As we sit back and reflect on the impressive 10 year milestone of the Toledo Free Press, we cannot help but review the last 10 years in the investment business. Tumultuous does not begin to describe what the US economy, debt and equities markets have experienced during that time. Some of the statistics are troubling, while others are rather impressive, but altogether they have helped shape where our economy currently stands and how we expect to go forward.
The following list provides a bit of 10 year historical data; the Dow has increased about 70% from 10,800 to around 18,000; the NASDAQ has increased about 150% from 2000 to almost 5000; the S&P has increased 76%; the US Dollar hit a 14 year high recently, 30 year US Treasury Bonds yields dropped from 4.5% to near 2.7%; we witnessed one of the worst global financial catastrophes that the world has ever seen; history’s largest Ponzi scheme unraveled; we have been through 2 Presidents of the United States and 3 Federal Reserve Chairmen/woman, all of whom pursued similar economic policies; lastly and perhaps most significantly, the federal debt has risen from $7.5 trillion to over $18 trillion, due in large to Quantitative Easing, TARP and interest rate policies.
That is a lot of numerical and statistical data to analyze in one paragraph. It is important also to remember that the gains and losses were by no means steady. For example, the Dow was valued at 10,800 in March of 2005, but dropped to 6,600 in 2009, then went on a bull market that saw us reach 18,200.
While it is important to understand where we have been and how investments have performed, we cannot act on that information. The only way that you made money on the 70% rise in the Dow over the last decade is if you in fact invested in the Dow before the rally. However, all the information detailed above has significant value in determining where the economy is heading.
We believe that equities are overvalued and have only been experiencing gains due to corporate stock buyback programs and investors who typically purchase debt instruments entering the equity arena in a search for yield. That is not to say that equities will not continue higher in the near term, but we urge extreme caution.
At some point, inflation will become an issue. An economy cannot create the amount of currency that the US has over the last 5 years with no repercussions. Once velocity picks up and money begins turning over in the economy (which low gas prices may encourage), we expect to see inflation surpass the Fed’s 2% target and rates rise in an effort to keep inflation at reasonable levels. The rise in rates will likely increase the value of the US Dollar, which will continue to negatively impact the United States’ ability to export.
The US Congress and the SEC are not doing nearly enough to deter the “Madoff-types” or to police large institutional firms in both the commercial and investment banking sectors. To date, leverage is at an all-time high and we have replaced sub-prime mortgage loans with sub-prime auto loans. However, regulators have displayed a willingness to fine large firms, extort their fee and allow them to continue to play their dangerous game. It is difficult to say what the impacts of these reckless actions will be, but it is all too similar to the years leading up to 2008.
The national debt does not concern us nearly as much as it does others. While the number is daunting at $18 trillion, rates are so low that the debt service is not unmanageable. Further, once rates begin to rise, the Fed will likely utilize the Federal Open Market Committee to enter the bond market and buy up the old debt with proceeds from newly-issued debt, essentially refinancing the national debt at a more reasonable level. If we fail to address the rise in the national debt and take no action at all, then we will have a problem on our hands down the road.
We believe above all else that the next 10 years will present major opportunities to investors, if they know where to look. As always, there will be significant fortunes made, and lost as well. We expect to see an economic recovery and a stable Dow, but not after some troubling times. Timing is everything, especially in investing. If you remain calm and patient, the next 10 years will be filled with prosperity and gains.