Submitted by Phil Mahoney
I was fortunate to spend a few days with the financial professionals at J.P. Morgan and get their opinions and outlook for the economy, markets and where we possibly go from here. I will share what I feel is pretty insightful information, but remember these are my comments taken out of the meetings are condensed due to the shear amount of information we went over. If you would like to discuss them, please give me a call and I’ll be glad to go into more detail:
Housing – The bubble is most certainly over and we are seeing signs of stability. This does not mean recovery, because in order to get that we will need money flowing more easily from the banks, along with confidence from buyers. According to the U.S. Census Bureau (2004) the number of marriages each year in the US is about 2.2 million or at a 7.5% rate (divorce is 3.6%). How many of these newlyweds will want to live with their parents or in-laws? There will be buyers of homes. Housing starts and inventories or homes are way down from their high levels, so we should see some new building by the end of the year.
Inflation – We will probably not have inflation until the end of the year at earliest – perhaps as long as 18 months from now. We need Growth, then Jobs, then Profits and then comes inflation.
Inventories – We are going into a “classic” inventory cycle where inventories are much lower and as demand picks up, production will need to follow. Take for example automobiles – millions are scrapped each quarter here in the US, and the congress is thinking about giving rebates to people to trade their old ones and buy new.
Unemployment – It will continue up and perhaps hit double digits by the end of the year. It is a lagging indicator though and any attempt to gauge the economy by that number will leave you months behind. The depression of the 1930’s had 25% unemployment and even in the pre-war 40’s it was still in the teens.
Federal Reserve/Government – Generally positive on the stimulus package given historical times (like the 30’s) when government cut taxes and didn’t spend money. Most economists agree this was a major problem and caused the depression to run several more years than if they had stimulated the economy. WWII was the biggest influence in getting the country out of the hole and if you think of all the guns and tanks we purchased and then ruined or just left behind. So nonproductive spending isn’t as bad as it seems. There is some criticism of the current Fed. however, and interest rate movements were discussed. When the Fed. saw the banking and housing issues occurring, they should have cut all the way – right away. If the economy is better they should say so – because if people believe it’s better they will buy now in order to get good prices. This would lead to quicker growth – otherwise we all wait for one more cut in interest rates or prices.
Valuations – Cheap, cheap, cheap – but don’t try to time the market or overextend yourself because it may take a fair amount of time to right ourselves. Asset allocation is still the preferred way of investing, and consider dollar-cost-averaging due to volatility.
Where to go? – Real assets. Think real estate, think stocks, but be wary of those with too high of dividends. They may still cut them in order to protect balance sheets. Many corporate bonds and munis are still attractively priced. Remember to consider your goals and objectives as well as risk requirements before investing.
What could go wrong with our scenarios? – We may be building a new generation of savers. The savings rate has gone to 4.2% from negative numbers just a few years ago, cutting into spending. If you remember where Japan went from 1989 when some real estate values in the Ginza District went for the equivalent of $1,000,000 a square meter, then into a recession for the next 10 years. A big part of which was the compulsive savings by their population which in early 1990s went to 15-18%!
Oil prices could soar again, possibly due to a Middle East war. Hurricanes, another swine flu, you name it, it can screw things up.
Above all – Remember the three most dangerous words:
“Wait and See”
No one can see the future, but we know that this has been an extraordinary time and with it comes extraordinary opportunities. Right now there is somewhere in the neighborhood of 5.5 Trillion dollars in short-term money market, T-Bills and cash getting nearly nothing in returns. It will come out sooner or later, and when it does you need to be allocated to those areas that fit your risk as well as goals.