Time To Choose - by Adam Taggert - Feb 8, 2013
Whether you're aware of it or not, a great battle is being waged around
us.
It is a war of two opposing narratives: the future of our economy and our
standard of living.
The dominant story, championed by flotillas of press releases and parading
talking heads, tells an inspiring tale of recovery and return to growth.
The other side, less visible but with a full armament of high-caliber
data, tells a very different story. One of growing instability, downside
risk, and inequality.
As different as they are in substance, they both share one fundamental
prediction - and this is why you should care: This battle is about
to break. And when it does, one side will turn out to be much more
'right' than the other. The time for action has arrived. To position yourself
in the direction of the break you think is most likely to happen.
It's time to choose a side.
The Case for Playing Offense
The past several months have seen a surge in positive stories celebrating
the U.S. emergence out of recession and back to solid economic health.
1) Tapping into shale oil and gas deposits is ushering in a new energy
boom. Domestic energy production is on the rise, creating jobs and
increasing exports, while reducing our dependency on foreign suppliers:
U.S.
close to energy independence by 2030 (UPI)
The United States may be close to self-sufficiency in energy by 2030
because of a "shale revolution" in the country, said BP's chief
executive officer.
2) The stock market is thriving, with several indices at record highs.
Corporate earnings and investor confidence are booming, and the expectation
of a Great Rotation of massive amounts of capital from low-yielding bonds
into the stock market is high:
The big theme of 2013 - according to investment strategists at shops
across Wall Street - will be the "Great Rotation," a massive move
out of bonds and into stocks.
Economic growth in the U.S. is expected to accelerate, facilitating the shift.
3) The global economy has made it out of the woods and is increasingly
robust. In the US, the unemployment
rate is down several percent from its recession high. The fiscal cliff was
averted. The 2013 deficit
has been reduced below $1 trillion for the first time in five years. The
crisis in Europe has been successfully managed.
Groupthink
in Davos: The Financial Crisis Is Over (BusinessWeek)
There is no official declaration, or even a formal survey. But the chatter
at the World Economic Forum in Davos, Switzerland, is about the end of the
financial crisis that began in 2008 and dragged on through last summer's
spike in Spanish and Italian government bond yields. "There's a
crystallization of thought that the financial crisis is over," says
Scott Minerd, managing partner and chief investment officer of Guggenheim
Partners, a Santa Monica (Calif.) firm with about $160 billion under
management.
4) Housing, the engine of consumer wealth, is in recovery. Home
prices are on the rise after years of punishing declines. And a rebound in
consumer spending is visible across a wide spectrum of home-related
services:
Housing
Packs Punch for U.S. Growth in 2013 and Beyond (Bloomberg)
The housing rebound is broadening to other parts of the U.S. economy and
will likely lend impetus to growth through 2013 and beyond.
Climbing home prices are lifting household wealth and boosting the
purchasing power of consumers. Declining mortgage delinquencies and
foreclosures are buttressing bank balance sheets, giving them greater leeway
to lend. And rising property- tax revenue is fortifying the finances of state
and local governments, alleviating pressure on them to cut budgets.
"The housing recovery will kick into a higher gear as the year
progresses," said Mark Zandi, chief economist in West Chester,
Pennsylvania, for Moody's Analytics Inc. "We're going to get a lot of
juice from the channels" through which it affects other parts of the
economy.
5) Jobs are being created and consumer income is on the rise. U.S.
personal income recently experienced its biggest increase in
eight years. Non-farm payrolls have increased every month
for the past two years. There are increasing examples of local job markets
experiencing a true employment "boom":
Silicon
Valley job growth has reached dot-com boom levels, report says (Mercury
News)
"Employment growth in Silicon Valley is impressive, very
impressive," said Russell Hancock, president of Joint Venture Silicon
Valley. "Some might even say the job growth is cause for euphoria."
Last year, the nine-county Bay Area added about 92,000 jobs, according to
the study. Of that total, Silicon Valley -- defined as Santa Clara and San
Mateo counties -- accounted for 46 percent, or 42,000 jobs.
"This is prodigious job creation," Hancock said. "The
growth is crazy and it's getting crazier."
A Rosy Picture
Taken collectively, it's hard not to feel optimistic - even
strongly so - about our future prospects. With these messages
constantly being delivered and reinforced, it's little wonder that the status
quo is not under attack. That the energy behind the Occupy movement has
dissipated. Because a better tomorrow lies ahead, right?
Right?
The Case for Defense
As alluring as the offensive narrative sounds, it contradicts starkly with
the preponderance of underlying data. Data that requires some - but
not too much - digging beneath the headlines.
In counterpoint to the above narrative, a sampling of this data reveals
the following:
1) Expensive oil is here to stay and will handicap economic growth for
decades to come. Peak
Oil is alive and well, despite the "shale miracle". The four
major global oil producers, including
BP, continue to report declining total production numbers despite more
than doubling well drilling activity since 2007. Gas prices this February are
the highest they've been in history:
Consumers
Taking Financial Hit From Rising Fuel Prices (CNBC)
Consumers have been spending more on gasoline than they have in nearly
three decades.
With pump prices at their highest level on record for this time of year,
the stage is set for an even greater climb in gasoline prices and
expenditures than in 2012. Retail gasoline prices have surged 17 cents in a
week to top $3.50 a gallon on average, posting the highest prices on record
for the beginning of February.
Meanwhile, the U.S. Energy Information Administration reported Monday that
gasoline expenditures in 2012 for the average U.S. household reached $2,912,
or just under 4 percent of income before taxes. This was the highest
estimated percentage of household income spent on gasoline in nearly three
decades, with the exception of 2008, when the average household spent a
similar amount.
2) Financial security valuations are dislocated from the fundamentals
of the underlying companies. The trillions of dollars of liquidity pumped
into the market by the Fed is, yet again, blowing asset bubbles in stocks and
bonds. Respectable veteran investors from Bill Gross,
to Jeremy
Grantham, to Jim
Rogers, to Bob
Janjuah, to John
Hussman are warning of a coming calamitous correction. Corporate
insiders, despite their proclamations of record profitability, are voting
with their feet and selling over 9 times more of their company stock than
they are buying:
Sucker
Alert? Insider Selling Surges After Dow 14,000 (CNBC)
Insiders have been pulling out of stocks just as small investors are
getting in.
There have been more than nine insider sales for every one buy over
the past week among NYSE stocks, according to Vickers. The last time
executives sold their company's stock this aggressively was in early 2012,
just before the S&P 500 went on to correct by 10 percent to its
low for the year.
"Insiders know more than the vast majority of market participants,"
said Enis Taner, global macro editor for RiskReversal.com. "And they're
usually right over a long period of time."
3) The economic "recovery" is anemic at best, and skewed
heavily to the top few percent. December saw negative
GDP growth and last week saw the persistently-high
unemployment rate creep back up. December's reported personal income
increases was primarily a
one-time event, as companies sought to pay out excess income and
dividends in advance of anticipated 2013 income tax increases. Payroll taxes
will rise
on all employees, but carried
interest and capital gains rates (how the wealthy earn their income)
remain unchanged at historically low levels. Nearly two-thirds of Americans
now expect anemic economic growth to define our "new normal" way of
life:
Bad
Economy Is New Normal, More Americans Say (Huffington Post)
More Americans believe today than they did two years ago that their
country will never fully recover from the Great Recession.
Fifty-six percent of Americans surveyed by the John J. Heldrich Center for
Workforce Development at Rutgers University in August 2010 said they believed
the Great Recession would permanently change the economy. In a January
follow-up survey, 60 percent of respondents agreed with that sentiment.
"Five years of economic misery have profoundly diminished Americans'
confidence in the economy and their outlook for the next generation,"
Rutgers professor and survey co-author Carl Van Horn said in a statement.
Most survey respondents -- 73 percent -- had either lost their jobs or
knew somebody who had. More than half said they have less money than they did
before the recession, and 61 percent believe they will never fully recover.
4) The housing market will not return to its former glory. With no
real wage growth and further de-leveraging still needed, the consumer is not
driving the modest price growth seen in many housing markets; instead, hedge
funds are - they are buying up huge tracts of foreclosed homes,
renting them out, and securitizing those rental streams. This will not result
in the competitive bidding by multiple parties that drove the appreciation
pre-bubble collapse. In fact, the entire concept of looking at a house as a
financial investment is eschewed by the founder of the Case-Shiller Housing
Index:
Shiller
Sees No Major Rally in U.S. Housing Market (Bloomberg)
"Housing traditionally is not viewed as a great investment. It takes
maintenance, it depreciates, it goes out of style. All of those are problems.
And there's technical progress in housing. So, new ones are better."
"So, why was it considered an investment? That was a fad. That was an
idea that took hold in the early 2000's. And I don't expect it to come back.
Not with the same force. So people might just decide, "Yeah, I'll
diversify my portfolio. I'll live in a rental." That is a very sensible
thing for many people to do."
5) Our trading partners are as bad off, or worse, than we are.
Global markets have rallied in recent months as the news from Europe grew
quiet - despite no real resolution to the core problems occurring. And
in recent days, fresh concerns about forex
rates hurting competitiveness, crushing
unemployment, and excessive
debt have erupted. Meanwhile, Japan is everyone's
leading candidate for the first developed nation of the 21st century to
implode under its debts. And China, whether it is able to avoid a hard
landing or not in the short term, is staring at a mid-term food
and water crisis that it has no solution to.
Europe's
Crisis Not Over Say Bankers, Policymakers (Reuters)
International bankers and finance ministers warned on Saturday that
Europe's crisis was not over even though the euro currency is now stabilized,
it will take years to overcome economic malaise and mass unemployment in
Europe.
After a private meeting of leading commercial bankers, government
officials, central bankers and trade union officials, Swedish Finance
Minister Anders Borg told Reuters: "There is a clear divide between the
financial markets, who think a lot of this is fixed, and the people in the
real economy and particularly from our side as the governments."
6) The risk of external shocks is under-appreciated and unplanned for.
Currently financial markets and our just-in-time national distribution
systems are geared for clear sailing ahead. Unexpected developments like
superstorm Sandy, a Fukushima-like event, or an oil price spike could easily
send prices - and availability of goods - swiftly awry. For
instance, the global drought continues, engulfing nearly 100%
of Kansas, Colorado, Nebraska, and Oklahoma in extremely dry conditions.
The UN warns that prices worldwide could easily spike this year, as world
grain stocks are near historic lows:
World
food prices stable, low stocks pose risk of spikes: U.N. (Reuters)
World food prices stabilized in January after falling in the previous
three months, the United Nations food agency said on Thursday, but it warned
that adverse crop weather could cause violent price spikes due to tight
grains stocks.
Global food prices surged in mid-2012 following the worst U.S. drought in
more than half a century and dry weather in other key grains exporters,
raising fears of a food crisis similar to the one in 2008.
"The weather could turn negative, and because we are in a tight
situation, prices could react violently and rise," FAO senior economist
Abdolreza Abbassian said.
FAO raised its estimate for world cereal use in 2012/13 by 0.6 percent to
2.326 billion metric tons, up nearly 13 million metric tons from the 2011/12
season.
A weaker dollar is boosting demand for dollar-denominated commodities,
Abbassian said, and rising oil prices will underpin food prices in
coming months, he said. Higher energy prices increase transport costs which
farmers pass on to consumers.
Sobering Thoughts
Sadly, this list could stretch longer if I didn't feel the need to end it
here to avoid overloading the reader. But suffice it to say that there is
certainly enough evidence to at least dispel a material amount of the
sanguine outlook of those cheerleading for an offensive stance at this time.
Picking Your Side
Offense
Those taking the optimistic view here argue that our economic engine has
been running hard to pull us out of the hole we've been in for the past five
years. And now that we're back on level track, the engine's built-up head of
steam is going to move us forward quickly.
Expect better GDP growth, lower unemployment, higher income, high stock
prices, higher housing prices, more innovation, and lower energy prices.
If this future comes to pass, you won't want to be left in the dust as the
party roars past. Get on the train - go long, perhaps with some
leverage, and bet on America's grit and ingenuity.
To be frank, this has been the winning side for the past year and a half.
Those who have sided with the bulls have been rewarded with sizable stock
gains and stabilized (or growing) housing prices.
Defense
But if, on the other hand, you - like me - find enough
reason in the data for doubting the optimistic case, you need to determine
what your defensive plan should be.
The degree of defense you adopt should be based upon your own exploration
of the data. Dig further than the samples I could only cursorily provide
above. Come up with your own personal assessment of the probability and
severity of the downside risks.
If you find you assess the risks at or above the 'moderate' level (which I
do), then consider strongly the following guidance:
·
Exchange paper assets for tangible ones. Acquire
exposure to the precious metals; we recommend having at least 10% of your net
worth in gold and silver (for those new to owning precious metals, you may
want to read our buyer's
guide). Above that, if possible, invest in productive hard assets.
Holdings like farmland, timberland, energy deposits, and mineral/water rights
are assets that will produce units that will generate an income for you.
·
Find a sympatico adviser to manage any remaining paper
wealth. For many reasons, most of us will still keep a percentage of our
wealth in the stock and bond markets (in retirement/pension accounts, 529
plans, etc). If you're in the defensive camp, make sure the adviser managing
your money is, too. There are several we
endorse, but we're impartial about whether you work with them or not. The
important point here is to work with the adviser whose outlook is most
closely aligned with yours.
·
Cultivate resiliency. Most Peak Prosperity readers are
well-aware of our recommendations here. Start at the
individual level to prepare both physically and emotionally so that
whatever the future brings, your quality of life is as least impacted as
possible.
·
Cultivate community. Whatever your plans, a support
network will help you achieve them better, and likely faster, too. Plus, it
gives you the added insurance of assistance should your best-laid plans not
play out as you expect them to (which happens frequently). Invest in fostering
collaborative relationships in your neighborhood, or join existing
communities relevant to your location
or interests.
·
Defend your income stream(s).Assess your employment
situation - how vulnerable is your income? Explore ways to make yourself more
valuable to your employer, add additional source(s) of income, and/or create
your own business. Steady income makes challenging times much easier to bear
by giving you the flexibility to explore different approaches that may work
better for the new reality. Without that ability to absorb failure, your
options are often much more limited.
If you take the above steps, regardless of what happens, you'll be able to
sleep at night knowing that you've acted conscientiously according to your
convictions. And in the event the bulls turn out to be 'right', few of these
steps will serve you poorly. In a secular bull market, hard assets should
still appreciate measurably. And personal and community resiliency is always
a net positive, regardless of the economic environment.
But if the bulls turn out to be the ones in error, the value of these
actions could be priceless.
So get to it. Do your own personal calculus of the risks. Determine where
you need to be positioned. And take the necessary steps to get well-situated
where you assess you need to be.
It's time to choose a side.
