Possessed by Demons
Briton Ryle
Photo By Briton Ryle
Written Wednesday, October 5, 2016
Is your head spinning? No? Not even a little?
We’ve got negative interest rates in Japan and parts of Europe, so it costs you to put your money in a bank… and those bonds pay you nothing… The Fed thinks another quarter-point interest rate will send the economy reeling into recession…The U.S. will inevitably have the least popular president in history… Saudi Arabia just made nice with Iran on an oil production agreement… the stock market is ruled by machines and trading algorithms… an army of terrorists have taken land and created their own country… Facebook is worth as much as Exxon (around $360 billion)… the biggest online retailer, Amazon, is accepting applications for a space mission to Mars…
It’s a small miracle your head’s not spinning around like Linda Blair in The Exorcist. It’s like the whole world has been possessed by demons that just want to make everything as confusing as possible…
At least we don’t have an obstructionist Congress threatening to shut down the U.S. government and default on debt obligations. That would truly be the icing on the weird-cake…
Still, to those demons of confusion I say: mission accomplished, many investors are indeed confused.
As an editor of the Wealth Advisory income/dividend newsletter, I do hear from individual investors fairly frequently. And while I occasionally hear from subscribers who think there is a recession coming, or that they’re worried that inflation is picking up, it doesn’t seem as though such fears/worries/concerns are keeping them from investing. After all, they’ve bought a subscription to get my insights and stock picks, and I know that many of them are buying stocks…
Still, total daily trading volume on the S&P 500 has been in decline for a few years. Surveys show that the number of households that own stocks is at multi-decade lows. And finally, other studies show that the average American does not have very much money saved for retirement at all. All this suggests that Americans are simply not investing as much as they once did. And that is a bad trend.
Devil in the Details
I strongly believe that people who might otherwise invest in stocks are still suffering from PTSD brought on by the financial crisis. And really, I can’t blame anyone for that. It was damn scary, watching the very pillars of the U.S. economy get completely unraveled. We quite literally stared into the abyss, wondering if we could still get money out of ATMs. And the speed with which it all fell apart absolutely had my head spinning…
And the thing is, we all know that the things that brought the economy to its knees — too much leverage, too much risk, not enough sensible regulation — are still very much present. And in some areas, it might actually be worse. Emerging market companies have taken on a few trillion in dollar-denominated debt that isn’t going to be easy to pay off. Here in the U.S., corporate debt levels are very high too, as companies have used low interest rates to borrow money and buy back stock.
The thing is, if all this debt was taken on and invested for a real return (infrastructure, improving operations, etc), that would be one thing. But for the most part, companies haven’t borrowed to grow their businesses. They’ve simply maintained the status quo. This a big reason why earnings and revenue aren’t really growing, and why salaries have been so stagnant.
Still, there’s one area of the U.S. economy that’s doing pretty darn well. And it’s a significant part of the economy, too. I’m talking about you, the average American and the average American household. I hope you’ll forgive me for calling you “average”, I don’t really think that. I think you’re pretty amazing. But the point is that debt and leverage for most American households is very, very low. Here’s a chart that shows you what household debt payments as a percentage of income looks like…debt payment to
We can easily see that the economic expansion from the mid-1990s to 2007 was fueled by more and more debt. With so much debt being added to the household, it shouldn’t really come as a surprise that the financial crisis kicked off at the household level, with a spike in foreclosures. We — you and I — finally buckled under the weight of all that debt…
And that’s the real irony about the financial crisis and the subsequent recovery (as tepid as it is) — it wasn’t the banks and other companies that started the financial crisis. Sure, they were over-leveraged, which made the crisis far worse when it finally hit, but again, the crisis started because households had too much debt. And now we are so focused on the health of the average corporation that we are missing what’s probably the single most important fact: the average U.S. household is in darn good shape.
Shhh, Just Between You and Me
The average U.S. household has done a fantastic job of de-leveraging and getting its finances back in shape. And I will tell you right now: this is going to pay dividends at some point, when that buying power gets unleashed. Seriously, you can look at the chart above and see that U.S. households could very easily fuel a decade-long economic expansion.
The question is: what would it take to get such an expansion started? What would convince the average American that things will be better a year from now, that he or she will be making more money and their assets will be worth more next year, and still more a year after that? What would unleash these so-called “animal spirits?”
Unfortunately, I don’t know the answer to this. But let me ask you this: what happened in the mid-1990s that suddenly kicked off a 10-12 year run of growth? Was it just the Internet? Was it the peace dividend after the fall of the Soviet Union? Was it deregulation and lower taxes?
Certainly it was a combination of these, plus some other catalysts, like the emergence of the Chinese economy and the impact of the EU on the global economy.
It would be a worthy exercise to consider new catalysts that are merging now that may have a similar effect on the world. Things like renewable energy, a consumer economy in China, a peace dividend if/when the Middle East gets some stabilization. Again I can’t put a finger on exactly when, but these ghosts of the financial crisis will be exorcised at some point, and we will start to look to the future with more optimism. You’re going to want to own stocks when that happens.
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Briton Ryle