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June 30, 2010 Markets Decline: Cash is King
Posted on 6/30/2010
by Don Creech
The G-20 meeting ended with a non-binding agreement to resolve the debt issues facing the global economy. Most of Europe wants to avoid becoming another Greece by choosing various degrees of austerity. The US already has a de facto austerity program in place through inaction. Current tax rates expire at the end of this year with very progressive changes that will remove money from households and businesses. That is a built in headwind for the economy to endure. It is not fuel for economic growth.
The US argued for global participants to increase consumption. Unfortunately, consumption can be impacted only on the margin by government. Demographics and the population within various stages of life determine consumption and savings. Young adults lack sufficient income to save the economy. Household demand grows as children reach adolescence when neither food nor clothing nor furniture nor cars last long.
Raising adolescents requires money, and that drives household spending. A growing demographic cohort of teenagers is almost 15 years away for the US. We are the lucky ones in the Western world. We have a positive birthrate from which we will get innovation, adaptation and economic growth. This decade will be choppy as it was in the 60s and 70s when Boomers left college to start careers and families.
Unfortunately, governments cannot change demographic cohorts, especially in Europe where births are below replacement rates. Domestically, the spending needs of Boomers are declining in favor of debt reduction and retirement savings. Other than shifting purchases through wealth transfer programs, (Cash for Clunkers; Housing Tax Credit) the impact on growth is net zero, at best. Tax one party to give the money to another party. There is no net growth through creativity or productivity which has been our economic engine for the last quarter century.
Continued uncertainty about global economic scenarios has been reflected in the markets with the worst quarter since March 2009. With Germany, Japan and China initiating budgetary constraint, growth must slow. Austerity does not create growth. Nor is austerity a vote getting program because politicians must be forthcoming about the lack of money to continue thestatus quo.
(1) The benefits from the current Obama stimulus peaked in the first quarter which means slowing GDP growth.
(2) In 2011, taxes are going up and that will hamper economic growth meaning more slowing of GDP growth. (3) Real estate prices are estimated to decline 20% in the next twelve months likely reducing consumer confidence and slowing consumer spending further.
At quarter’s end, the small business jobs report for June was 13,000 new hires instead of the expected 60,000. Friday’s employment report should reflect the loss of 100,000 jobs primarily from the termination of census workers. We expect unemployment to rise, keeping consumer spending at bay.
More optimistically, S&P-500 companies have almost $1 Trillion of reserve cash – equal to the GDP of S. Korea. In the first half of this year, nearly 140 companies initiated or raised dividends with only two decreases unlike last year when 78 companies reduced dividends. Analysts at Standard & Poor’s expect announcements of dividend increases to accelerate and average more than 5% by year’s end.
This will not be headline news. The “doom and gloom” drives headlines. While we watch markets decline, we are entering the area where real risk is low while perceived risk is high. The disparity creates significant opportunity to buy good assets cheaply.
The S&P-500 has declined 7.7% since the beginning of the year and 15.5% from the April peak. Our heavy cash position has protected account balances. Market sectors are changing with the economy. We expect to see some attractive places for investment near term. Categories: |
