Herb Caen was a columnist for the San Francisco Chronicle for 53 years ending in 1991. He sometimes offered what he called my "thoughts while shaving," which introduced a potpourri of random ideas he considered to be column-worthy.
Today I'll offer an entire column of my own thoughts while shaving as they relate to what is happening in the stock market and the economy in general. And by the way, this August will mark the end of the 16th year that I have been serving as your weekly financial gossip provider. I'm closing in on Herb's record.
As for the U.S. economy, we are actually 5 percent larger than we were just before the Great Recession. The sages at the Trends Research Institute originally predicted an economic slowdown toward the end of 2013, which they are now indicating would be expected toward the end of this year. While a "double-dip" recession comes with the territory of major recessions typically, today's expected aftershock seems to be taking its time to arrive.
Financial newsletter writers like Richard C. Young consistently make the case that we are propping up the economy with cheap interest rates courtesy of the U.S. Treasury "printing money" and buying bonds with dollars that just contribute to our long-term debt. Who knows for sure?
In the meantime, we have a robust economy that is predicted to contribute to a worldwide historic economic boom in the second half of this decade. It wasn't so long ago when, at the end of the Clinton administration, we had essentially paid off most of the country's debt. The fear at the time was the government would no longer be issuing long-term bonds because we didn't need to borrow the money. Insurance companies, in a panic, were concerned about where they were going to be able to buy the bonds they needed to fund 30-year obligations. It's entirely possible that a growing economy and higher tax collections will pay off that burgeoning debt sooner than we may have expected.
People who attribute low interest rates solely to government action are forgetting that there are trillions of dollars sitting in cash that is content to earn nothing. This is a hangover from the collapse of the financial services industry. Individual investors who finally threw in the towel when they had lost 50 percent are still sitting in cash and now losing 2.5 percent per year to inflation. Corporate financial officers unable to meet short-term borrowing needs, and who actually had to consider what could have become a bartering economy with IOU's, are determined to never be in that situation again. They sit on record amounts of cash too.
Why would anyone pay interest to borrow money for 90 days (that's essentially cash) when trillions are available for free? At one time a few years ago, even before the government stepped in, this cash hoard amounted to a record $9 trillion.
Here's another example of why it's so hard to predict stock market performance prospectively. For months, we have been hearing that the minute the government starts tapering off its practice of supplying cash to the bond markets to keep interest rates low, the economy, and hence the market, would begin their tailspins.
So what happens at the end of 2013? The tapering begins and it is interpreted as a sign that the economy is strengthening. Reacting to the law of unintended consequences, stocks have one of their best months ever. The matrix of influences that affect stock prices is just too vast for professionals to second-guess effectively.
Over at the American Association of Individual Investors, we have a national organization of individual stock pickers whose members pay $29 a year because they "like to make money AND fool around" (my words, not theirs). Their winning stock screen of 2013 was up 143 percent. This was the Piotroski screen based on the analytics of Joseph Piotroski, an accounting professor at the Stanford Business School. The screen selects for stocks with prices that are low relative to their book values.
What these random thoughts should illustrate is that it's futile to try to second-guess the future impact of economic forces and stock market moves. You solve the problem of a murky crystal ball by diversifying assets and being patient. If you seriously want to attempt to beat the averages, set aside your armchair quarterback uniform and join something like AAII. Plan to devote time and technology to give you an edge.
Steve Butler is CEO of Pension Dynamics. Contact him at email@example.com or 925-956-0505, ext. 228.