Sunday Morning Coffee

This week was the first installment of the Barron's Roundtable. There were three quotes that stuck out to me as being especially useful to ponder.

Felix Zulauf: Many American consumers are back to reality. A fourth of all homeowners with mortgages have negative equity in their homes, and another fourth have less than 10% equity.

In most instances home values will come back to what people spent to buy in. The variable is time and the exceptions will probably be in certain parts of Florida, Las Vegas and maybe Phoenix. More likely those place may just take longer. A point I have made several times with no claim of originality is that if you are living in a home you enjoy and that you can afford then a drop in value doesn't have to adversely effect you. I mean really, if you can afford it and want to stay how much does it matter? And eventually the equity issues will tilt back in your favor, that is if you were even ever underwater.

Bill Gross: When you include government and private net saving after depreciation, we are dis-saving. We are below the trend line for the first time since the Depression. We haven't even started to come to grips with the conservatism required.

Believe it or not I take this comment from Gross as very encouraging. I can't envision how the problems the US has will get solved. There is a lack of will (political and otherwise), an apparent lack of common sense and a structural problem in the government in that the fix needed is likely longer than the typical political cycle--the problems took longer than one political cycle to build.

What is encouraging is the extent to which we can determine our own savings rate, decide (mostly) how long to work, and not leave ourselves overly vulnerable to the future of the current entitlement programs. I realize this may not be the case for the majority of people but I imagine that someone interested enough in investing to visit a site like this one has a better chance at this outcome than does the majority. By saving more, people are able to put more into foreign denominated assets which will protect purchasing power if Fred Hickey is correct and the dollar index drops to 50.

I also think that more people are in a position to live below their means than actually do. The extent to which more people adopt this sort of lifestyle the better off the country will be from the bottom up. From the top down of course the implication is that a drop in consumer spending adversely impacts GDP.

Zulauf: In the past five years, the individual investor has been hit by two bear markets in stocks and a severe bear market in housing. He is just done. You see it in fund-flow statistics. Money is flowing into fixed-income investments that are perceived to be safe.

If you understand the argument that says rates in the US must go up and you buy into it then you know the risk of certain types of bond funds, mostly but not exclusively long dated treasury funds. Of course as is often the case most investors do not understand the full consequence of the risks they take. I am reminded by what Nassim Nicholas Taleb said (paraphrasing here); if people understood the risks they were taking in the stock market they would never invest in it.

I don't think Zulauf's five year reference is quite right, more like ten years. I made a comment in this week's video about many people not having a great experience navigating the market. The oughts was a bad decade, the 1970s was a bad decade as was the 1930s. There will be another bad decade in the future and then another one 30 or 40 years after that. The odds that stocks will work for a while after not working for ten years are pretty good. My own take here is that the S&P 500 will do much better than down 24% for the new decade but still below what is considered normal making foreign markets the place to be.