By Barry James
All of the ideas in this issue to generate income for your clients during retirement require that they still have capital to invest. But what if President Obama's February $787 billion stimulus packet suffers the same fate as President Bush's stimulus? FED Chairman Ben Bernanke remarked recently that the recession is "very likely over," but in November of 2007, right before the start of the worst recession since the Great Depression, he was quoted as saying growth would "gradually return to a pace approaching its long-run trend." He then went on to discuss how the housing market was perhaps reaching a bottom. Since airing this prediction, prices in the housing market have fallen more than 25 percent.
The National Bureau of Economic Research uses four key factors to determine the start and end of a recession: employment, real personal income, industrial production and retail sales. Two of these (employment and real personal income) are still showing long-term downward trends. The other two are thankfully showing signs of recovery; however, much of their increase was due to heightened auto sales and production induced by "Cash for Clunkers." Sales since the program ended are characterized by Sergio Marchionne, Fiat's CEO, as a "disaster."
The basic problem with this administration's plan is not that it lacks good intentions or is wrong in size; it's that government is so inefficient it will have little impact. Our previous research shows it takes about $7 in government spending to equal the benefit of $1 in private investment. About $80 billion of the authorized $787 billion has been spent, a mere pittance in a $14 trillion economy. In addition, a lot of money is being wasted on pet projects, or will go to cover state funding shortfalls. Furthermore, in a major blow to stimulus spending, consumer savings has been increasing at a rate much higher than the stimulus payments.
Adding to Washington's woes, the public is losing patience. Home foreclosures and delinquencies are still at record levels. On average, those laid off now take 22 months to find new jobs. Lastly, commercial real estate and credit card failures have yet to gain much attention, but they will.
There are rays of hope (not green shoots) that will yield benefits in the distant future. Spending by the public has been curtailed; consumer credit has now decreased in seven of the last eight months. Consumer savings have increased from zero in April 2008 to almost 5 percent of disposable income, replenishing reserves and available for future purchases. Personal income has increased, even as GDP falls. Declining commodity prices are taking oil and gasoline prices lower. The export picture is brightening a bit, relief for some manufacturers of technology and other capital goods. The biggest positive change for the long term may be the change in attitude of bankers and the public, who are now shunning excessive debt and leverage.
- What kind of investing approach will work in a weak/nonexistent recovery?
- Avoid heavy equity exposure. Valuations have not yet hit bargain levels.
- Favor high quality bonds and dividend paying stocks. In a weak economy, both inflation and interest rates tend to decline.
Sovereign bonds and precious metals offer future opportunities in a falling dollar environment.
The end of recessions and bear markets historically sees equities priced at deep discounts to earnings, book value and dividends. This sets up generational buying opportunities. We aren't there yet, and we believe capital preservation is now key.
Barry James is president and CEO of James Investment Research Inc. in Alpha, Ohio.