North America Recession Coming?

[dre]

Yes, a recession will happen one day.

But that's not very helpful is it?

Its not a matter of "recession will happen one day". Its a matter of recognizing where we are in the business cycle, and acknowledging important macro-economic indicators.

And yes that realization COULD be very helpful. It could make the difference between bankruptcy and prosperity for your average family.

[msj]

So where are we in the cycle?

If you're an oil worker would you have known that oil was going to drop by 61% which could hurt your finances?

What if you're like me and you get cancer?

Nothing to do with macro-economy.

Well, no problem thanks to having many months savings and critical illness insurance there were no financial consequences. Financially my best year ever.

You see, if one takes care of themselves then one should not need to know anything about the macro economy to be successful.

In fact, for most people it likely ruins investment returns as they create certain narratives to justify buying this or selling that when doing nothing more than disciplined monthly savings is all anyone needs.

It's not rocket science but people's brains make it that way.

[bush_cheney2004]

...In fact, for most people it likely ruins investment returns as they create certain narratives to justify buying this or selling that when doing nothing more than disciplined monthly savings is all anyone needs.

But the very nature of investing requires an understanding of conditions and risk coupled with time horizon goals, tax consequences, fees, employer matching, etc. It takes more than just static savings each month to qualify as "investment". Each year the squirrels in my back yard work hard on their savings, but they are not getting much for investment return.

Edited May 29, 2016 by bush_cheney2004

[eyeball]

Each year the squirrels in my back yard work hard on their savings, but they are not getting much for investment return.

I bet they're quite happy getting by with what they need.

Do you feed them anything by chance?

[msj]

No, not really.

In Canada it can be done by simple rules of thumb:

1) Rent vs own a home - if you can rent at a P/E ratio equivalent of 15 - 20 then buy. If 20 to 25 then consider rent/ buy. If 25+ then rent. Only need to know you local market.

2) if your marginal tax rate is > 40% consider maxing out RRSP's first and then TFSA's. Otherwise do TFSA's first.

3) Get educated.

4) buy CI insurance.

5) put money into broad based investments using something like Vanguards portfolio manager.

6) spend less than you earn.

That's it.

It is really that easy and involves little to no knowledge about the macro economy.

[bush_cheney2004]

Like most insurance products, CI policies are a poor investment....pre tax health care savings accounts are a better way to go. Employees will be bearing more and more of health care costs through taxes, copays, and premiums. Health care is part of the North American economy....even in Canada. It is a growth industry with so many graying boomers.

[msj]

Critical insurance is not an investment: it is INSURANCE.

With a return of premium built in, the cost is actually quite cheap - if you don't get ill then you are only out the investment return of those premiums. Especially when one is young - it is very cheap.

If you do get ill then it comes in handy.

And, once again, no need to know anything about if a recession is coming or not because most people have no idea if one is coming or not (and if you want to know then just watch for an inverted yield curve).

Even then few know how or if the recession will effect them at all.

But if one gets one of those critical illnesses then that is a big event at the micro-level and it can be financially devastating.

[bush_cheney2004]

...But if one gets one of those critical illnesses then that is a big event at the micro-level and it can be financially devastating.

There are lots of other insurance products available for circumstances related to health, disability income, and wealth management, but these are just part of a larger investment strategy to minimize risk/liabilities while maximizing return and/or preserving capital.

Most young people just starting out will not be buying CI insurance. It's hard enough just to get them to save for retirement.

[msj]

Sure, most won't.

That's because we have illiteracy everywhere.

People think that people need to know the bigger picture macro economy when people are too stupid to understand a few simple rules of thumb that will make them comfortable and will protect them from the most likely risks.

If one can't understand these rules of thumb and implement them then there is no way they are going to understand trade deficits (even if that could be meaningful to most people in any way).

[bush_cheney2004]

...People think that people need to know the bigger picture macro economy when people are too stupid to understand a few simple rules of thumb that will make them comfortable and will protect them from the most likely risks.

They can't escape from it even if they want to. News media spoon feeds them basic stuff on a daily basis (currency valuation, employment rates, GDP performance, trade balances, M&A, layoffs, interest rates, etc.). Cross border shoppers are keenly aware of their buying power (exchange rates), price of petrol, and equity markets performance. The CBC routinely reports NYSE, NASDAQ, and S&P 500 index changes along with the TSX.

Consumers and working stiffs are actually part of the risk/sentiment game with price indexes, confidence levels, home sales, savings rates, debt load, etc.

[msj]

Sure it's hard to ignore the noise and people are unable to tease out a decent interpretation of the signal.

The point is they do not need to.

To listen to the MSM provide terribly uninformed interpretations of old data does not help anyone understand anything.

Knowing the FX rate is only helpful when one is converting currency or when one is planning a trip ahead of time and is converting some savings into that currency because they are actually thinking ahead.

The problem being that even then one could be buying currency at sub-optimal levels because one does not know, other than with hindsight, if the currency is going to appreciate or depreciate.

Sometimes a person gets lucky and sometimes not.

But even here some general rules of thumb can come into play - if the CDN $ is at par or higher then accumulate USD; if it's trading at 0.75 or lower then consider selling those accumulated dollars (but even that depends....).

So one really only needs to pay attention to one data point over time: price.

The point remains: none of us are very good at understanding trends, predicting trends, knowing if a regression to the mean has started or ended or the end of the start has begun or the beginning of the end has started etc....

So what's the point in "knowing" historical data through an uninformed, misinterpreted, often mistaken and cherry picked filter?

If you want the data then go to the sources and get it without the useless MSM.

Or find those few curators you can trust.

Then reduce the visits to the G&M, National Post, CBC etc sites accordingly because very few are ever going to find out that they lost their job or that the economy is doing well or poorly in real time from those sources that will be actionable in any meaningful way.

By the time it hits the papers it's old news - especially in the internet age.

[bush_cheney2004]

Sure it's hard to ignore the noise and people are unable to tease out a decent interpretation of the signal.

The point is they do not need to.

Except that many want to.....people with many investment options for their retirement portfolios can make smarter adjustments and allocation changes when better informed by financial media.

Edited May 29, 2016 by bush_cheney2004

[msj]

Except that many want to.....people with many investment options for their retirement portfolios can make smarter adjustments and allocation changes when better informed by financial media.

I doubt it.

Most people perform much worse than the very funds they invest in because they buy the hot investments only to see them go down which, in turn, they sell, often at a loss.

If it has anything to do with knowing the macro economy it is the usual "invest in what appears hot now" rather than thinking about what may be hot next month/year/decade.

But you tell me: with expected interest rate increases coming up, what should people be investing in at this moment?

Provide your real time commentary so we can get a glimpse into how well your crystal ball translates into some kind of macro economic narrative that then somehow translates into wonderful investment returns.

What put/call options are you so sure of thanks to Fox Business News?

[bush_cheney2004]

I doubt it.

Most people perform much worse than the very funds they invest in because they buy the hot investments only to see them go down which, in turn, they sell, often at a loss.

Then a lot of people wasted their time developing diverse allocation options for retirement plans. May as well go back to heavily loaded managed funds and brokers.

If it has anything to do with knowing the macro economy it is the usual "invest in what appears hot now" rather than thinking about what may be hot next month/year/decade.

But you tell me: with expected interest rate increases coming up, what should people be investing in at this moment?

People should be investing in whatever they want....be they bulls or bears. If they have low risk tolerance or short time horizons, then a conservative approach for allocation mix that preserves capital may be appropriate. Depends on what their goals are....but the point is to be engaged and make informed decisions, not just park it all in a Vanguard fund and go to sleep for 25 years.

My personal situation is satisfied with a 70/30 bond/stocks mix for main retirement account (capital preservation) plus Roth/IRA/Cash accounts that can be managed on a daily basis depending on what opportunities pop up (such as Valeant - VRX). Like TFSA/RRSP accounts in Canada, there are tax savings strategies associated with each including the timing of distributions. Maybe it is a false presumption that Canadians have similar account options like those provided by E*Trade or Fidelity.

Basically my goal is to protect assets I don't want to lose, and play a bit with the rest, mostly to just beat inflation and fees....no big home runs required. Turns out that retirement isn't really about how much money you have, but how much you spend, which is far easier to control than financial market swings.

When (not if) the Fed raises rates, I will see the impact on markets and bust a move as required. Don't watch FBN...I'm a Bloomberg man...plus the wife does not like me messing around with margin accounts.

[Charles Anthony]

Guys,

Avoid thread drift.

[August1991]

The following article that North America may be going into another recession like in 2008 and one sign is some warehouse are filling up and goods not being sold...

IMV, we are all slowly moving out of a severe deleverage by many Americans.

What happened in 2008 was worse than 1929. But the Fed (in modern times) got it right. In 1930, the Fed utterly bungled it.

With that said, I suspect that if Greenspan had been chair in 2008, we could have avoided this fiasco.

Economists (let alone behavioural economists/psychologists) do not understand why people hold cash. Keynes started the questions, Lucas followed.

We still don't know why people hold cash, or borrow.

Edited June 1, 2016 by August1991

[msj]

So, here is some interesting macro economic research for people: http://lpl-research.com/~rss/LPL_RSS_Feeds_Publications/WEC/Weekly_Economic_Commentary_05312016.pdf

Interesting trend showing US GDP being weak in Q1 and then rebounding in Q2.

So, how does one use such information for ones portfolio?

Load up on consumer discretionary?

While so many people are talking about the "next recession" because they are looking at the terrible numbers of last quarter what are they doing with their investments?

I bet cowering in cash.

Which is fine and probably not very useful.

This is the problem with recency bias.

Especially with Q1 GDP: it's like Groundhog Day every stinking year as we go through the same " the US is going into a recession" crap.

Once again, not very useful, especially if your investment horizon is measured in decades.

[bush_cheney2004]

While so many people are talking about the "next recession" because they are looking at the terrible numbers of last quarter what are they doing with their investments?

I bet cowering in cash.

Which is fine and probably not very useful.

I disagree, and as indicated above, some people fled to cash and took the opportunity to clean up their balance sheets, shed debt, and set different priorities. About 10,000 boomers are now retiring each day in the U.S. with broad implications for markets and consumption.

This is the problem with recency bias.

Especially with Q1 GDP: it's like Groundhog Day every stinking year as we go through the same " the US is going into a recession" crap.

Once again, not very useful, especially if your investment horizon is measured in decades.

Focusing on the U.S. so much is also a bias...the past few years have been more about China's "collapse" to lower growth rates, other BRIC and emerging market stumbling, and oil. The U.S. is perfectly capable of marching to a different beat (up or down), even if the Fed starts to care about what is happening outside American borders.

[msj]

Why should the fed care about China?

We heard the same crap when it came to Japan, Inc and then Japan went into nearly 30 years of recession. Sure, we heard in the early days how this would doom the world and the US but um.... Nope.

As for baby boomers: big yawn. Demographics are overrated.

Tell us which asset allocation we should employ to capture alpha from the boomer retirement.

And are you sure it hasn't already been thought of by a zillion other investors thereby neutralizing the demographic factor into irrelevancy?

Not that I think the markets are efficient but when it comes to the broad macro strokes it is more often nearly efficient than not.

A person is either better off going deep in details like Munger/Buffet or taking it easy and buying the monthly index funds and controlling what is most easily controlled: time in the market by getting in while young, keeping costs down using cheap funds, and contributions by spending less than one earns thereby ensuring more savings are achieved.

No crystal ball required, no need to know what Brexit means (even the Donald doesn't know), no need to worry about things none of us are good at predicting anyway - especially the impact of big macro economic events at a micro individual level (whether specifically to my job or to a company I own or a fund I own).

KISS.

Edited June 2, 2016 by msj

[bush_cheney2004]

Why should the fed care about China?

The FED / FOMC has chosen to expand its data domain to include factors external to U.S. borders/control. It is another feedback loop to inform monetary policy by central banks. Apparently world financial systems are a bit more connected since Bretton Woods.

We heard the same crap when it came to Japan, Inc and then Japan went into nearly 30 years of recession. Sure, we heard in the early days how this would doom the world and the US but um.... Nope.

The US had a fun time when the bubble burst in 2007-2008.

As for baby boomers: big yawn. Demographics are overrated.

Tell us which asset allocation we should employ to capture alpha from the boomer retirement.

Those sectors are already well documented:

Health care

Personal services

Financial services

Travel/Leisure

Consumer staples

Assisted living

No crystal ball required, no need to know what Brexit means (even the Donald doesn't know), no need to worry about things none of us are good at predicting anyway - especially the impact of big macro economic events at a micro individual level (whether specifically to my job or to a company I own or a fund I own).

Do as you please....I very well do need/want to care about employee owned stock plans, sponsoring company, market sector performance, and economic metrics. A single item like the price of steel has a huge impact on mining, taxes, subsidies, development, real estate prices, and employment in my state.

KISS.

No problem...I never need to pay somebody else to do my taxes.

[msj]

The FED / FOMC has chosen to expand its data domain to include factors external to U.S. borders/control. It is another feedback loop to inform monetary policy by central banks. Apparently world financial systems are a bit more connected since Bretton Woods.

Well, good for you for knowing how they are connected and how this will impact various asset classes in the coming years.

If only I had such knowledge and clairvoyance!

The US had a fun time when the bubble burst in 2007-2008.

This was the recession that many people were in denial about and still are to some extent.

People just don't appreciate the difference between a financial meltdown (hence the long recovery time) and a regular recession.

Of course, the US bubble had next to nothing to do with Japan just like any recession in the US now would have next to nothing to do with China.

The US is exceptional.

[dre]

Of course, the US bubble had next to nothing to do with Japan just like any recession in the US now would have next to nothing to do with China.

The US is exceptional.

Actually the bubble had quite a bit to do with China, Japan, pacific rim nations, etc, and especially countries running large trade surpluses with the US.

These countries were flush with US dollars and had very high savings rates. And countries running a current account deficit are required to have a matching capital investment account so there was a massive river of foreign capital flowing into US financial markets driving up asset values and driving down interest rates.

This is an important causative factor in the meltdown because that foreign capital was the "fuel" for the fire.

Edited June 3, 2016 by dre

[msj]

Fair enough.

However, the causes go well beyond that are have more to do with poor lending oversight, a Fed chairman always putting a stop on the market declines, and other factors home grown in the US.

[dre]

Fair enough.

However, the causes go well beyond that are have more to do with poor lending oversight, a Fed chairman always putting a stop on the market declines, and other factors home grown in the US.

Yup. Not just that but the housing bubble was US government policy. It was the only bright spot in the economy after the .com boom ended, and the Fed cut the rates, and then went on TV and told everyone to apply for teaser rate mortgages.

And once you have that much easy synthetic money in swirling around in the economy people start doing riskier and riskier things with it.

[msj]

Here are a couple of more investment guru's making macro predictions and linking it to investments:

Albert Edwards of Societe Generale: http://www.businessinsider.com/condition-red-alert-recession-is-imminent-2016-6?curator=thereformedbroker&utm_source=thereformedbroker

He is a permabear though so no surprise there. The usual broken clock being right twice a day.

The other one everyone is talking about is George Soros.

Of course, Soros has been down this road before: http://www.pragcap.com/beware-of-guru-worship/

Nothing like being bearish in 2013, 2014, 2015, and 2016.

Even the GOAT trader can be bearish during periods he has no business being bearish in (at least publicly).

Not to say that Soros doesn't make money during this time but his book is different from any of our books: http://thereformedbroker.com/2016/06/09/what-youre-not-hearing-about-george-soros-today/?curator=thereformedbroker&utm_source=thereformedbroker

Josh here basically, hes worried about all of the same issues everyone else is: Chinas economy and the political mismanagement of it, #BREXIT, the migration crisis, the rise of right-wing separatist movements throughout Europe (and here, LOL), etc. All worthy things to be concerned with for a rational person, of course.

So, Soro's worries about the same macro events we all know about and for which we all have opinions but none of us will likely be very good at predicting how the outcomes will impact our jobs or our investment returns next week/month/year/decade.

The other problem with this reporting is that Soros can always, and quickly, change his mind:

Heres the first thing: Soros doesnt need to be right. Ill go ahead and make the assumption the he really wants to be right, but its not going to break him or anything he cares about if the market goes in a different direction than his instinct tells him it will. Soros runs a family office essentially managing his own enormous fortune and the wealth of his employees. There is no OPM involved.

What this means is that he can, at a whim, change his mind, change the directional leaning of his trades and even completely rework his portfolio to bet the other way. This is hard to do when one is answering to outside investors or LPs. Actually, its probably no longer possible for 99% of fund managers in the modern age. Consultants need the narrative sold to them so they can pass it on to their clients. Schizophrenia works for people operating at Soross level, but it doesnt sell well.

The point being that he will likely be better at changing his mind and switching his investments accordingly more quickly than any of us could possibly know about (unless we wait out the 45 days for the 13g to be filed).

Which is why it is so hard to be a regular joe and be successful by being bearish: even those who one would think are in the know aren't in the know.

He's guessing just like the rest of us and will adjust his guesses accordingly before anyone following him have the time to change their portfolios.