Investment & Economic Outlook 2009
There have been many questions on the general economy, current crisis, US auto industry, and how they may relate to investing, so I have decided to give my view on them in a nutshell and what I think investors should do to better position themselves. Keep in mind these are not meant to be predictions, but more of ideas and thoughts to help one think of the likelihood of events and possible outcomes to be aware of. Its to help investors prepare & plan given the global circumstances, and not to be caught off guard in the years to come.
The current recession:
The current recession may even become a depression, or at least something in-between. If we look at the problems they are very large, deep, and affect almost everyone in every nation now. Countries are so interconnected that its hard not to be involved in other countries’ problems. Even though most of the problems came from the US, everyone else in the world got involved. The rapidly rising economies such as Russia, India, China enjoyed enormous GDP growth and industrialization. However, at the same time, the level of fraudulent activity, scandals, tainted food/product investigations, and other issues have ballooned due to the same root causes of the problems in the US. Greed, excess, appetite for risk & credit, lack of responsibility, lack of ethics, short sightedness, and the “me first” attitude became globally widespread. Banks around the world purchased the packaged loans from the US, lured by their unreasonably high returns to boost their own returns [See my article on Banks and The Lure of High Returns]. They also had loose credit practices as well, now that more people were able to afford more and wanted more. They made bad decisions just to increase their immediate competitiveness.
Getting back to the interconnectedness, very few economies can do without trading with other countries. One of the other trading partners that the US depends heavily on is China. Look at the bottom of anything and it likely says Made In China. But can China do without the US? It would be very naive to think so. Trade, by nature means it is a two way relationship. Much of China’s industrialization is due in large part to the increase in factories in order to support American companies. Without the American consumer, the number of factories would diminish severely. With the US consumer spending at lows, there will be negative ripple effects felt in Asia and across the globe. All industries from electronics manufacturers, oil producers, mining, and drug & pharmaceuticals, have already been affected.
Length of the recession:
Think about how many years this amount of greed, excess, lack of responsibility, loose credit policies, etc has been going on for. Its been going on a year or two after the last downturn (tech bust), where the GDP and productivity numbers really started to take off from. In turn, the global housing boom also started to take off. It would not make much sense for the problems to be resolved in a much shorter amount of time than it took to build and create the problem in the first place. Yes there are stimulus packages & bailouts, but that money comes at the price of putting the governments heavily into debt. With people going bankrupt, companies going bankrupt, its not hard to imagine countries going bankrupt and needing help from other nations. Iceland is a good example. But Russia in helping bailout Iceland has now put itself further into financial trouble as well. All nations have debt obligations to other nations, and this is where you can see things get really messy. I think it will take a good number of years rebuilding before things start to turn around. Historically, recessions last typically 2-3 years. My guess which is as good as anyone’s, is at least until end of 2010, which is closer to the 3 year mark. But that also depends on the events that unfold. If the Big3 automakers were go down completely, that 3 could easily turn into 5 years.
The crisis of the US automakers which provide 1.6 million US jobs (approx every 1 out of 3) is definitely going to make its impact. Imagine if 1 of the 3 automakers collapse, and along with them the jobs. That means that average Joe can no longer pay his mortgage and defaults on his loans. There will be no easy solution, but make no mistake, their fate will definitely make waves. Auto parts makers, sales, administration staff, and countless other support and related jobs would also be immediately affected.
When will the problems stop, and how come they just keep continuing? At first it was the toxic subprime loans, mortgage backed securities, bad loans, and other related high risk assets. But now, even good loans are turning bad. 8 percent of all US jobs are in banking, brokerage, investment, and insurance. With hundreds of thousands of them cut and more likely, their impact is as large as the automakers. Finance jobs are being cut significantly on a global level as well. Unemployment: Unemployment in the US hit 7.2%. I still think it is likely the low double digit mark will be reached (10-11%) before a turn around. So when I hear “economists”, predict a turn around in late 2009, it really does not make any sense. Its possible, but I wouldn’t plan on such a wishful and quick recovery. Also, remember these economists are the same ones that said everything was fine before the downturn as well. Not to mention many of them also work for the big banks, giving me the same level of confidence I have in a lottery ticket.
Obama & US Government Debt:
Before the financial crisis, the US already took on $10 Trillion of debt. Before Obama came into office the US added approximately $8 Trillion more. The new president’s forecast was for about $2 Trillion a year in deficits. He also promised healthcare and other social security measures and polices that he wished to put in place, which will be another $30 Trillion to be added to the tab. The total amount of government spending and debt will be enormous. Usually, the taxpayer is ultimately made to bear the burden of such spending. Although politicians always say “working” and “middle” class benefits from the aid, make no mistake that it is precisely the working and middle class who will be paying for it, whether it really benefits them or not. Remember that low and no income earners pay little or no tax, and taxes is the number one method the government uses to make money. A large increase in taxes will likely follow in the later years, which may keep consumer spending low for many many years. In Economics 101, the usual result of massive government spending like what is happening in the US currently, is massive inflation (and interest rates). When will such inflation will occur? It depends largely on how much and how fast the government spends, but my guess is it will become rather evident within 3-5 years. When the economy picks up, is when they will be able to raise rates more aggressively. If they do it any sooner, they will end up killing the economy which was what all the spending is supposed to prevent in the first place.
So what does this all mean for the investor?
– Lack of credit, and difficulty obtaining credit for investment purposes. Make provisions for obtaining credit or loans now.
– Opportunity in stocks and real estate.
– Markets may not likely bounce back any time soon. If they do, it may not be back to normal levels for a while. There is likely time to invest in a depressed market condition (stocks, real estate, other). Keep in mind any investments made now may be longer term than they were in the recent past. Be patient and perform research, analysis. Take only absolutely fantastic opportunities.
– Ensure you have an adequate personal finance buffer (emergency funds & plan), in order to allow you to make investments without having to necessarily shorten the time horizon on them (usually resulting in investment loss) if a difficult situation arises.
– Ensure you take into account the likelihood of high inflation and interest rates that will occur in 3-5 years time. Higher interest rates means higher borrowing rates.
To Do List for Investors?
– Revisit your long term investment & financial plan.
– See if there are any current opportunities right now, or ones that may possibly come up, that would fit with your plan.
– Remember to also stick with a sound plan and proceed step by step.
– If it needs to be changed, then change it. But do so carefully and conservatively.
– My plan is to become financially free, by replacing my current income with income producing assets and/or businesses. I think that is a sound plan, so I’ll stick with it.
– The current markets provide more opportunities than usual, which fits with that plan.
– The stock market is currently at very low levels. They may not be at ultimate lows yet, and I wouldn’t be able to predict what will happen. However, I do know that on certain stocks I am getting a good bargain. I intend to continue to add to my long term portfolio, knowing that a capital gain on them would be years away. That capital gain would later be used to again increase my income producing items.
– I also intend to add to my set of core dividend producing stocks as the yields are higher than they have been in a long time, with depressed prices. Percentages in high single digit and low double digits make them hard to ignore.
– However, the yield on preferred shares, subordinate notes, corporate bonds, other interest paying corporate debt instruments are also at highs. It is certainly a good time to add to my fixed income and other income producing paper investments as well.
– On the real estate side, things in Canada haven’t been as opportunistic as they have been in the US. However, it is a possibility that a significant decline will occur. I am making preparations that will give me flexibility for any future acquisition opportunities. This includes ensuring I have adequate cash on hand for a large investment.
– I also can’t forget about my favorite REITs which are at double digit yields.
– Taking into account all current and possible upcoming opportunities, I need to take a look at where I am now, and see what needs more attention (or which opportunities may be harder to come by later on).
– I know that opportunities in real estate seem harder to come by so I prioritize ensuring I am ready in that area. That also means utilizing less on paper investments. Short term-deposits and cashable GICs would be more appropriate while waiting for those opportunities.
– Next, opportunities in the preferred shares or interest bearing instruments giving such yields are harder to find in normal times, and because my portfolio has a significantly smaller amount I would utilize capital in this area over regualar dividend paying stocks.
– The REITS which have now dropped out of favor, but are still equity based. Yet they are harder to come by than opportunities in other common stock.
– The core dividend paying stocks, which haven’t taken much of a beating but are at higher yields than normal should follow next.
– Finally any investments made for capital gains are at the bottom of the list.
– Now that I have my current strategy for maximizing the advantages of the opportunities, I would execute it. Keep in mind you may also have strategies for each individual area as well.
Always think a few steps ahead. See if there is anything that helps push your plan forward. Make careful and conservative moves to take advantage of those opportunities. Always bettering your position towards executing your plan and reaching your goals.
Another recommended article is my July 2008 article discussing the How The Financial Crisis Will Affect The US Dollar, Inflation, Gold, and Oil Prices, which discusses many related issues, the causes behind them, and the effect they will have (particularly on inflation, gold, and oil). Regarding oil, which is currently at significant lows compared to when I wrote that article, I unfortunately still believe oil will not remain this low in the future. The reasons are briefly summarized in that article as well.
Feel free to post questions, comments, or topic suggestions.
Thanks & Happy Investing!
The Investment Blogger