Growth and Debt and Everything in Between
Dear Valued Clients and Friends,
We will close out the second trimester of the year this week. As of last Friday, markets had a small upside for the month of August. We appear set to complete the sixth consecutive month of positive stock market performance. (Don’t hold me to that.) But let’s dig into some other issues that matter to investors – from student loan debt, to the media, to where a marriage and dividend growth stocks have something in common. Let’s get into it…
Watch this article’s Video Executive Summary at this link (unique content).
The media’s perspective makes perfect sense!
To give you an idea of how I feel about the way financial media covers markets and the economy, I think there’s a perfect parallel in the coverage at the tail-end of the Olympics… The U.S. had two of the great Olympic stories in history this year with Michael Phelps and Simone Biles. And what has dominated the coverage? The antics of this idiot, Ryan Lochte. The coverage will never be about that which is most relevant or powerful; it will always be about that which is most sensational and tantalizing. No thank you.
I miss the old millennium!
We talk a lot (rightly) about the anemic economic growth in this post-recession recovery (less than 2% per year). Did you know that the high year – by a lot! – in terms of economic growth since the new millennium began 16 years ago was 2004′s growth of +3.8% (and frankly, that was heavily boosted by much of the then-insanity around home equity refinancing and spending). Why is this interesting? Because that high number of 3.8% in 2004 was the AVERAGE number for the 50 years prior to this millennium! Ay yi yi…
The more we pay for stuff, the better?
There is a very understandable confusion about whether or not we should be viewing low oil prices as a good thing or a bad thing. The consensus view has always been that the less companies and individuals had to pay for an input cost (oil), the more money that would hit the bottom line. The less a consumer had to pay for one thing (gas in their car), the more money they would have to spend on other stuff (frivolous spending). So naturally, there is tremendous confusion as to why the stock market now seems to be positively correlated with oil prices, and why pundits are rooting for oil prices to be higher, when we have generally wanted it to be lower (unless we sold oil for a living). However, there is a sort of rationality to the desire that oil prices be higher right now, and here is why: (1) Our economy has had so little growth over the last 7 years outside of the energy industry that the negatives of a suffering energy complex have far outweighed the limited positive effects of lower gas prices; and (2) It isn’t that oil is considered a cause but rather an effect, and lower oil prices are perceived as a sign of global weakness (particularly in China). In other words, the rules are all backwards right now because the few sectors and companies that benefit from lower oil prices are offset by the macroeconomic damage a slowing energy complex represents.
One man’s loss is another man’s gain
We wrote several weeks back about why the growing LIBOR rate despite negative bond yields around the globe was not a sign of frozen credit markets, but rather a by-product of changing regulations in money market funds. Those borrowing on a rate linked to LIBOR may not like it (we should point out that we switched all of our client credit line borrowing from LIBOR-based to Fed Funds-based in the middle of 2015), but those invested in bonds that ratchet up their income as LIBOR goes higher SHOULD like it. And what I am referring to there is our very own Floating Rate Bank Loan investments which are linked to LIBOR, and which in this low rate environment are in the middle of increasing the income they pay to us. We knew one of these days the “floating” part of “floating rates” would actually matter!
Do as I say, not as mom & pop investors do
The most discouraging thing to say about the present state of equity markets may be that in the last few weeks, stock funds saw their highest level of inflows they have seen all year. On one hand, it is potentially a classic contrarian signal that “retail investors” sudden confidence with stocks means it is the ideal time to pare back (I assure you the opposite is generally true – the more skepticism and fear we see from investors, the more attractive we find stocks to be). On the other hand, it is also a textbook argument for the need of an honest, competent, fiduciary, financial advisor. The most money of the year flowed into stock funds after a nearly 3,000 point move up in the Dow since February lows? It is a tragedy – and it is never, ever going to change. When we put our foot down in the face of emotionally-driven panics, we are operating in your best interests, and to keep you from becoming a bad statistic.
No new clothes for me – but I will take that science textbook!
I have taken on the student debt fiasco in our country as an area of intense study because (a) I have strong opinions about the numerous flaws in our higher education model, and (b) I think there is an economic bubble at play in student loans that will have profound effects, many of them positive (as I see it). But in the short term, one by-product of the student loan mess is that we believe it will effect spending at retailers in the next five years. Moody’s released a report last week on the demographic shift taking place as the lion’s share of student debt will be held by folks in their 30′s, not in their 20′s. There are higher delinquencies in student loan debt that any other category of debt, and it is the only type of debt growing faster than income.
A marriage without argument is no marriage at all
Married people disagree sometimes. Is that profound enough? Very loving and committed couples often have tension and disagreement. It does not undermine the “thesis” of the marriage (if you will forgive the use of financial writing terminology to describe as romantic relationship). The “love” and “commitment” do not go away just because there is inherent tension and argument at times. In our world of dividend-growing stocks, many of which (not all) that are also known for lower volatility, there does actually exist the potential for tension. It hasn’t felt like it this year as lower beta, higher dividend names have hit the ball out of the park, but what do we make of this “marriage” when certain realities inevitably kick back in? Should price fluctuations re-surface, or a period of high beta growth out-performance come back, will it undermine the “thesis” for ownership? Absolutely not. The discipline of dividend growth investing expects periods of out-performance and periods of under-performance. It expects periods of price upside and periods of decline. In other words, like any successful marriage, it expects turbulence, but never undermining the real foundation.
Choose your poison!
There exists a permanent debate amongst market pundits and economists as to which headwinds we face are “structural” (embedded and not transient), vs. “cyclical” (temporary and part of an economic cycle). Sometimes you get cyclical factors helping markets even as structural factors are holding markets back. The largest structural headwinds we face right now are global growth slowdowns in the face of deflationary pressures from massively indebted economies. The cyclical factors that exist vary. Whether one believes they biggest headwinds are cyclical or structural, they are headwinds, and have to be competently managed in the context of a thoughtful asset allocation!
We can all be skinny if the scales get adjusted
A very important reminder in the never-ending measurement of economic growth: We use GDP (gross domestic product) to measure the overall size of the economy, and it is a fine measurement as these things go. However, because it includes government spending and private production and consumption, etc., it is not necessarily a perfect measurement of “productive growth.” The correlation between GDP growth and stock market performance is pitifully low. Not all figures are figuring well.
Chart of the Week
There is an unprecedented level of low volatility, low fear, high complacency amongst investors right now, and the measurement known as the VIX (which is a way of measuring all of this via the protection that investors are buying on the S&P 500) bears this out. But note in this chart how the low levels of fear/protection now compare to where things are priced into November and beyond. The first thought may be “well sure, investors want protection going into the U.S. election,” and perhaps there is some truth to that. But we suspect the referendum vote in Italy is an even smarter money consideration!
Quote of the Week
“Markets are a complex, adaptive system being acted upon by millions of individuals who do not behave according to any predetermined set of rationales or rules. This plain and simple fact is what condemns all market timers to inevitable failure, regardless of their experience or the calibration of their indicators.”
Originally posted on HighTower Advisors.
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