Published February 28, 2013
Everyone is pensively asking the same questions concerning the market’s big gains: Is this the beginning of a new and better Bull, or is this just another disappointing head fake?
My prognostics are swayed by my fiduciary responsibilities. Currently, these lie with retirees or near retirees. Still, for those 50 years of age and under, it doesn’t matter what the near-term direction of the market is. Just keep diligently saving by dollar cost averaging into the market. You do have the time to profit, and you certainly have more pressing issues to deal with. Like why your youngest child thinks Kim Kardashian is the new prototype for Eleanor Roosevelt.
The Controlling Themes
As for the retirement set, you must to be constantly aware of a couple of themes to determine if this market is sound. The first is globalization, When we exported a large part of our manufacturing and intellectual base away in search of cheap unregulated labor, we simultaneously destroyed a sizable chunk of the income base of our huge middle class.
It is estimated that Stateside, this amounts to a 15-20% reduction of this group's wealth. Of course, during this time we have also created vast wealth and new consumers in the recipient countries of our manufacturing transfers. The question is: “Are they growing a consumer base that will continue to spur market growth and make up for our own weakened consumer base?”
I think so, but it will take some time, and by the very nature of globalization, if a country climbs up the income scale there is always the threat that manufacturing will leave to go to the next underdeveloped country on the list. So, emerging countries are in a proverbial catch-22. They want to grow and industrialize, but they also want to keep wages low, as to keep attracting foreign investment and access to foreign markets.
Corporates Love the Back Rest of Socialism
The reduction of the middle class’ disposable income is troubling. Along with this is the government’s policy of printing money and increasing entitlements to make up for it. Thus, we are seeing some of the middle class becoming hooked on a socialist syringe. This isn’t an issue for corporations, but it will be when the government’s printing presses slow down. So, will this path encourage market growth long term?
I doubt it. We need jobs and wage growth spurred by demand and a corporate culture that acknowledges it. We also need a leveling of the playing field. A good example of the right attitude on this would the outlook of Theodore Roosevelt and Henry Ford. Teddy was a dye-in-the-wool Republican, but he leveled the playing field for future wage increases by controlling the robber barons and monopolies. Then there is Henry Ford who said, “There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.”
Today’s corporations get the first two of those pretty well, but the third is unrealized. Henry Ford knew that ultimately you must have consumers that can afford to buy your products, and he paid his workers far above scale at the time.
Ok, Things Have Changed… I Get That
Today, I see where smaller companies burdened by regulation and taxation in this new global world might not be able to match past years' compensation, but what about the IBM’s (IBM) of today? Well, let’s look at Apple (AAPL). Have you been to an Apple store? The staff is unbelievable at doing their jobs. But here’s a troubling fact: These tens of thousands dedicated Apple store employees will never make over $25,000 a year, and Apple knows it. They know most will stay two or three years and get frustrated and move on, and they don’t care.
My question is, why does the CEO of Apple get a package worth hundreds of millions in stock options, salary and benefits while many of the people working for this highly profitable company can’t earn enough to buy a house, let alone a new car? The excuse is it’s globalization that is making their new opportunity less.
Granted, they are still better off than their Chinese counterparts who work at Foxconn, the main land company that builds all of Apple's gadgets. These Chinese workers make around $17 a day or a meager $360 to $400 a month. My point is, if the up-and-coming generation isn’t making enough to afford to buy homes, cars, refrigerators and the never ending rest of it, how can markets really sustain long-term, booming growth?
I don’t think they can. Therefore, until I see the job numbers and earnings go up because of demand and fair policy, I am leery of this market, especially for those who are near, or in, retirement with large market exposure.
Timeless Truths Adrift on Paper Flotillas
Remember the old saying about the stock market, “When interest rates are low, stocks grow. When interest rates are high, stocks die.” However, what’s the rule to use when interest rates aren’t really low at all? They are just manipulated on a costly and perpetual basis to appear low. Won’t there be a reaction to that?
There is. Traditional savers are penalized and are earning less interest. This in turn reduces discretionary income. Plus, more of our budget is used to service the debt and less is re-invested by government in infrastructure and projects like NASA, for instance. All this ultimately is a drag on job growth.
With that in mind, when it comes to this market, I’m not sold at all. My advice is: don’t get greedy, stay very skeptical and find every way possible way to protect your profits and reduce any potential large reversals and downside. Remember, you can always buy back in on the downs, but you can’t buy much if you’ve lost it to another market valley rollercoaster ride.
If that happens, then all you can do is wait to get back to even while inflation takes down your portfolio by 3%, 4% or more a year. Whether you use stops or move to cash, commodities or very conservative allocation, be ready to jump.