Albert Einstein and Benjamin Franklin identified compound interest as a wonder of the world, perhaps the 8th wonder. Learning how compound interest works and mastering it are fundamental to growing your wealth. Learn these principles and you can control your financial destiny.

Let’s start with the basics. Assume you could earn a constant 6% every year. If you invested $1, it would grow to $2 in 12 years. Do the math and you will see this is true. What is interesting is that in 12 more years your $2 will now be worth $4. This doubling is called the rule of 72. The rule says, “if you divide the interest rate into 72, quotient will be the number of years it takes money to double.”  So try it.

Rule of 72 - 1

As you can see from the table, the higher the interest rate, the fewer years it takes for money to DOUBLE. So how many intervals do you have until you reach retirement? The goal is to grow your money so you have enough to live on when you are no longer able to work. If you are 40 years old, and you can earn 6% on your money, you have about 2 intervals until you reach 65. So if you have $100,000 in your 401k, it will be worth $400,000 ($100,000 grows to $200,000 and then doubles to $400,000) in 24 years. If you wait until you are 72 to start taking the money, you will be part way (2/3rds) through the 3rd interval.  So your $400,000 would grow by about $260,000 to $666,000. Here is a table to show the number of intervals you have until age 72 (the new retirement date for most people).

Rule of 72 - 2

Look at the chart carefully. At 6%, you had 2.67 intervals before you reach age 72 if you start at age 40 (1st interval is age 40 to age 52. The 2nd interval is age 52 to age 64. And then part of the third interval – 8 years to age 72). Your $100,000 would have grown to $666,000. But what if you could earn 10%? Then you would have 4.44 intervals and your $100,000 would double 4 times. (Age 40 to age 47.2; age 47.2 to age 54.4; age 54.4 to age 61.6; age 61.6 to age 68.8 and then 3.2 years to age 72). That’s FOUR DOUBLES plus a little. Your $100,000 would grow to nearly $2,400,000 over that period of time.

So ask yourself – what is the POWER of compound interest? The POWER is time. The longer you let money work, the more it will grow to over time.

Does it make any sense to procrastinate? Does it makes sense not to contribute to your 401k as much as you can as fast as you can? Sure, it will take some self-disciple and personal sacrifice. But it is worth it. Get as much into your 401k as you can, as fast as you can. Then the Rule of 72 will work for you!!!

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Investing involves risk including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

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Are We Starting a Recession?

On September 23rd, 2016, posted in: Economic News by

The question is being asked regularly and often, are we starting a recession? Time will tell, but there is evidence we are and evidence we are not. Those who have yet to call a recession are called perma-bulls, wrongly I think. The 2008 Panic was not a recession because it was artificial and caused by bad regulatory policy. The policy led to dysfunction in the markets by those who took advantage of the regulatory lapses. Another reason is that for 7.5 years, the economy has not exploded or imploded. It has just bumped along due to low interest rates and low oil prices.

This economy has been referred to numerous times as a Plow Horse economy. It has been growing steadily but slowly. Remember fears about adjustable-rate mortgage re-sets, or the looming wave of foreclosures that would lead to a double-dip recession? Remember the threat of widespread defaults on municipal debt? Remember the hyperinflation that was supposed to come when Quantitative Easing abated? Or how about the Fiscal Cliff, the Sequester, or the federal government shutdown? We also had the recession talk from higher oil prices…and then from lower oil prices. How about the recession from the looming breakup of the Euro or Brexit?

In the end, none of these brought recession or were reasons to bail out of stocks. Does this mean those who were “steady as you go” were “perma-bulls?” Does it mean that just because you don’t yell “The sky is falling” that there will never be concerns about the prospects for a looming recession?

Recessions are cyclical. Markets go up and markets go down. So sooner or later, the US will have another recession. And even though the “perma-bulls” have pushed back against recession theories these past several years, recession theories that make sense are always being considered. Looking at the current data, a recession is still not likely to happen anytime soon. BUT, there are some data that is concerning.

For more than fifty years, medium and heavy truck sales have been an indicator of an impending recession. Anytime sales have dropped substantially, a recession has begun within 2 years based on the data. There has been a 31% drop since June 2015. If that metric holds this time around, a recession could be starting by the middle of 2017. The US is heavily dependent on trucking, so a drop in sales has to be taken seriously. This drop since mid-2015 would normally be a strong signal a recession is in the offering. However, this decline has been precipitated by falling oil prices and less mining activity. Other declines have not had such an apparent cause and effect.

Another factor is new regulations that were instituted prior to mid-2015. Sales increased dramatically due to the implementation of new regulations on truck antilock braking systems. The announced regulations likely accelerated some sales to avoid the new rule. There are other regulations related to emissions that affected sales as well.

“Core” industrial production, which excludes utilities, mining, and autos, is down 0.9% from a year ago. Historically, a decline of nearly 1% is a precursor to a recession or happens right after they end. But this decline also happened back in January 2014. It is always best to wait and see. The lower oil prices and the huge drop in drilling activity in the energy sector could be holding down production. However, should truck sales and core industrial production continue to show weakness, this would certainly indicate a recession is starting.

For now, the weight of the data shows continued Plow Horse growth. Job growth continues on the uptrend. Initial unemployment claims have averaged 261,000 over the past four weeks and have been below 300,000 for 80 straight weeks. Consumer debt payments are taking a low share of income, while consumer delinquencies are still dropping. Wages are accelerating. Home building has continued to increase the past few years, despite the decline in home homeownership. This portends plenty of growth ahead.

Meanwhile, government policy has been relatively stable the past two years. Many would say policy could be much better, but at least the pace of bad policies has waned somewhat. In summary, there does not seem to be any reason to think the Plow Horse economic growth is fading. Remember, markets go up and markets go down. Even if there is a recession, protecting your capital through a diversified and balanced portfolio is the best way to proceed. What goes down, goes up. When an investor tries to miss the downs, it becomes a lot easier to miss the ups. Rebalancing and tracking the Efficient Frontier remains the best way to protect against the ups downs of a capitalistic economy.

 

 

 

 

The foregoing content reflects the opinions of BTA Advisory Group and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

 

All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. There is no guarantee that any strategy will be successful.

 

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No Sign of Recession in the Data

On February 19th, 2016, posted in: Economic News by

If you are a market-watcher, you know the S&P 500 is down around 9% since the beginning of the year and has been down as much as 10.5%. As investors watch their accounts, the fear is always TWICE as significant as any euphoria over gain. This is the investor’s dilemma. How to fight the urge to cash in your chips and run for the hills.

However, this situation, based on the numbers, is classified as a garden variety correction. But some, if you read the pessimistic pundits, analysts, and pseudo “investors” (frequently called speculators or gamblers), are treating this correction as the precursor of the recession they’ve been consistently predicting for 6 years. You have to wonder what else they think about, if anything.

Their argument is if we’re falling into a recession, then the decline in stocks isn’t really a correction but the end of the bull market that began in March 2009 and the start of a new bear market, with at least another 10% decline to go.

S&P Price IndexThere is only one problem. The data on the economy is simply not cooperating with their recession theory.

For instance, new unemployment claims fell to 269,000 last week and remains very low by historical standards. Historically, new jobless claims SPIKE higher right before or in the early stages of a recession. This has not happened yet, but according the pundits, that does not mean we are not in a recession fall.

The data shows jobs are growing and workers are generating more and more purchasing power. Exclude fringe benefits and irregular bonuses/commissions, workers are earning 4.7% more than they did a year ago. Meanwhile, the consumer debt service ratio (the share of their after-tax income needed to make monthly debt payments on mortgages and other consumer debt) is hovering near the lowest levels since the early 1980s.

Theoretically, it is possible consumers have a low debt service ratio because the highest earners are earning more, driving down the ratio overall and hiding growing financial stress; but the data doesn’t show this. Borrowers are “current” (or not delinquent at all) and this ratio increased for the sixth year in a row in 2015. This does not include student loans. After peaking in 2009 at 2 million, the number of consumers with new foreclosures fell to 400,000 in 2015. This is the lowest on record going back to 2001.

Cars and light trucks continue to fly off of dealer lots, reflecting growing earnings and consumer savings from lower gas prices. The median credit score on auto loans is down from 2009, but it’s equal to where it was in 2003 and higher than every other year between 2000 and 2008.

Energy companies continue to get hammered because of the oil prices. But companies outside that sector, overall, have been doing fine, with earnings up slightly from a year ago.

Recession history shows an upward spike in inflation generally precedes the Federal Reserve tightening monetary policy. Inflation will gradually move higher in the next couple of years, but, as of yet, there’s simply no sign of a recession-causing spike in inflation. Those who argue the Fed was causing hyperinflation with low interest rates have proven to be wrong.S&P Price Index

Recessions usually have a major downturn in housing. Home builders started 1.1 million homes last year, including both single-family homes and apartment units. That’s roughly double the bottom in 2009, but still well off the roughly 1.5 million homes we need to start each year just to keep up with population growth and losses due to voluntary knock-downs, fires, floods, hurricanes, tornadoes and earthquakes.

All to say, the kinds of events and economic numbers that are indicators of a coming recession are just not there. However, the current Plow Horse expansion is almost seven years old. But, as a recent Fed Paper makes clear, modern economic expansions don’t end just because they’re old. As an expansion ages, the odds of a recession starting soon barely budge.

Is a future recession is inevitable? Yes, markets go up and markets go down. Current economic conditions suggest the US Economy is not on the precipice and is unlikely to get there any time in at least the next couple of years. However, this will NOT keep the pundits from spewing their disaster scenarios. Because one day, unfortunately, they will be correct; only, they forget they won’t last real long before the market starts another uptick and bull market rally. Remember, markets go up and markets go down. It is the law of capitalism and economics.

 

 

 
The foregoing content reflects the opinions of Tax Efficient Asset Management Solution, Inc. and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct or that long or short term market trends will continue in the future.
 
Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk, including the potential for loss of principal. There is no guarantee that any strategy will be successful.  

 

 

 

 

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Are You an Investor or a Gambler?

On November 2nd, 2015, posted in: Economic News, Newsletter by

One of my Advisor friends in Vancouver BC, Clay, told me how he communicates the volatility of markets to clients. He said, “I remind them, ‘I have been doing this for more than 20 years and there is one thing I know for sure. Out of any 10-year period, you will NOT like me very much TWO of those years. THREE of those years you will not care one way or the other, and in FIVE of the years you will be very glad you listened to me and followed our advice.'”

Clay was very prescient. As I have said to most all of our friends and clients, markets go up and markets go down. It is a fact of life. The key to investing long term, according to Warren Buffet (in his 2010 letter to shareholders) is that  “To be successful, you need an intellectual framework for your investment portfolio, based on research and data. But equally important, you need an emotional construct that will protect you from your natural aversion to loss.” Risk aversion is the enemy of long term, successful investing according to most all of the behavioral academics.

Buffet capsulized what behavioral finance author and Nobel Prize winner Daniel Kahneman identified the as Prospect Theory. It is based on happiness and peace, which is called utility within this theory. What Kahneman discovered is that happiness associated with gain is only half as intense as the fear of loss, which is double any joy. People would far rather not lose something they have, than gain something they don’t yet have.

This theory ties directly to investing. While every investor hopes for their portfolio to grow at an expected return, their biggest concern is loss. When the market does what it inevitably does – goes down – the natural reaction is to believe all will be lost and the portfolio will never recover. Historically, this has been an irrational fear. But the future is not the past. So, it is far too easy to extrapolate into the future our worst fears and then act on them, which inevitably causes the loss they fear the most.

The reason I am so convinced Wealth Teams Solutions and the DFA construct is the right thing for our clients, is that it is built on normative, rational research and data. The emotions of behavioral finance are not embedded in this math which means over the long run, it is reasonable to expect that markets will regress to the mean and perform as they always have. In fact, over the last 15 years, which have been awful by almost any standard, DFA has done quite well.

Our Wealth Team is committed to helping you weather the storm of volatility and hold fast while others are jumping ship, basing decision about investing in the market on instinct and fear. In the final analysis, everyone has to answer this question – Are you an investor or are you a gambler? The market can actually serve both. Investors do not let the market movements dissuade them from their long term objective. They understand expected return and are willing to let the market work to that end. Gamblers, on the other hand, seek to take advantage of what they believe are market shifts. They try to exploit the purported inefficiencies in market prices. Some get lucky and win, for a time. Most do not.

I wish we could make this a smooth ride for everyone. It would be my hope, using DFA, we could remove most of the volatility and deliver compounded growth over all time periods. But it is not realistic or possible to experience a market that only goes up. So we do what Warren Buffet said to do. We build the best framework, using the most up to date academic research and data possible, and we cling to the emotional construct and remind our clients that their biggest risk is their own worst fears.

As always, I am here to discuss this approach to investing with you at your convenience. It is my hope and prayer that during those TWO inevitable years out of TEN, we can still remain friends, so we can enjoy the inevitable FIVE years that will make all the difference. Please call if you would like to discuss further.

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www.ftportfolios.com_common_research_brianwesburybio

 

Brian Wesbury received an M.B.A. from Northwestern University’s Kellogg Graduate School of Management, and a B.A. in Economics from the University of Montana. He is a contributor to the editorial page at The Wall Street Journal, and is a regular co-host on CNBC’s Squawk Box. The Wall Street Journal ranked him the nation’s #1 U.S. economic forecaster in 2001 and USA Today ranked him as one of the nation’s top 10 forecasters in 2004.

 

First Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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www.ftportfolios.com_common_research_brianwesburybio

 

Brian Wesbury received an M.B.A. from Northwestern University’s Kellogg Graduate School of Management, and a B.A. in Economics from the University of Montana. He is a contributor to the editorial page at The Wall Street Journal, and is a regular co-host on CNBC’s Squawk Box. The Wall Street Journal ranked him the nation’s #1 U.S. economic forecaster in 2001 and USA Today ranked him as one of the nation’s top 10 forecasters in 2004.

 

 

Have you noticed? Everything’s bad these days. On February 25, 2015, the Washington Post wonkblog posted a piece titled “Why rising wages might be bad news.”

Last week, on September 1st, after another strong month of car and truck sales, the Wall Street Journal published a story “The Bad News in Strong Car Sales.”

Back in January 2014, when the dollar was weak, Zerohedge.com published a piece titled “The Slow (But Inevitable) Demise Of The Dollar.” Buy gold!

Now that the dollar is strong, the US is in a deadly currency war. On July 28, 2015, cnn.com published a piece titled “Watch Out: Strong U.S. dollar could trigger currency crisis.” Sell everything!

Television is even worse, but combing through hours of tape to find those nuggets of really bad analysis, we already know are there every day, seems like a waste of time.

We are tempted to argue that bad news sells, so the bigger the explosion, the more flame or flying metal a story has, the more viewers tune in. But, it goes deeper than that.

First off, our political leadership – on both sides of the aisle – use economic fear in an attempt to win votes.

The Right argues that as long as Barack Obama is president, nothing good can happen. Ask them about the stock market and they say it’s just a sugar high caused by the Fed. Ask them about 66 consecutive months of private-sector job growth and they argue all the jobs are part-time (not true) or that the labor force isn’t growing. Vote for us and this nightmare will end.

The left argues that bad economic news is because George Bush let his bankers destroy the country and we need more government spending and redistribution (more Democrat policies) to fix things.

Second, ever since the trauma of 2008, investors have had a bad case of Post-Traumatic Stress Disorder. Every drop in the market, every weak economic report, every analyst with a doom and gloom story, no matter how unlikely, creates a visceral reaction of fear, loathing, fight, or flight.

Third, there are so many outlets for thought these days that every voice and every opinion has an outlet. C’mon…rising wages and strong car sales are bad?

All of this makes the “fog of war” look like a picture window. There is more bad economics, bad math and bad information masquerading as analysis these days than we have seen at any time in the past 30 years.

Talking heads look into the TV screen and say things like; “China is collapsing.” But the reality is that Chinese real GDP is still growing somewhere between 4% and 6% per year. Yes, the Chinese stock market has fallen sharply in recent months, but the Shanghai Composite stock index is only down 2% year-to-date and is still up 36.3% from 12 months ago.

After last Friday’s jobs report – yep, the one that reported 173,000 new jobs in August and a 5.1% unemployment rate –some analysts expressed the idea that, “the US job market is falling apart.” Give us a break. Historically, August is the month with the most upward revisions and payrolls in June and July were revised up a total of 44,000. Over the past 12 months, total non-farm payrolls have climbed an average of 243,300 per month, better than any twelve-month period in the prior expansion in 2001-07.

Another line we heard last Friday was, “wages were up only a TINY 0.3% in August!” But, 0.3% in one month is 3.7% annualized growth! Even if inflation were running at 2%, anyone complaining about what is naturally a small gain in one month is misusing mathematics.

We aren’t saying that you should only listen to First Trust Economics…we think listening to only one argument is a mistake. What we are saying is “be careful,” try to use some common sense and turn your nonsense filters on high.

For example, Greece has the GDP of Detroit, how could it possibly take the world down? China is the #2 economy in the world, but so was Japan back in the late 1980s. Entrepreneurs create growth, not politicians or the Fed. Janet Yellen doesn’t frack wells or write Apps and a 0.5% federal funds rate won’t slowdown Apple. Everything’s Not Really So Bad.

 

 

This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

 

 

 

 

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www.ftportfolios.com_common_research_brianwesburybio

 

Brian Wesbury received an M.B.A. from Northwestern University’s Kellogg Graduate School of Management, and a B.A. in Economics from the University of Montana. He is a contributor to the editorial page at The Wall Street Journal, and is a regular co-host on CNBC’s Squawk Box. The Wall Street Journal ranked him the nation’s #1 U.S. economic forecaster in 2001 and USA Today ranked him as one of the nation’s top 10 forecasters in 2004.

 

 

Well…what’s up? The Chicago Cubbies, that’s what. They’ve won 19 out of their last 23 games and have the fourth best record in Major League Baseball. Maybe hell really is about to freeze over. Cub’s fans have been waiting for a very long time.

The only people more giddy with anticipation are the stock market pundits looking for The Big Short – II. It’s an eagerly anticipated sequel of the Panic of 2008. The S&P 500 is tumbling again today, more than 10% below the peak in May.

The Pouting Pundits of Pessimism have been waiting for a long time for this. They haven’t waited as patiently as Cubs fans, but they’ve waited. In the past six and one-half years, every time the market has gone down sharply for a day or two, or a piece of economic data turned negative, the decibels have risen. Technical moves in stocks, or seasonal patterns in data, are turned into a fundamental reason to run for the hills with weapons and gold.

These fear-mongers are traders, not investors. Macro-short-sellers face impossible odds because markets go up over time. To make money shorting, you have to know when to sell and when to cover. No one we know can do this successfully over time. Investing involves long-term thinking about fundamental factors, like profitability, new technology or serious policy changes. Trading is short-term, involving technical factors and emotion.

Shorts get power from fear and confusion, and nothing creates fear like the belief that market declines are being caused by some fundamental problem.

We don’t see any serious fundamental problems.

1 – Private sector jobs have increased for 65 consecutive months. There is unambiguous improvement in housing and construction taking place. Auto sales are near record highs, and rising. Yes, it’s Plow Horse growth, but profits, outside of energy, continue to grow. Using total profits, or forward-PE ratios, which include the drop in energy profits paints a distorted picture.

2 – Since the crisis of 2008, pundits have convinced themselves that the bull market in stocks is because the Fed, and Quantitative Easing, have created a “sugar high.” By definition, taking away the sugar is painful. But, there is no “proof” that QE is responsible for record high corporate profits. M2 (the money supply Milton Friedman told us to watch) has continued to grow at about a moderate 6% per year.

3 – Even though tapering didn’t end the world, now they say rate hikes will. But, seriously, is there anyone out there who thinks a 0.375% federal funds rate will stop the iPhone7 from being introduced? There are still massive amounts of excess reserves in the system, and paying banks even 1% for those reserves (instead of 0.25%) is not going to cause the money supply to shrink.

3 – Yes, China is slowing. So what? Exports to China make up 0.7% of US GDP.

4 – The very same people who three months ago were saying the Chinese yuan would be the new reserve currency, now say Chinese devaluation is calamity. Which should we fear, a rising or falling yuan? Answer, neither.

5 – Corrections are about moving capital from weak hands to strong hands and are always scary, especially when the pundits argue loudly that the correction is due to fundamental factors.

But, this correction is not due to fundamental factors. It’s technical. We can’t prove it to you, but that’s what corrections are all about – opportunity for those who can see through the fog. Die-hard shorts are just like Cubs fans – this is the year, until we have to wait for the next one.

 

 

 

 

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www.ftportfolios.com_common_research_brianwesburybio

 

Brian Wesbury received an M.B.A. from Northwestern University’s Kellogg Graduate School of Management, and a B.A. in Economics from the University of Montana. He is a contributor to the editorial page at The Wall Street Journal, and is a regular co-host on CNBC’s Squawk Box. The Wall Street Journal ranked him the nation’s #1 U.S. economic forecaster in 2001 and USA Today ranked him as one of the nation’s top 10 forecasters in 2004.

 

Monday Morning Outlook

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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What Do We Do About Greece?

On June 30th, 2015, posted in: Economic News, Newsletter by

In a foreseen yet dramatic move, Greece defaulted on a $1.7 billion payment to the International Monetary Fund (IMF) Wednesday, making it the first ever developed country to default to the IMF. The Greek debt crisis began in 2010, the same year Greece accepted a bailout of billions of euros from the IMF and European Union (EU). The bailout came with strict austerity terms, including increasing taxes and reducing spending. However, in January 2015 the voters elected an anti-austerity far left government that believed they could renegotiate the austerity terms of the bailout. The leaders said they would not cut retirement benefits and decided to raise taxes on the wealthy. This failed and caused the economic and financial situation to worsen; the new government did not contribute to the country’s growth and failed to pay any of its debts.

Since Greece is in the EU, it no longer has its own currency. Greece could devalue its currency to make the debt go away, or reduce pension benefits so its supporters won’t see it. Instead, the new government is in a tough position. Having run out of OPM (other peoples’ money) they are forced to rely on the market. However, private investors are unwilling to buy Greek bonds, so they are hoping other governments will step in and save them.

Fortunately, thus far, the IMF, the EU, and the European Central Bank (ECB) are refusing to support the status quo. With the Greek government’s back to the wall, a national vote on their options has been scheduled for July 5th. This referendum will decide whether the people want to accept the lenders’ latest offer and continue with austerity (higher taxes, pension cuts, and some market reforms) or not. If the vote is a no, it is unclear what will happen. One potential outcome is Greece exiting the Eurozone and abandoning the euro.

The government is urging citizens to vote no, believing if the lender’s offer is rejected it would put more pressure on other governments to step in and bail them out. At the same time, the Greek banks are facing liquidity problems as citizens are withdrawing funds to protect what little they have. The Greek banks are receiving Euros from the Bank of Greece (their central bank), which is being provided through ECB. The ECB has stopped the Bank of Greece from printing more Euros to fund the outflows. Having no choice, the Greek government declared a “bank holiday” until July 6. This makes it so customers can only withdraw 60 euros per day.

Greece, at the same time, is preventing capital from fleeing the country. The result is likely to be a double-dip recession. Fortunately, Greece cannot go bankrupt. Though many have compared the situation to Lehman Brothers, the Greek debt crisis is more like Detroit. When Detroit defaulted, the U.S. (equivalent to the EU) survived just fine. Greece, like Detroit, has already wasted the money it borrowed. The only thing left for Greece to do is recognize the loss. This loss doesn’t damage the Greek economy; instead, the loss will be absorbed by the IMF, EU, and ECB.

Economists are urging the EU to not cave to this leftist Greek government. Greece must implement the reforms it has steadfastly refused to utilize. If they do, it will result in Greece eventually repaying its obligations (albeit the pains of austerity–increased poverty and unemployment rates–will indeed continue to be felt). Without reforms, the outcome is likely more of the same. This will lead to more stagnation and default in the future, especially with more payments due at the end of this month.

Regardless of how this turns out, most commentators say it is getting more press than it deserves. Europe has had years to insulate itself against the potential bankruptcy of Greece. Foreign banks are no longer holding much Greek debt and the countries most susceptible to the effects of Greece’s bankruptcy are being backed by European lenders. Therefore, Greek’s bankruptcy will most likely just affect Greece. There is not a world liquidity crisis like 2008. With the US equities going down, it is really a buying opportunity. In any event, investors should stay the course and wait for the correction.

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Plow Horse Keeps Plodding

On April 14th, 2015, posted in: Economic News by

There are three things going on in the markets right now. First, most all of us know that long term performance smooths out short term volatility. By definition, weekly, monthly, or quarterly data will always be more volatile than the long term trend. Go back to the 1980s or 1990s, when real GDP growth was 4%, a “slow” quarter was 2%. But today, our Plow Horse economy has been expanding at about 2.5% annually instead of 4%. This means a “slow” quarter can show zero growth, or even less. This is not abnormal volatility for a slow go economy and could easily be mistaken for real economic trouble. But is it, really?

Second, too many analysts and investors believe the current recovery and bull market are “sugar highs.” This is a mistake. They believe the government’s easy money and spending policies are what lifted stock prices. They believe all growth is artificial and everyone knows a sugar high, by definition, is temporary. All markets are subject to regression to the mean. So when the winter weather negatively impacts the economy, like it has the last two years, the rebound will likely look bigger than the trend.

Third, investors are still suffering from what might be termed, Post-Traumatic Stress Disorder as a result of the Panic ‘08. I wonder how many investors remember the Panic of 1907? Not many, I am guessing. But the Panic of ‘08 is still upper most on the minds of many and they are like abused spouses, every time something happens reminds them markets are random. It makes the world seem less stable. Every piece of bad news is a precursor of another “black swan” event… even though “black swans” are very rare, by definition.

All this produces a feeling of “Dread.” This is the perfect word for how many investors view the markets, the political environment and the economy. Some experience it daily, ever since the bottom in March 2009. Some experience it every time they see the stock market fall. Remember, markets go UP and they go DOWN.

If the economic data is weak, dread can reinforce an emotional response. If there is a change in fiscal or monetary policy, or the market becomes volatile, dread can gain a foothold and cause dysfunctional reactions. The truth is, dread has encompassed the markets a couple of times a year every year for the last six years.

When the employment figures on September 2, 2011 were announced as zero, dread consumed investors. Real GDP in the first quarter of 2014 was negative and caused waves of dread! The concern about interest rate hikes and the reduction of government bond purchases all evoke dread.

So, here we go again, dread is consuming the media and the investor exuberance. But this time the bar is substantially lower than the past. But it is causing dread. We saw payroll employment increase by 126,000 in March and some analysts predicted reduced real GDP estimates for first quarter to less than 1%. Dread became double dread in some quarters!

It seems the Fed is positioning the economy for a rate hike later this year. Couple this with a series of temporary, or at least one-time, events affecting economic data – weather, the drop in oil prices and union slowdown at West Coast ports, you have dread.

It was reported this February was the coldest since 1979. The cold and the sustained decline in oil prices has undermined investment growth in drilling activity. The work slowdown at West Coast ports affected trade data, production schedules, and retail activity. These are disruptive, but are they long term predictors of the trend? Will they have long term impact on the course of the economy? Remember, this is still a Plow Horse economy, plodding along, but with great strength and resolve.  The Fed knows these problems are temporary. So do most analysts. Yet, because these factors have brought growth close to zero, and because the economy is already growing slowly, it builds fear and dread.

How did we get into a situation where public faith is in the government? If the US really wants to grow faster, it must start having faith in markets and entrepreneurship. Government spending and redistribution of wealth undermine growth and confidence in the greatest economic engine in history. If you know horse racing, you know they handicap the horses by weighting down the jockey. The heavier the jockey, the slower the horse, and the slower the horse, the more dissatisfied the bettors. The same is true of go-go investors. They want a lot of action.

However, despite the socialistic mindset of the ruling class, it does not change the fact new technology is raising productivity, and increasing returns on investment in the private sector. The Great Divide (what some call income inequality) is caused by this dichotomy. The free market economy is booming, while the government-funded side is suffering. But many of the citizens have chosen to make less money so they don’t have to work. This choice looks like there is great disparity in opportunity. But instead, it is great dysfunctionality in work ethic.

In the final analysis, investors don’t invest as one. They do not invest in the aggregate. Instead, they invest in the companies that are experiencing high productivity and high profits. As a result, this current wave of dread is just like the last wave of dread and fear. It is all temporary. Markets go up and markets go down. Don’t dread the Plow Horse. It the economy is healthy and moving forward despite all the efforts to subvert it.

Q1 Dimensional Equity PerformanceHere are two charts from Dimensional. In other newsletters and reports, we have discussed 2014 was a large cap year. Look at the returns posted by the various asset classes in ’14. You can see this chart that large companies provided most of the market return in 2014. The international market was hard hit by the Greece issues and other geopolitical events.

We also saw the S&P 500 gain 13.69% in 2014, out preforming most other market indices. But was that the full story?
As we look at the Dimensional returns for first quarter 2015, the markets have come back into stability again. It is easy to see from this chart the general performance of all the asset classes.

Q1 Dimensional Equity Performance (2)Again, it is important to remember, when you invest in markets, it is not a straight line up. Markets do go up and down depending on many factors. But over the long run, they have always gone up. There is nothing to think that will change any time in the foreseeable future.

So what is the best way to invest? We still believe, as we have for 25 years Dimensional offers the most cost effective way to invest in the stock market. The research and data continues to show that the FOUR Nobel Prize winning lessons are more reliable and predictable than alternative strategies that have no basis in history or fact.

We are proud of our association with Dimensional. We continue to believe Dimensional will deliver a high standard of value over the ups and downs of the markets. We hope you do too.

 

 

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. All investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

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Guy Baker