The other day I received the following question that I know is on the minds of many people right now:
Are you still advising about getting in the equities market after the great bull run of 2013? I put all my 401k money in a money market account at the end of Dec 2012 due to us switching to another firm and not knowing what would happen with the financial cliff. Now I feel as I’ve missed the best rally. What is your reasoning for not investing in the market right now?
-Joanie
Please understand that I share Joanie’s (and everyone’s) frustration with the stock market, but I continue to believe the smart thing to do is not to invest in the stock market- in most markets, for that matter.
On February 1st I posted a blog, Investment Holding Pattern addressing this situation. In that post I told you that the current upward movement of the stock market is happening because people are caving in frustration after getting no real return on their money in safer fixed income investments. While I’m sympathetic to the feelings behind this trend, I know better.
The problem with what they are doing is that the underlying strength of the U.S. and most major world economies is highly likely to continue to erode. Any market bubble that may be developing is strictly temporary. Attempting to play a potential bubble is a very bad idea as the insiders control such games and more importantly, nobody can time markets. Nobody. It’s gambling pure and simple. Over time, gamblers almost always lose big-time. Common sense investors usually don’t. Me, I’ll stay out of the stock market until real and reliable growth is inevitable, and I don’t expect that to happen anytime soon, thank you.
Ask yourself, what is going to improve the economy? Consumer spending is 70% of the U.S. economy. Is consumer spending going to rise in any significant way going forward? I highly doubt it. For openers, median household income is the lowest it’s been in decades. Household income hasn’t gone anywhere but down since the recession hit. Real median US household income—that’s “real,” as in “adjusted for inflation”—was $50,054 in 2011, the most recent data available from the US Census Bureau. That’s 8% lower than the 2007 peak of $54,489.
And there’s more. Household debt is maxed out at about 100% higher than it was 10-15 years ago. The stimulation of our economy from all that debt driven spending is now a thing of the past. Family net worth, inflation adjusted, is back to what it was 40 years ago.
So, if the consumer isn’t propping up the economy right now, what is?
Government spending, that’s what. So where does the government get its money? State and local governments are just like the consumer, tapped out under a huge burden of debt, some of it, such as a good portion of their 50% unfunded pension obligations, never to be repaid.
So what’s been keeping us going for the last 5+ years? Federal government spending. And where has the federal government gotten the money to do this? Loans. Debt.
By the way, do you happen to know who’s been loaning the federal government all that money? The federal government, that’s who. For the last few years the Fed has been by far the biggest buyer of Treasuries, in recent times sucking up more than 60 percent of the total issuance. According to some reports, the Fed is expected to buy up to 90 percent of Treasuries in 2013.
Think about it. Say you’re broke and need money, so you borrow it from yourself with a paper IOU to yourself? How absurd, and yet that’s exactly what’s been happening and what continues to happen. When that game ends it will end badly for the economy as the government has no way out of the box its creating, as any reduction of money printing will hit our fragile economy hard. It is no less than a time-bomb awaiting it’s moment.
Understand that the Financial Services Industry and the Financial Media are your enemies here too. And, they always have been. The 85% of American investors who listened to them have lost almost half their money, inflation adjusted since the turn of the century, 13 year ago.
But the industry itself continues to do just fine, thank you, because they make money whether you do or don’t, with their fees and commissions, including profits that are often quite hidden (i.e. trading costs are a cost to you, but a profit to them). As it’s all working fine for them they’ll never stop selling you the idea that you have to be in it to win it, that things are about to get a lot better, so don’t miss out.
The bottom line to me, is that the stock market, also all fixed income other than very short maturities, has become a highly undesirable investment for now.
As to where to invest now, my advice remains the same. Yes, our cash is being eaten by inflation but, to me it’s the least worst place to be right now except for starting or buying the right business, investing in your career (if the opportunity is there) or buying a home with a 30 year fixed mortgage (if you don’t already have one).
Other than that, I believe the best bet is to keep your powder dry and your money safe until the next good investment opportunity shows up. They always do eventually. Stay primarily in very short term fixed income investments, pay off all debts except a low rate real estate mortgage, and keep saving as much as you can. (See my site for how to save a lot more.)
So to Joanie, and to everyone, I hope this helps you win, not lose, in the months and years to come.
As a last input, if you would like to know how others are coming down on investing in the stock market right now, check out the thoughts of several other well respected people:
Doug Casey, Chairman of Casey Research: Yahoo Finance article from 1/17/2013.
“There are going to be other bubbles created by all the money central banks are printing,” (Casey) says. “And, they’re likely to be in the stock market.”
Casey’s not alone. Bloomberg reports Federal Reserve officials from Chairman Ben Bernanke to Kansas City Fed President Esther George have been voicing concern in speeches over the last few weeks “that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases.”
“I’m of the opinion we entered the ‘greater depression’ back in 2007,” Casey explains. “Look at it as being a hurricane. We passed the leading edge of the hurricane of 2007 – 2009. We’re now in the eye of the storm, which was created by these governments creating trillions of currency units. I think 2013 we’re going to come out through the trailing edge of the storm, and it’s going to be much worse and much longer than what we saw in 2008.”
Peter Schiff 3/1/2013 http://www.europac.net/commentaries/bens_balance_sheet_blues
The Federal government is projected to run trillion dollar deficits for years to come. To cover that gap, the Treasury will need to continuously sell new bonds. This need will persist regardless of the Fed’s policy priorities.
..any attempt to tighten, no matter how passive, will result in a significant drop in the price of U.S. Treasuries and mortgage-backed securities. Not only would this inflict massive losses to the value of the Fed’s balance sheet but it would exert enormous upward pressure on interest and mortgage rates that the Fed will be unable to control.
As I have said many times before, the Fed has no credible exit strategy. Its portfolio is far too large, and the economy, the housing market, the banks, and the government, are far too dependent on ultra-low interest rates to allow Bernanke any real options.
Bernanke is banking on the hope that his policies will jump start the economy which will then be able to motor along on its own. However, the current era of cheap money and fiscal stimulus will never create an economy that is capable of standing on its own legs. Instead, it is propping up a parasitic economy that is completely dependent on the very supports the Fed believes it can one day remove. But if the Fed does not remove them on its own, the markets eventually will.