The Weight of Money in 2009 8 comments
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Economic recovery is the pathway to restoration of wealth. Consumers have lost over $8 trillion of wealth to date. The vast majority of it was either in the equities market or housing prices.
Home Prices
It is unlikely housing prices will stabilize in the next few years. There has been an economic study done of the largest five financial crises in modern history. It concludes that housing prices will fall to 2003 levels. This means housing prices have another 15% to fall, and according to the results of this study – another two years for the bottom to be reached. .
I have written in the past on the need for the baby boomers to sell houses, and the hidden backlog of housing inventory – all which work against recovery. Lower interest rates should mitigate the situation somewhat, but it will not trigger a housing market recovery.
Equities Market – Weight of Money
Money needs to be engaged in a money making activity. The road to wealth building for most is not through labor, but investing money. There is a lot of money sitting on the sidelines in brokerage accounts, T-Bills, and other types of cash accounts. With ZIRP (zero interest rates), there is no way to build wealth with cash. Cash is just waiting to be invested in a wealth building stock market boom. This is the weight of money.
As there really is no viable wealth building investment vehicle for 2009, the premise is that the only place for all the money to go is the stock market. It is believed the need for rebuilding wealth will be so great that nothing will stop investors from flocking back to the market if just a little upward momentum can be created. Once the momentum begins, the weight of money will continue to keep the stock market surging ever higher.
There is just one tiny little problem with this scenario – corporate earnings.
We are in a world wide recession. Most businesses are contracting.
- Cutting workforce
- Absorbing losses on operations
- Consolidating business lines
- Terminating expansion plans
- Fighting for credit lines
- Absorbing costs of expansion which cannot be sold at this time
- Closing unprofitable units
- Selling or buying distressed companies
All of these activities expend existing cash. They are trying to get lean and mean to peak profits (or just survive) in this downturn.
click to enlarge image
With the weight of corporate money plus the leverage of credit, these companies can begin to re-expand when economic conditions are appropriate. But the amount of leverage they can create is limited by their cash which has fallen to 2003 levels, and will reduce even more in the months to come.
The pumpers of equities like to point out that the market recovers approximately six months before economic recovery. I expect the downward spiral to end next year, and some tiny growth as we leave 2009. But it is difficult to project a scenario where corporate earnings will grow next year – or in early 2010. In the short term, changed conditions always work against earnings. Adapting to change costs money.
And will recovery return us to the business fundamentals of yesterday? Companies which decide to simply hunker down may be mis-positioned for tomorrow’s changed fundamentals. If there is a significant equities market recovery next year it will be based on smoke and mirrors – and not on future corporate profitability,
You need to be careful of equity and bond investments inside of 401(k). You cannot focus investments, and the opportunities of jumping in and out of the market are constrained.
Other Options……
I would be wary of any long investment opportunities because there are remaining downside shoes which have not fallen. Trading of gold, currencies, and stocks seem to be the only vehicles to potentially make money in 2009. Trading is not investing as you must keep your eye on the ball.
Disclosure: no positions
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This article has 8 comments:
I think you are on the same page as me from your other articles that safety should be people's primary concern over making money. So I am just re-interating to other readers who haven't read your stuff that you are not pumping for everyone to dump their money into short term trading of gold, currencies, and stock.
Personally, I'm a bit leery of gold because if there is a real collapse gold being a commodity itself will face less demand and more government dumping to raise the cash in the currency du jour.
Currencies, well most people's currency is in the currency they use in their country. A sliver of that money can be in another currency like the Yen just in case. Even so, you probably will never be able to retire there based on your bet, so it will probably always be a hedge for most investors.
Stock... hmmm it's a roulette wheel. At least you can determine when to take your money off the table (Don't try doing this in Vegas).
The Hand is 100% right that you must manage your 401k investments especially if they are in mutual funds. You never know what dumb bunny mutual fund managers are doing and stuff like "growth and income". Sadly most of them are underperforming their categories thanks to fat fees and the money they dump to traders for CNBCish ideas and tidbits.
Nothing hurts worse than loosing money on your house and loosing your retirement also. At least, most of us still have our jobs for now.
If you own raw stock make sure the company has enough cash to live 1-2 years. Big drops in cash flow in 2008 most likely spells trouble in 2009. You can't rely only on income statements any more (actually you never should have before either, although it doesn't stop people from trying).
I understand the leery attitude to gold from commenter Constructe. It remains to be seen what gold will do next, although my senses instigate a very prosperous period ahead for the value metals. Due to the fact, that these precious glimmers are the only 'value' in the year ahead.
Mr Hansen has a good point about the weighting of money on the sidelines. Its sparkling to go some place to appreciate and the bond markets isn't that interesting anymore with the low yields (actually negative corrected for inflation). Also, considering the high bond prices and inflationary policy of the FED, I think this bubble is about to collapse as emerging countries sell their bonds at peak to put in use domestically. One way or another, (socialist) countries need money for their expenditures. Commodities are down, so that doesn't supply aggregate revenue to cover balance sheet properly.
Having said that, gold (better; precious metals in general) becomes more popular by the day. The daily price hikes will remain volatile but that is nothing different than its historic behaviour, although somewhat magnified momentarily. This gives opportunities, as I view it.
Diversification of money on the sidelines is going to feed the coming precious glimmer bull ahead. We had all the bubbles you can think of, except for the true value bubble of gold. This one is due.
Not only private institutions and investors will participate above $1000 but also the emerging country SWF and governments authorities will boost their reserves by diversifying into gold and silver (two of the precious glimmers) but also don't forget palladium and platina.
There is money to be made in 2009 and everyone is willing to participate as recent losses are eating the investors soul out of his/her body.
What was is that drives people? Greed or competition? You name it. One way or another, we will see the flock of sheep (or birds) jump the fence to reap the rewards.
Have a good one all.
Corporate cash might have the makings of a stock market indicator. Dips and recoveries indicated nothing of interest, but dipping and failure to recover marks the October, 2007 top.
Caution: Don't start trading an indicator on the basis of a single occurrence. However, this is s good research project for someone who can access 30-40 years of historical data.
2. If you are a long term investor you really don't need to make money in 2009. What you have to do is preserve capital get into position to take advantage of the huge move back into equities that will come when the economy turns.
constructe - you are right my last paragraph was not explained well enough. we remain in volatile times. there will be trading advantages which will appear in gold, currencies, and stocks. i am not predicting ups or downs. others can do this. but there will be times you should take advantage of situations. but do this with small bets - do not bet more than you are willing to lose.
de graaf - gold historically preserves wealth. i have a long call on gold. but there are currently some short term negative pressures. it will be interesting how things play out. but whatever you do, spread the risk. it you are choosing to invest, do it in many sectors. i am personally mostly in cash with a bet from time to time on a stock or currency or gold.
john - you caution about using this as an indicator is correct. there are many reasons corporate cash falls other than a recession. but when it falls AND you are in a recession - i believe it forces the company to build a warchest before it can take advantages of a new market. in other words - the recovery is slower.
peterthepainter, 1977, and auto44 - thanks for commenting.
otbricki - i wanted to provide reference to the study and graphs so that you would understand the movement is not linear but bell shaped (not V). i have approached the economists and requested their permission to publish their data. the decline in housing prices according to the study will slow until it reaches a flat line. this is why it will take two years more. your second point on investing in 2009 is correct for me (and pretty much how i expect to play it). however, if i see an advantegous play - i will take it.
steven hansen