It’s been a remarkable year, with many lessons. Read more here.
Last week we were in San Francisco listening to a presentation by Schwab’s chief economist, Liz Ann Saunders. My takeaway was that the economy is not thriving because of
a. excessive debt in the system.
The excessive debt may or may not have prevented a depression but its legacy is gargantuan payments to keep from defaulting. These will only become larger as interest rates rise.
The complexity is due to technological change and off-the-charts over-regulation. Distractions have grown and regulatory uncertainty is rife.
What will happen? We don’t know. Here’s bond guru Bill Gross’ latest comment.
At the end of a busy day of study and action, I’m looking at overall debt loads and interest rates. I’m wondering if, perhaps, the US government might seek to “accidentally” create runaway inflation for a short period to reduce the real cost of their soaring debt load. Otherwise, when interest rates go up, it’s going to be very difficult to repay. It worked for Germany in the 1920’s. No, wait, it didn’t work, did it? Still, it will be tempting when the bills come due.
We have largely exited our energy holdings. Most of these were profitable. We have cut our gold exposure in half after a very successful run. Our overall holdings in technology and health care remain in place. Now we are newly invested in bank stocks, both foreign and domestic. The challenge of financial stocks currently is that they are a very uncertain and high-risk position, dependent upon both interest rates rising and economies not stalling. We can’t really guess what will happen. For example European bank stocks…of which we own a dollop…were hammered today with bad Euro-economic news (Is there any other kind?) I’m thinking that patience and humility may help us produce outsized gains in this unloved, ignored sector. Meanwhile billionaire bond trader Jeff Gundlach says sell everything, even the kids. I’m inclined to keep the kids. Stay patient.
If it feels like it’s harder and harder to successfully finance retirement, you’re right. Here’s an article by one of our fund providers, PIMCO, about the numbers behind retiring, and why they’ve changed.
That would be at least a decade of slow growth. The article is attached. As I read this, I’m struck by how fortunate we are that we didn’t go to cash back when it seemed that cash was best. I’m interpreting this article as a prediction (and you know how well those work) that index funds won’t uniformly perform optimally. (That’s investment-speak for “They might lag.”). There will still be very attractive sectors, if we have the wisdom to see them and the courage to invest in them.
On Wednesday, the government auctioned off $12 billion in U.S. Treasury 30 year bonds for the astoundingly low interest rate of 2.172%. These are taxable bonds. This means that the investors in these bonds expect essentially no economic growth in the U.S. in the next thirty years.
Consider what 30 years of “steady state” economic growth would mean.