“Wow,” was All I Could Muster For a Shocked Response

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The other day I picked up a copy of the Wall Street Journal. There was an article about The Great Depression by Morgan Housel. He mentioned a big hedge fund manager thinking that today’s economy is like the 1930s.

The two times are hugely different!

“Let me count the ways”:

1. Today’s economy: Up over 2% versus down 45% then

2. Today’s economy: 89% private and 11% government vs. about three percent federal government spending in The Great Depression (government spending = more diverse economy and on-going stimulus)(also, this doesn’t include current government payouts like Social Security, Medicare, etc. and their impact in the economy)

3. Today’s economy: internet, smart phones, apps, technology, biotechnology, alternative energies vs. none of that (in other words, we have a much-stronger, more-diverse economy)

4. Today’s unemployment: 5.5% vs. 25%

5. Today’s stock market: near historic highs vs. Dow Jones down 89% (and the current market is at an historically average price, when looking at forward 12-month earnings)

6. Today’s banking: FDIC insurance covering $250,000 per account vs. no bank insurance

7. Today’s brokerage: SIPC insurance covering $500,000 per account vs. no brokerage insurance during the 1930s

8. Today’s brokerage: margin limits of $1 equity to $1 debt vs. $1 equity and up to $9 debt! (this made the stock bubble and crash of the 1930s significantly worse and is even blamed for starting the depression)

9. Today’s retirement: Social Security income vs. none

10. Today’s retirement: Medicare coverage vs. none

(Both of these programs create an on-going stimulus from government dollars and a more-stable economy)

11. Today’s liquidity: corporate and personal cash of over $4.148 trillion vs. ??? (I really don’t know how much cash was around back then. I’m pretty sure that it was less than trillions, even adjusted for inflation)

12. Today’s Federal Reserve: experienced and aware of volatility caused by rate moves vs. inexperienced and short-sighted in The Great Depression

This list could be longer but you get the idea.

What was the hedge fund guru, Ray Dalio’s point? That the Federal Reserve is ready to raise rates and this could cause a market panic and drop. So have a lot of cash.

I agree with the “have cash” idea but that’s pretty well covered with over $4 trillion in cash.

Mr. Dalio’s other point was that the Fed Reserve was going to raise rates (like in the 1930s). That’s absolutely true. Rates are at zero. Most likely, there’s only one way to go with them…up. See my post for my predictions for 2015, including rate moves.

So worry not, dear investors, we will have stock market volatility. Probably a correction. Maybe even a moderate bear market. But we may also have a near-repeat of the record gains started in the late 1980s and running all the way through the 1990s.

You don’t want to miss a “super bull market.” Have cash but own a lot of equity….

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What Are the 3 Incredible Fed Reserve “Variables”?

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The Federal Reserve is being more transparent, trying to lead investors and the markets with better guidance on their potential actions.

They’ve now winded down their bond-buying program. Next in line is increasing the Fed interest rate. But what do they look at before they pull the trigger?

GDP, Unemployment and PCE Inflation

The brain trust looks at three different variables. Really its four but one is just two different, but very similar, inflation numbers. You can take a look at their latest projections in this PDF.

GDP is, of course, the biggie. If our economy is shrinking, slowing or growing that’s gonna make a huge difference to Fed behavior. Next year they predict a range of 2.1 to 3.2 percent growth. And we just got quarterly numbers saying GDP grew by 3.9 percent!

That’s good news and confirms the belief that they will raise rates in 2015. Fully fourteen, of seventeen, members think 2015 will be the right time to raise rates. Only two members think 2016 is the prime time. So its a good bet that next year we’ll see rates move up.

They also expect unemployment to drop to as low as 4.7% in 2017. Or as high as 5.8 percent, depending on which Fed member you believe. The lower number would be an even bigger improvement than we’ve already seen.

The inflation figure is based on Personal Consumption Expenditures, or PCE inflation. Here they project very moderate rates no higher than 2.4% and maybe as low as 1.5 percent. That’s very moderate and below the 3 percent historical average.

With inflation expectations low rates should move up pretty slowly. They don’t have to put on the brakes quickly to control runaway price increases.

What’s an investor to do? Make sure sure you have plenty of risk exposure, short-maturity bonds and alternative bonds that behave differently than traditional bonds. Also, make sure you’re long-term bond exposure is very light.