Behind the mainstream media's attention to the daily economic numbers there is a hidden economic depression running along the underbelly of the country. High levels of unemployment have kept pressures on wages even as work hours have lengthened. This, of course, is assuming full time employment. In reality many individuals are working but either part-time at one or more jobs to make ends meet or working full-time as a temporary hire at reduced wage levels. The declines in real income are evident. The burgeoning labor pool and demand for work is suppressing wages as companies opt for increasing productivity and streamlining employment to protect corporate profit margins. However, as the cost of living is affected by the rising food, energy and healthcare prices without a compensatory increase in incomes - more families are forced to turn to assistance in order to survive.
For a large portion of America the issue of unemployment and underemployment remains an everyday concern. Without government largesse many individuals would literally be living on the street. The chart shows all the government "welfare" programs and current levels to date. The black line represents the sum of the underlying sub-components. While unemployment insurance has tapered off after its sharp rise post the financial crisis, social security, Medicaid, Veterans' benefits and other social benefits have continued to rise. The government "safety net" is already under tremendous strain as the number of "workers" supporting the system has fallen markedly over the last 30 years. With more than 78 million "baby boomers" rolling into retirement the Social Security Administration has already warned they will begin paying out more than they take in by 2017 and will be insolvent not long thereafter without real reforms to the system.
For the average person these social benefits, however, are critical to their survival as they make up more than 22.5% of real disposable personal incomes. With 1/5 of incomes dependent on government transfers it is not surprising that the economy continues to struggle as recycled tax dollars used for consumption purposes have virtually no impact on the overall economy.
More disturbing is that this huge increase in demand on "welfare" support in its various forms does not include the more than 46 million Americans which are dependent on the Supplemental Nutrition Assistance Program (SNAP), or more affectionately known as "food stamps." Without this assistance the basic needs of survival for many families can not be met. Yes, we all hear of the occasional lottery winner who is also living on "food stamps" but the reality is that there is a large and growing population that would not eat without the program. Despite commentary from the Department of Agriculture that says "obviously, it's [the food stamp program] putting people to work. If people are able to buy a little more in the grocery store, someone has to stock it, package it, shelve it, process it, ship it. All of those are jobs," the reality is that recycled tax dollars have been proven to generate little or no economic growth which is evident from recent GDP data. Astoundingly the total benefits in 2011 rose above $71 Billion which was a 107% increase from 2008. Yet we are told the economy is improving?
The issue of dependency, as more of the nation's population receives nutritional assistance as well as other forms of support, is that it leads to decreased productivity over time. Yes, on an immediate basis, individuals are able to buy the necessities of life but reduces their ability to produce at higher levels in the future as long term unemployment leads to degradation of job skills. As consumption is inhibited due to lack of productivity; increased dependency leads to lower standards of living.
As the ability to source income from traditional support programs becomes limited or exhausted - individuals can become very creative. Two of the most interesting areas that have been tapped to support basic consumption needs since the beginning of the "great recession" is student loans and disability insurance.
The number of individuals claiming disability has surged to the highest levels on record since beginning of the last recession. What is most notable, however, is when the surge of individuals claiming disability began - exactly two years from the beginning of the financial crisis. This is when the 2 years of extended unemployment insurance began to run out. Well, it is either that, or the work place has become extremely hazardous over the last couple of years. Today, more than 28 million Americans who are of working age have a disability - a level higher than at any other time in recorded history.
However, if you cannot claim disability why not just say you are going back to school. Student loans have been hitting the mainstream media lately as the current administration debates the merits of lowering interest rates and forgiving student loan debt. We are told that we should pity the youth of America who are graduating college but so indebted that they can not service their debt or have a fair start at life. However, forgiving student loan debt when it wasn't used for education, but a new iPad instead, is another issue. The chart shows only the federal student loan program which has surged 400% since the end of the last recession and is now the federal governments largest financial asset comprising 31% of its balance sheet. However, in reality, student loan debt in total, which including private label loan programs, has now reached $1 trillion. Either I am correct about the real uses of student loan debt, or, we are about to embark upon the great educational renaissance.
The problem for American families today, despite media commentary to the contrary, is simply the inability to maintain their current standard of living. When income remains stagnant or falls, due to job loss or reduction in pay, the impact on the budget at home is significant when there are already very low saving rates and the inability to access a tight credit market. The recent surge in consumer debt, with little relative increase in overall personal consumption expenditures, shows this to be the case. For Main Street the economy remains mired at sub-par growth rates three years into a post-recessionary environment.
These financial strains are pervasive and continue to weigh on families and their relationships. While it is true that "money can't buy happiness" try asking a couple who are living on food stamps and working two part-time jobs just to "get by" about how "happy" they are. Even as the media trumpets that the Fed has saved the economy from a "depression," it might just be a statistical victory at best. The government may say this is not the 1930's where bread lines formed outside the corner soup kitchen, however, for many American's the only difference is that they are found at the mailbox and online instead.
How To Invest
This got me to thinking about the things we need to consider, as investors, when thinking about saving for retirement and managing portfolio risks. Here is a list of things to consider.
- "Buy and Hold" investing will not work. Active management to participate in cyclical upswings, and avoid the majority of downswings, will be key.
- "Save More & Spend Less." Savings will make a large chunk of your total retirement nest egg. This has always been the case.
- "Lump Sum Invest Vs. Dollar Cost Averaging." Accumulate cash and invest in lump sums when things have become undervalued during the cyclical bear markets. This will provide better returns over time especially when combined with an active management strategy.
- "Income Over Growth." The income theme will continue to dominate investor psychology particularly in the baby boomer generation.
- "The Inflation Benchmark." The real benchmark for investors to focus on is inflation - not an index. Inflation, except in rare instances, actually compounds annually - stock markets don't. Managing portfolios to limit losses and pace inflation will be key to ensure future purchasing power parity.
- "Diversification." Real diversification between non-corollary assets will be key in the future to hedge off market volatility and reduce emotional mistakes.
- "Real Assets." Investing in physical real assets such as income producing properties, oil and gas wells, precious metals, private equity, etc. will perform better in a rising inflationary environment. The key here is having a "real asset" behind the investment that will retain value even in deflating market environments.
- "Fixed Income" Even in a rising interest rate environment actual fixed income, not bond funds, will provide income, low volatility and principal protection to portfolios. Short duration ladders that can ratchet up as interest rates rise will provide portfolios with an edge over long only equity portfolios.
Of course, there are many other investments that will do well and these are just a few ideas to start the thinking process. Furthermore, there will be fantastic and tradable bull market rallies (SPY) like we have seen twice so far this century. Being able to capitalize on those rallies will be critical in offsetting the rate of inflation and creating portfolio returns. Unfortunately, the ensuing declines will also destroy all the gains and then some so being vigilant and disciplined in your risk management process will be critical.
However, the most important asset destroyed by reversion processes is "time". It is the one commodity that you have a very limited supply of and no ability to replace. The impact to the financial markets and the economy due to the rise of dependency in the U.S. will most likely translate into a very "slow grind" in the markets as more assets continue to come out than go in.
Understanding the environment that we are in today, and will continue to face going forward, can help us make better decisions in both our planning and investment process. Ignore the reversion process at your own risk.