarter does not a year make. One quarter does not a two-year time frame make, and I hold to that.
I think that going forward there are so many pieces of data that are negative, there are so many pieces of data that are positive, and that’s normal. When someone says to you, if you see some kind of a TV pundit or an analyst that, well, all these, we have conflicting data. Well, there’s always conflicting data. There’s never 100% way or the other. We have to become comfortable with that type of chaos, and we I think have to take all the data in and say, okay, what does it really mean? And for me it means that it’s going to continue to be that muddle through.
One thing that does concern me from an economy point of view is it feels like a very sluggish economy. The participation rate from an employee point of view, I’m going to throw a chart up there, continues to discourage employees. That being said, I don’t take the complete pessimist view, because we knew this going back that there’s going to be so many baby boomers exiting the work force, so we knew this. Remember that book back in the early 2000s, The Roaring 2000s by Harry Dent, he talked about how around this time frame there are going to be a lot of people exiting the work force and starting to withdraw money from the market. That being said, I think that if you talk with some of your friends and family members, you probably know people who have tried to get a full time job that have decided to go back to school or decided to take something that is less than full employment or what they’re looking for, so it’s a combination of those two, and at various points in time we have a major shift change, and I think that we’re going through that right now and have been for the last two, three, four years, of what does it really mean to be fully employed? What skill levels are we as a society needing in some of those high tech and creative positions? And so that’s what we’re seeing right now. It’s always painful when we go through it, but I’m ultimately an optimist on the US and how we solve things and our ability to weather many things.
Now, I want to talk about unintended consequences. The unintended consequence from August of 2011, remember what we were talking at that point about the down grade of the US from triple A down to double A, and everyone said oh, my gosh, no one’s going to want our treasuries. Well, the exact opposite happened and people basically looked at, investors looked at all of their options and said, you know, this can have a huge impact on some of these other asset classes. I actually want the treasuries which look the best horse in the glue factory, and so that’s exactly what happened. There was a huge rally in the treasuries. I think about, and this is a slight tangent, but I think about Kenya about four or five years ago. I think many of you know that I go to East Africa for two to three weeks a year and do some charity work there, and in Kenya they had a riot after one of the elections and it cut off the whole, you know, Rwanda and Uganda from the ability to get fuel and to get other goods and services because they were coming through Kenya. Well, what was the unintended consequence of that? Now there’s a huge pipeline and rail that’s going through Tanzania that completely bypassed – they’re going to completely bypass and have as a secondary something that’s not Kenyan. That’s really going to long term hurt Kenya, who had a monopoly on getting goods and services in there.
The reason why I bring that up is let’s look at what happened with Cyprus and the European monetary union. Essentially the Cyprus banks decided to treat their depositors as investors in the bank, saying, well we’ve lost all this other money, we can’t – we’re having real difficulty, and the European monetary – European Union is basically saying well, you got us tickets to those uninsured depositors. Now, if you were a depositor of a large amount, you think that’s not going to cause some concern down the road? I mean, I think this is probably the end of the Cyprus banks there, and it also had an unintended consequence of everyone else who is looking at the investing, not investing but depositing banks and European banks is that the European Union said, you know what? This country, the next time Italy comes around, the next time Portugal or Spain comes around, or Ireland, you know, you’re on your own. It’s up to the country. We’re not unified as a European monetary union, unlike what we have here in the United States.
So I think that the unintended consequence of that is a further segregation of the banking system and financial system in Europe that’s just going to speed along what we’ve been talking about for two to three years. Whether all that money that was part there now comes towards the US banks is still to be seen. That being said, I actually think the US financial system is still sick, I mean there seemed to be no consequences for bad action and bad investments even here in the United States, and this is something that we’re going to have to pay at some point as a society and as tax payers, and I don’t know when that’s going to be, whether it’s one quarter, two quarters, two years, or within ten years, but that is something that is going to have to be addressed at some point.
What does this mean for 2013/2014? I continue to believe in the trading range and that we need to be prepared for some up and down movement in the next year and a half, year to year and a half to two years. If you’re my client, of course I’ve talked with you about it. I met with pretty much all the clients in the first quarter and I tried to recommend managers and third party managers that I believe do well in that type of market.
I’m going to put up there on the chart a long term 110-year, 113-year view of the market, and the longer the time horizon that you have as an investor, the happier you’re going to be. If you’re a minute by minute, if you’re an hour, a day, a week, a month, those are hugely short times frames, and what we want to do is have investments that do well on the yearly, the two, the five, and the ten-year time horizon, and if we can have decade time horizon, you’re going to be a very happy, happy camper.
Before I end here, I’m going to throw a couple more charts up to show you what Europe looked like in the first quarter. You’re going to see that Europe was definitely trailing the S&P 500. You’re going to see that the financials trailed all the European stock market indexes, the unmanaged stock market indexes even more, and going forward I think that we need to be prepared for some volatility. We have to remain diversified, and we have to remain consistent with the risk level that we need for the plan that you hopefully have in place. The reason why I say the plan that you hopefully have in place is you’ve got to know where you’re going, you’ve got to have that nice retirement analysis and plan, and what risk level do you need? Because if you only need 2 to 3% a year and you’re taking risks that can get you 10 or 12% in a good year but also lose it in another, why are you taking all of that risk? And so I think that that’s something that you need to keep in mind.
I’m going to wrap up now, because it feels like I’ve been talking for awhile. I’m going to be a little bit more consistent with my videos going forward because gosh darnit, this first quarter was so busy for me as I was meeting with my existing clients and meeting with new people, that I didn’t have – I felt like I was communicating one on one all the time but I wasn’t doing as good of a job with my newsletters and my videos, and I’m going to get back to that, so you’ll see an awful lot going forward.
I am taking new clients. I would love for you to give my name out to your friends and colleagues and family members, et cetera, have them give me a call. We’ll have a conversation whether or not it makes sense for us to sit down and whether I’m the right guy to help them out. What people want, I can’t help everyone, so what they might need might not be what I do, and I’ll be very blunt about that and then very timely of course, but I’ll try to point them in the right direction.
Mike Brady, Generosity Wealth Management, 303-747-6455. You have a wonderful week, wonderful quarter. Thanks, good-bye.
The article below is in the “alarming” category.
Japan borows more than it raises in taxes, and its debt amounts to two years’ worth of Japan’s economic output.
Japan has the highest debt-to-GDP ratio in the world. Half of the country’s tax income is directed to simply servicing it’s debt.
In addition to Europe and China (which I’ve written about in the past), Japan is one of the next huge players we’ll be unraveling in the future. I have great concerns about investing in Japan, and a Euro-Pacific investment is the most troublesome to me.
Be careful if you have that allocation in your portfolio.
If you’ve been wondering if you’re the only person confused by what all the hub bub is about, this is your opportunity to get caught up.
I’ve had a relatively low position in stocks for clients for quite some time, but I’ve decided to lower it even further. I’m quite concerned about the correlation between Europe and the US, emotion/news driven volatility, and the uncertainty about what the Fed will do.
The risk just doesn’t warrant having as high a percentage as I’ve had.
On the flip side, profitability, efficiency, and cash balances have all been rising in the firms that comprise the S&P 500.
Is the return worth the risk?
Click on video to hear more.
TRANSCRIPT:
Hi there, Mike Brady with Generosity Wealth Management, here in Boulder, Colorado and the question is “where do we go from here?” And we’re getting a lot of conflicting information. In the last month or so we’ve had huge volatility. We’re basically in a trading range, we have been for the last three or four weeks, but it’s been a trading range that’s extremely volatile. And we’re talking a half percent to one percent up over a few days and then “Boom!” a negative two, three, four percent.
We’ve seen the correlations between the European markets and the U.S. and Asia; very high. And as we look back, five, ten, twenty years, the correlations for the international market have become increasingly correlated. We’re a global market now. And so what happens in Europe is, irritatingly, affecting our situation here today.
We’re also seeing a lot of emotions. And we’re seeing a lot of news driven markets- which just absolutely irritate the heck out of me. We as a market, as investors, keep waiting for some bail out, some news from the government: and that just absolutely distorting things.
Philosophically, I’m going to go off on a kind of a slight tangent here. I understand that the government will always be a part of our free market system. It’s never been 100% free. However, the interaction we’re having now, it’s like this 900 pound gorilla in the room; that makes things kind of difficult.
Kind of on the flip side, as we’re looking at some of the positive things. We’ve got almost all of the S&P 500 have done their earnings for their second quarter. And year over year growth is about 12% over the previous year. And if we take out some of the financials, we’re talking almost 20% earnings, net earnings growth.
You’ve got net margins, back in 2008, that’s efficiency of almost 6%. Now we’re going all the way up to 9.27. So when you look at companies, at balance sheets, Apple’s got 76 billion dollars in cash. I mean a lot of these companies have cash on the side-lines, they have been very efficient. Unfortunately, the negative effect of that is they have trimmed their work forces. But as you’re looking at some of the larger companies, the S&P 500, they’ve become very efficient over the last three or four years. They’ve kind of trimmed, as they see it, the fat, and they’re sitting on huge sums of investable assets that they can redeploy at some point. They’re just not redeploying it right now. And so that’s very frustrating.
I am, long term, when I say long term, we’re talking three to five years, bullish on the market. I think that, you know, we’re set up for that. But on the flip side, I mean, I hear all the arguments about how Europe is imploding- which it is. How that’s going to drag our financial system down. What’s going to happen with the EU and the Euro is anybody’s guess. And so, there’s a lot of reasons right now where it could go either way. I mean I just want to sit here and admit that.
What I’m doing, in my portfolio, is I am decreasing some of the equity positions that I have. I’m absolutely going to continue to have some. But from the very conservative to the very aggressive models that I have for clients, I am decreasing the equity positions. Most recently, most likely in the next week or two, we’re going to hear what, if anything Bernanke and the Fed is going to do. We’ve been talking about a little bit about this twist where they buy a bunch of medium to long duration treasuries- to shore up…, well to keep interest rates low.
So, you know, there’s a lot of things in play but I’m just telling you that right now I’m going to decrease my equity position. The market could go up. Once again, I’m going to be happy three to five years from now. But right now, it’s kind of hard to analyze which way it’s going to go. And in that particular case, are you getting the return for the risk that you’re taking and right now I’m questioning that. So I’m going to reduce some of my equity positions and decrease the percentage, of course still stay in the game.
Anyway, Mike Brady, Generosity Wealth Management, here in Boulder, Colorado, my phone number is 303.747.6455.
I have a new blog on my web site, www.generositywealth.com. And I highly encourage you to go there and look at it. I’m going to have archives going back a number of years. And I think it hopefully will be, I think it will be very helpful and very interesting as you go back maybe two years of weekly or every other week, videos like this or other things that I’ve found interesting and (some) analysis. So you can go and get a flavor of what I’ve been talking about for the last couple of years.
I am taking new clients I would love it if you gave me a call or passed this video along to someone who might be interested in a comprehensive wealth management firm, Generosity Wealth Management, that’s me. You have a wonderful week, we’ll talk to you later, bye, bye.
For years pundits chastised Americans for not saving enough, but in the past few years savings rates have exploded from negative to positive 5%. An unintended consequence of that plus banks and companies building up their own cash on the balance sheets leads to the “velocity” of money to plummet.
Money needs to change hands in a vibrant society in the fair exchange of goods and services.
Unfortunately, a liquidity trap can occur and may be occurring now that does not bode well for the economy going forward.
Read more about this at the link before. I’ll keep you updated on this too in subsequent newsletters.