A bear market coming???

Investment Analysis Clubs Saul’s Investing Discussions
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Of late, I noticed many talking about the markets being heated, getting over extended etc. The general notion seems to be - we have seen 6 years of market indices rising, so we must be getting close to a correction. Of course, we will have a correction sometime and those who keep saying there will be a correction will eventually be right, but a big market downturn at this point likely be caused by an ‘external’ event and not because stock prices have gone up.

I agree anirban, for the US at any rate:

Inflation is nonexistent
Interest rates are low
Energy prices are low
The economy is growing
Employment is rising
Unemployment is falling
Companies are making good profits
Companies have lots of cash
The deficit has fallen as a percent of GDP every year for the past seven, and is certainly now at normal sustainable levels
There’s no euphoria: Everyone is worried about a correction coming. No one, but no one, seems to be saying that the market is due to shoot up.

Does this really sound to you like a bad environment to be investing in?

Saul

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I agree Saul.

Many posts about folks raising cash. Value newsletter are increasingly looking to ‘turnarounds’ and ‘low quality’ firms because they can’t seem to find value.

I 'm more or less fully invested and plan to remain so. I have about 5% cash generally available for ‘at call’ investment but otherwise fully invested.

Anirban

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Saul"Does this really sound to you like a bad environment to be investing in?"

Europe is in a funk

More people than ever in the USA are not working

SS is underfunded and will be in the red shortly. It will have to cash in billions of IOUs, requiring massive more borrowing by the government to pay those IOUs. SS Disability is broke now.

We have 80-100 trillion in unfunded liabilities.

We are still running a half trillion a year in deficit. We have 20 trillion in national debt.

China’s growth is slowing down.

The middle east might erupt in total war at any time.

The world’s energy supply still comes from the Middle East. Any cut off will trigger instant depression and calamity.

Companies are borrowing in record amounts to just fund dividends and stock buy backs. Trading debt for equity, which is bad for stock holders. If a company gets in trouble, it can’t cut dividends it isn’t paying any longer on the retired stock. It must make the interest payments or else. Zero interest rates won’t last forever and that debt must be rolled over.

I’m happy the market keeps going up, but realistically I can’t see it going up much longer and at a pace more than inflation.

Who is going to buy all the crap the companies make? Folks earn less today, inflation adjusted, than any time in the past 40 years. Less spending power.

t.

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Nearly everything you say, telegraph, has a flip side, if not a rebuttal.

For example,
Companies are borrowing in record amounts to just fund dividends and stock buy backs.

Yes, there are some companies borrowing to fund dividends, but where is your data for record amounts, especially in an environment where one of the things we know is that companies, in the US at least, have record amounts of cash which they are sitting on. The two do not make a consistent picture.

SS needs some adjustment, but that doesn’t need to be dramatic if people would stop playing politics with it and just do some reasonable tinkering … but we don’t want to go there to bring politics into a sane board.

Debt as a percent of GDP keeps going down at a significant pace. Unemployment percentage is going down and while there are some qualifications on that and wishes that it was faster, considering the long term trends that should be meaning that increasing productivity will mean that fewer than 100% of the possible workers will be sufficient to produce all the goods we need, if anything it is surprising that as many people are working as there are.

Might this and might that is not a basis for an investing strategy other than moving to an island in the South Pacific and turning all investments into cash. Not me.

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Europe is in a funk
And has been for pretty much the entire time the US has been having a recovery. Europe, Merkel of Germany in particular bought the govt. austerity line hard and have been paying for it big time. NY Times columnist and Pulitzer prize winning economist Paul Krugman has covered this many times. He predicted years ago that the inflation bogey man, for now was a nonissue. He predicted the problems of austerity during an economic downturn. Economists make many predictions. So far, Krugman has had the advantage over his detractors of being right.

More people than ever in the USA are not working
Really? Per capita? Even counting those who have given up looking, the unemployment rate has been dropping. Not as much or as quickly as one would like but certainly better than it was say 6 years ago when every month saw hundreds of thousands losing their jobs and the economy was in a freefall. But maybe you read different news sources than the rest of us. So, data please?

SS is underfunded and will be in the red shortly. It will have to cash in billions of IOUs, requiring massive more borrowing by the government to pay those IOUs. SS Disability is broke now.
The sky isn’t falling for SS as some folks have been predicting for decades. There is also a really easy fix. Raise the cerling on the amount of income which is taxed and delay the age at which payments start. This would accommodate our increased longevity compared to when the program was started. Yeah, there is that dirty tax word but if you want a program to be fiscally sound you have to fund it. It’s that simple. The answer of some to privatize SS or eliminate entirely would just bring us back to pre-SS times when there was 50% poverty among the elderly.

We have 80-100 trillion in unfunded liabilities.
Borrowing our way through the Iraq and Afghhanistan wars was the height of fiscal irresponsibility. You’re right. We’ll be paying for this for decades. So which programs would you like to cut?

We are still running a half trillion a year in deficit. We have 20 trillion in national debt.
As a percentage of our national gross income the rise in the deficit has dropped considerably. You don’t hear much about this from most professional politicians as the improvement has been quite amazing.

China’s growth is slowing down.The middle east might erupt in total war at any time. The world’s energy supply still comes from the Middle East. Any cut off will trigger instant depression and calamity.
Now you’re talking. Externalities as the original post suggested could be a huge problem. Add Greece and the potential collapse of the Euro. Collapse of the talks with Iran in my mind are a real possibility and the alternative there is war. The idea of crazy suicidal lunatics having their hands on nuclear weapons is even scarier. So yes, the mideast and other externalities are a tinder box of potential fiscal disasters. But these have been there forever in one form or another. Were you around during the Cuban missle crisis?

People who have totally sat out the market for the past few years because they are scared silly about immediate economic collapse and runaway inflation have missed out on some of the best times in history for investing. And those who have invested but have neglected to rebalance and take some money off the table are asking for a pile of trouble. But overall, the market is still climbing its wall of worry. It will certainly “correct” at some point. It drops on a pretty irregular basis but it does not go up forever. So the key is still not to have money in the market you need in the next 3 - 5 years or would be tempted to sell when the market does one of its inevitable dives. Otherwise, it’s steady as she goes.

Who is going to buy all the crap the companies make? Folks earn less today, inflation adjusted, than any time in the past 40 years. Less spending power.
Whoever can afford it. But that is as much a philosophical question about greed and gluttony as one of economics. It is also the strongest argument for raising the minimum wage. Those are the people most likely to spend their money whereas those at the top of the wealth pyramid are most likely to just sock their money away into more investments which does not help the economy nearly as much.

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More people than ever in the USA are not working

Telegraph, That’s just plain silly!

In 2009 we had unemployment of 10%. Now it’ 5.4%!!! More unemployed than ever??? And do you not know that in the 1930’s we had 25% unemployed? Where did you dream up that statistic?
Saul

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In 2009 we had unemployment of 10%. Now it’ 5.4%!!! More unemployed than ever??? And do you not know that in the 1930’s we had 25% unemployed? Where did you dream up that statistic?
Saul

Saul, I don’t have the numbers in front of me nor am I agreeing with Telegraph, but the unemployment figure only counts people actively looking for work. If you “drop out” of the workforce and are no longer actively looking for work you don’t count as “unemployed”.

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This is probably what he is referring to.

http://www.shadowstats.com/alternate_data/unemployment-chart…

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Just to give a quick example of how the labor participation rate affects the unemployment numbers. If you have a population of 100 people and they are all working you have an unemployment rate of zero. Now if 10 people stop working and just give up trying to work, maybe they are discouraged, maybe some decided to retire, maybe some decided to stay home with the dog. etc. You have a labor participation rate of 90 percent and everyone considered to be in the labor force is working so you still have an unemployment rate of zero. And it follows then that if another 10 people give up the labor participation rate would be 80 percent and all of those people are working so your unemployment rate is still zero, even though 20 percent of your total population is not working.
I am sure there was some good reason to work the numbers that way. I don’t subscribe to the theory that it was designed to help politicians look better. But you wouldn’t have to work too hard to convince me that it didn’t take politicians long to figure out that if you drop people form the active labor force you can lower the unemployment number with fewer people actually working. The current labor participation rate is near or at record lows.
I feel that is why we have these shadow numbers. To me they mean more as far as trying to get a clear picture of the economy.
In the end I think the best thing to do is focus on your individual companies, and how they are doing in their market.

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Actually, if you go to
http://data.bls.gov/pdq/SurveyOutputServlet
and look at the data from 1948 forward, you will see that 1948 to 1977 or so the rate was lower than it is today, so it is not even slightly true that the current rate is at or near record lows.

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AlanK added to your Favorite Fools list.

Well thought out.
Wendy

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Actually tamhas I did use those numbers. I guess it is just how you look at it, or possibly how I expressed it. The highs, using those numbers is in the 67 percent range and the lows are in the 59 range and we are around 62 and that number has been trending down since the '08 crash, so we may be close to 61 soon, if the trend continues. So to me that is close to historical lows, and that is what I should have said. The point really was to explain that the labor participation rate does affect the unemployment number that is headlined. So it is not necessarily correct to simply state that because the number is lower now than say two years ago that more people are working. It is more complicated than that.
There are several places to find those shadow numbers and they try to take other things into consideration and that is why I think they give a little clearer picture to the economy. I watch them, but again, I spend more time thinking about how the companies I own will succeed in good and bad times.

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But, it is a lot more than economy. There is a long standing idea among some economists that increasing automation and consequent productivity means that less than the full possible labor force should be capable of producing all the goods that a society needs. This should lead to a lower labor participation rate as people choose to do something other than have a job. This has been held off to some extent by the growth of service sector jobs, but no only is there an upper bound to the number of McDonalds workers that one needs, but current earning potential in those jobs is of marginal utility since adult expenses like child care and transportation and non-minimal housing make taking the job non-profitable.

So, it is silly to watch the number go up and down and pretend that it has only to do with the health of the economy. There are also substantial social and cultural factors. Not to mention the “shape” of the economy. If the bulk of wealth create post 2008 is going to the wealthy, it means that it is not flowing to the interface of the non-working and working, motivating people to try to work.

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tamhas, that is basically what I was trying to say. Simply saying the published unemployment number is lower or higher, therefore more people are working, or not working, is not necessarily accurate, it might be, and it might not be. The labor participation rate is part of the calculation. There are many reasons, as you said, for the participation rate declining or rising, and some of those reasons are used to come up with the shadow numbers, at least that is my understanding. I don’t pay much attention to the unemployment rate, because I believe unemployment is a lagging indicator. It can be moving lower as the economy is tipping into recession and it can be rising as the economy is gaining strength.
It takes time for companies to hire in good times as they wait to see if the recovery is real, and time to see if a down turn is going to last before laying people off etc. So unemployment lags what is going on in the economy. Just as an example I have only recently had several friends in the oil and gas industry loose their jobs, even though the price of oil started falling nearly a year ago. It takes time for projects to be canceled and decisions to be made. They knew they were probably on the bubble months ago as did most analysts that follow the industry, those analysts didn’t need to wait for the numbers to know that lay offs were coming.
So it is not of much use to me. By the time it rises or falls how the economy is doing is pretty well already known.
But enough of this, I enjoyed the discussion, and as I have said before, better to be focused on the companies you own and how they might continue to grow in times of expansion and times of contraction.

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For those who want to look into this a bit more I found this article to cover a few points not mentioned, most particularly that we boomers are aging out of the work force. The article seems a bit less one-sided than the title would lead one to expect.

http://qz.com/286213/the-chart-obama-haters-love-most-and-th…

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But, it is a lot more than economy. There is a long standing idea among some economists that increasing automation and consequent productivity means that less than the full possible labor force should be capable of producing all the goods that a society needs.

This is silly. A society will never stop “needing” more, it’s inherent in the human psyche. The billionaire doesn’t “need” a yacht that 10 feet longer than his neighbor’s, but he will buy it anyway. You don’t “need” a new car when your five-year-old Chevy serves you well, but you “want” a new car anyway. If you have a 42" TV you want a 56". If you have a 56" you want a 65". You don’t “need” to paint the rec room blue because you like it better than tan, but you will, and somebody will have to make the paint for this “useless” improvement. We will never stop “needing” more, just as we will never stop using more and more energy (until society collapses, of course.)

The reason the labor force participation rate is lower than previous times, and as the article linked upthread, is simple. The baby boom is “retiring” more and more people, disproportionate to any previous time in history. Colleges are accepting more and more students, disproportionate to any previous time in history. Neither of those is “bad” and they are both quite real, and both show up in the statistic of “Oh, I’m not looking for a job anymore.”

That is not to say that there aren’t ALSO real, actual “discouraged” workers, particularly those who still cannot find employment equivalent to what they were earning in 2007. Those days may never come back for them, and they may finally, eventually be reduced to accepting lower status and paying positions than they had at one time. Then again, that “one time” was a bubble where money was flowing freely and irresponsibly (not unlike the internet bubble of the 90’s, obviously a narrower and different sector.)

So I am not particularly concerned with this statistic. It was invented precisely to keep clear anomalies like “retirement” and “student” out of the statistics. Neither do I think the solution of excluding those populations entirely to be perfect, but I am unable to think up a way to include them while excluding them, so I live with it. My best suggestion would be to lengthen the period of reportage from 4-weeks to 8 or more, but I suspect the effect would be minimal anyway.

The widely reported “unemployment” statistic is a gross statistic at best, imperfectly massaged for seasonality, but super-widely researched and sometimes revised, and it serves a useful, if imperfect purpose.

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