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business newsIs This an Economic Recovery?
Insight into potential outcomes for investors with a shorter time frame.
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A very good question Ken, and one that was asked more than a few times. So today I'll touch on that thorny issue, as well as look at the employment numbers for what we see about the potential for an actual recovery.
First, let me say that what I'm not doing here is giving you, gentle reader, specific advice. To be able to do that I would need to have specific knowledge of your situation, assets, location, needs, health, etc. But what I will try to do is give you a general assessment of what I see for the economy over the next few years and what the investment climate might look like. I'm also going to refer to a lot of previous letters I've written, for those of you who want to do further research.
Is This a Recovery?
First, we're in a nascent recovery from the depths of the Great Recession, but the question is "what kind of recovery?" Many suggest that we'll see a typical recovery, like we've seen with every recession since World War II. As regular readers know, I don't think we've gone through a typical, garden-variety recession, and to expect a typical recovery is more faith-based than factual. We had a deleveraging recession and we're still deleveraging. The process, as shown in studies I have written about, takes years to conclude.
When I started talking in 2002 about a Muddle Through Economy for the rest of the decade, I had a lot of people giving me a hard time by 2005-2006. But as we closed out the decade, average growth of US GDP for the entire decade was less than 2% annualized, which, by my definition, is Muddle Through. For the US economic machine, that was pretty anemic growth. It resulted in a lost decade for stocks, except for the NASDAQ, for which it was merely a dismal decade. Traditional 60-40 (stocks-to-bonds) portfolios didn't fare well, coming nowhere close to the projections of standard-issue money managers.
I think we're in for yet another Muddle Through period, at least for five to seven years and maybe for the decade, depending on a few scenarios I'll come to in a minute. As my friend Prieur du Plessis outlined for us in last Monday's Outside the Box, if we measure the stock market by either earnings or dividend yields, valuations are in the top 10% historically. Average returns, going out for 10 years, are 2.6% real, with some historical 10-year periods being negative. Below is the range of returns, based on dividend yields. It doesn't look much different from the chart based on earnings. We're currently at the far right bar.
This doesn't suggest a happy outcome for those who espouse buy-and-hope portfolios, at least not if you have expectations or needs of 7% to 8% or more.
This Time is Different
If you're a new reader, I suggest going to the archives and searching on the name "Rogoff," to read the letters I've written on his and Carmen Reinhart's must-read book, This Time is Different, which shows us that it's never different this time. They looked at 266 financial crises in more than 60 countries across a span of 200 years.
Debt crises have sadly similar conclusions: They always end in pain and tears. And although we have stopped, as private citizens, from accumulating debt (or in some cases, such as mortgages, have just walked away from the debt), our national government has stepped into the breach and is borrowing at mind-boggling levels.
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