National Debt Redux

About a year and a half ago, I made this blog post about the national debt, at the request of one of our clients.  In the post I wrote:

This issue is so important and complicated, that I will not try to address it all in one blog post. Instead, I will look at pieces of the puzzle over several posts. Hopefully, I will get some feedback as I go along and will address the most pressing issues.

Much to my chagrin, I never followed up as promised. Since then, the national debt has become an even bigger issue, as witnessed by this summer's political drama on raising the debt ceiling. Fortunately, the very client who originally asked me to address this issue is also keeping me honest, having recently reminded me that I never made any subsequent posts. So, I will now take up the issue again, and this time, I promise to do it justice. 

I think the best place to start is would be with this article in yesterday's Wall Street Journal, which provides an excellent primer on the national debt.  I encourage those of you who are interested in this topic (and who isn't these days) to read it.  The author of the article, John Steele Gordon, is a well known business and financial historian.  He recently wrote a book on the history of the national debt called Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt.  I have just purchased the book with intent of using it to help guide us through the discussion over the next few months. So, please stay tuned...

Stay the Course

It has been about a month since the stock market entered "bizarro world".  On July 21, the Dow closed at 12,724 -- close to it's highest point since Lehman Brothers went bankrupt in September of 2008 and almost twice the level of the low point hit in March of 2009.  Yesterday, the Dow closed at 10,854, representing almost a 15% drop since July 21.  However, including this drop, we are still at a net increase of almost 7% for the past year.

Like it or not, it is not at all unprecedented for stock markets to lose or gain 15% over a single month, but it can certainly be unnerving, especially when daily volatility is so high.  We would all be happy to get the 7% return of the past year without all of the volatility, anxiety, euphoria, etc... that has taken place month after month, but it doesn't work that way, and it never has.
Right now, with all of the dour economic news, many people are wondering why they should even have any of their money invested in stocks.  Here are links to two good answers from well known and respected finance professors, as well as a quote from each article:

Don't Panic About the Stock Market

"My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world."

 The Bond Bubble and The Case for Stocks

"Despite the sluggish economy, the corporate sector is churning out record profits and increasing dividend payments. We believe dividend-paying stocks are the answer to a Treasury bond market that looks more dangerous than ever."

Hold On Tight Part II

We understand that many of you are nervous and apprehensive about the markets and economy.  I will reiterate what I told a client over the weekend, since the same message is true for all.  First off, don't panic. Bad decisions are made in times of duress.  I don't know if we are in a secondary recession (double dip, etc..) and I'm not very sure it truly matters with respect to the markets in the short term, which are as volatile and unpredictable as ever. The most important idea for an equity investor to remember is that you are most concerned with the profitability of the companies you own, over the long term. None of your short term money is in equities, and you all have at least six years (or more) of spending in "safer" assets (ie cash and bonds).  This enabled us to withstand the last crisis and to more than fully recover during the following market rebound. 
An important long term risk right now is certainly inflation. Cash and bonds will at best keep pace with inflation or at worst significantly underperform inflation. Equities still offer a higher expected return than cash or bonds and have the best chance to outperform inflation, which is important for everyone.
So I still recommend that we stay the course and let our asset allocation plans work over time. The only alternative is to sell equities for some time and then see about getting back in. This is market timing and is a sure recipe for failure.
One final comment.  This morning's anxiety is due to S&P's downgrade of the US credit rating.  Would you prefer to believe S&P (who played a key role in bringing on the sub-prime crisis and its aftermath), or Warren Buffet (who, in an interview on Bloomberg Television Saturday, said that S&P was wrong and that the US merits a AAAA rating instead).  We prefer the latter.  Buffet's optimism and common sense have helped to make him one of the richest and most successful men in the world.
Please reach out to us if you'd like to discuss anything or if you just need a pep talk.

Bizarro World

It feels like we are living in Bizarro World.  In case you don't know, Bizarro World is the fictional planet where Superman's evil opposite lives.  The motto  of Bizarro World is  "Us do opposite of all Earthly things!"  Here is Wikipedia's entry for Bizarro World.  (Most of us remember Bizarro World from the famous Seinfeld episode).  Here's a quick rundown of recent Bizarro events:

- Last week, our government solved the debt crisis by...... agreeing to appoint a commission.
- Over the weekend, S&P, those same geniuses who rated subprime mortgages AAA, decided to downgrade Uncle Sam.
- On Monday, in reaction to this downgrade, investors decided to sell shares of companies that make profits and buy U.S. Treasuries - the exact things that were downgraded.
- On Tuesday, the Chairman of the Fed said that the economy is weaker than previously thought, and the stock market surged 4%.


What the heck is a rational investor supposed to do when living on Bizarro World?  I guess one answer is to jump right in, and start acting Bizarro - buy, no sell, no buy.....(I call this this the Jim Cramer answer).  A better response is to sit back and enjoy the weather, knowing that an appropriate asset allocation plan is in place which will help us reach our long term goals (I call this the Frank Bond answer).

Please note that my intention is not to make a joke of or to minimize the real structural challenges facing the global economy, or the fact that our clients have real money invested in the stock market.  It's just that, over the past two decades, I have learned that when it feels like we are living in Bizarro World, it really is best to sit tight until the dust settles.

Hold On Tight

As I write this, the Dow is down 365 points, which certainly makes lots of people nervous.  I wish I had new insights to offer or new words of wisdom, but I don't. Periods like now are part of the deal of being invested in stocks - the perils of short-term volatility in exchange for expected long-term returns that beat inflation.

Selling at times like this is a bad idea, because at some point markets will turn and we can't know when that will happen.  Any money invested in stocks should be money that isn't needed any time soon, so that it can ride out scary times like this.

Hold on tight, fasten your seat belt, because it's a bumpy ride, as usual.

(If you feel the need for more reassurance, please call or e-mail)