Tag Archives: investment advice

The Next Recession

My Comments: It’s a given there will be a ‘next recession’. People much smarter than me say it’s not many months away. It’s a normal event and we’ll most likely survive.

What we may not survive, however, apart from a random collision with an asteroid, are the effects of income inequality across the planet and the massive debt overhang facing us in this country. Combine those two forces and you know there’s going to be chaos down the road.

Olivier Garret, Forbes Contributor / Jun 26, 2017

In the coming years, we will have to deal with the largest twin bubbles in history. It’s global debt (especially government debt) and the even larger bubble of government promises.

Together, these twin bubbles make up what investor John Mauldin calls “The Great Reset.” Nobody can tell how this crisis will play out, but one thing is for sure, it will affect everyone in a big way.

The Debt Burden Is at a Breaking Point

The mere existence of these bubbles has profound economic implications, as research shows high debt levels weigh heavily on economic growth.

The total debt-to-GDP ratio is at 248% today. The non-partisan Congressional Budget Office (CBO) projects it will rise to 280% by 2027. And that’s assuming nominal GDP grows at 4% per annum.

Despite the post-election optimism, nominal GDP growth in 2016 was just 2.95%—making it the fifth-worst year on record since 1948. There are no signs it will pick up soon either.

That means the reality may be even gloomier than what the CBO projects.

If a higher debt burden means lower growth, the recovery from the next recession, whenever it arrives, will be even slower than the last.

Now Count in Government Promises

Those sky-high debt-to-GDP ratios don’t factor in the unfunded liabilities—pensions, Medicare, and Social Security, which the US Government has promised to millions of Americans. Those total about $100 trillion today.

The chart below shows that by 2019 those unfunded liabilities, along with defense and interest, will consume ALL tax revenue:

Last year, the first baby boomers turned 70. The average boomer has just $136,000 in retirement savings. If that individual lives for 15 years after retirement, his annual income comes to just $9,000.

Because boomers are living longer and need income, they’re staying in the job market longer. The fastest employment growth now is among people 65 and older.

However, with 1.5 million boomers turning 70 every year for the next decade, a huge strain will be put on government finances in the form of pensions and Social Security.

But the pension crisis isn’t just in the US.

A Citibank report shows that the OECD countries face $78 trillion in unfunded pension liabilities. That is at least 50% more than their total GDP.

Pension obligations are growing faster than GDP in most, if not all, of those countries. Those obligations sit on top of a 325% global debt-to-GDP ratio.

Prepare in Advance

Politicians and central bankers could try to “fix” these problems in several ways.

They could default on the debt and pension obligations, or they could print money to fund them. There is no way of knowing ahead of time how these bubbles play out.
What we do know is the chosen approach will bring a different type of volatility and effect on the markets.

For investors, this will be a period of enormous volatility.

That’s why it’s essential to arm yourself with the knowledge of how to deal with this volatility ahead of time.

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When Will the Bull Market End?

My Comments: Be assured, I have no idea. But then, I don’t know what I’m going to have for lunch either. All I know is that I will have lunch and one of these days, this bull market will end.

The trick is to understand that it will end, and if you’re not ready to watch a ton of your money disappear, then you have to be ready. Some of you may have enough money that you really don’t give a damn. Good for you.

But if you worry about this, even a little bit, then you should talk with someone who has some answers. Someone you can relate to. I promise it won’t hurt much.

By Anne Kates Smith, Senior Editor @ Kiplinger, June 26, 2017

As the second-longest bull market in history makes its way into its ninth year, many investors are understandably asking: When will it end? We’d all be rich if there was a foolproof way to figure that out. But we can make some educated guesses.

One thing to remember is that bull markets don’t die of old age alone. Something’s got to kill them. And the surest weapon is a recession. That’s not always the case. There have been bear markets without a recession, as the crash of 1987 shows. But many of the worst downturns have been accompanied by a recession – or, more accurately, followed by one. The Great Recession that began in December 2007 was preceded by the start of a bear market in October of that year that went on to lop 57% off stock prices. The recession that began in March 2001 followed a March 2000 market peak that initiated a 49% stock decline.

False alarms are frequent, says economist and market strategist Ed Yardeni, of Yardeni Research. “The next bear market will start when the market anticipates the next recession – and turns out to be correct. The market has anticipated lots of recessions since 2008 that have turned out to be buying opportunities,” says Yardeni.

When recessions do pair with stock market peaks, they can do so immediately, as with the concurrent start of the recession and bear market of July 1990, or they can lollygag more than a year behind. On average, recessions begin 7.7 months following a stock market peak, according to market research firm InvesTech Research.

If we only knew when the next recession would begin. Well, Yardeni has a date in mind: March 2019. He bases his determination on the average number of months the economy has continued to expand after it has reached its previous peak, going back to the early 1970s. Counting from November 2013, which is when the economy finally surpassed its 2007, prerecession peak, Yardeni arrives at March 2019.

The date is not an official forecast, says Yardeni, who adds that it comes with no guarantees and plenty of questions. “What do we know today that suggests that March 2019 is a realistic date, or that a recession will come sooner or later? Right now, March ’19 looks realistic,” says Yardeni. “But if pressed,” he adds, “I’d say it might be later.” If the economic cycle sticks to the averages and if the stock market does, too – both big “ifs” – then investors should look for a market top around August of next year.

4 signs of recession

Sam Stovall, chief investment strategist at investment research firm CFRA, looks at four indicators when he’s searching for a recession on the horizon. Every recession since 1960 has been preceded by a year-over-year decline in housing starts, says Stovall. The dips have ranged from a 10% decline to a drop of 37%, and they have averaged 25%. The most recent report on housing starts showed a decline of less than 3%. “So we’re on yellow alert, not red,” says Stovall.

Consumer sentiment is another signpost. Before a recession kicks in, you’ll typically see an average decline of 9% in the University of Michigan’s monthly sentiment index compared with the previous year, says Stovall. Current reading: up 2.4%.

A drop over a six-month period in the Conference Board’s Index of Leading Economic Indicators means trouble, too, with declines of 3%, on average, registering ahead of an economic downturn. Latest six-month change: up 3%.

Finally, when yields on 10-year bonds dip below the yields on one-year notes – known as an inverted yield curve – look out, says Stovall. Ominously, long-term rates recently have been under pressure while the Federal Reserve pushes short-term rates higher. “We’re getting a flatter yield curve, but nowhere near an inversion,” says Stovall. His conclusion: No recession is in sight.

Before you fixate on the twin risks of recession and a bear market, ponder a third risk – exiting a bull market too early. The payoff in the final year of a bull market is historically generous, with returns, including dividends, averaging 25% in the final 12 months and 16% in the final six months.

Nonetheless, investors have every right to ratchet up the caution level at this stage of the game. Now is a good time to make sure your portfolio reflects your stage in life and your risk tolerance. Stick to a regular rebalancing schedule to lock in gains and maintain the appropriate balance between stocks, bonds and other assets, domestic and foreign. And whatever you do, make sure your portfolio is where you want it to be before you go on summer vacation next year.

This Is Not How A Bear Market Starts

My Comments: Today is Memorial Day, and the markets are closed in this country. It’s a day for us to instead remember those of us who gave their lives that we might continue with ours. Pray that fewer lives will be given in the years to come.

The following comes from someone whose name I do not know. But if you can wade through the math and graphics, you may find that the world is not about to end. At least financially.

Here’s how the author describes himself: “I have a degree in Math and Science from the University of Toronto, as well as a degree in education, also from U of T. I have traded private equity for 38 years and have developed a proprietary Price Modelling System which has provided me with consistent profitable trading success. In partnership with my computer scientist son, Aidan Gomez, we have automated this model using neural networks, and offer a Trade Alert service that lets subscribers replicate the trades we are involved in.”.

To see the charts, you’ll want to visit the source article HERE.

May 22, 2017 | ANG Traders

Summary
There has been much digital ink spilled trying to convince us that the bull market is on its last legs.

We present fundamental and technical reasons to support the idea of an ongoing bull market.

Black swans aside, this is not how bear markets start.

There has been, and continues to be, an inordinate amount of digital ink spilled promulgating the imminent demise of the bull market. Most of the arguments for this, center around the near-historic levels of certain metrics, such as PE ratios and S&P averages, but they ignore the factors that truly coincide with the launch of bear markets. In this piece, we will attempt to elucidate several of the metrics that we have correlated with bear or bull markets, and hopefully, show that the bull market is alive and well.

Rate Differential
When the 10-y minus the 2-y Treasury rate inverts, it has a way of marking the end of bull markets. When this differential turns negative, in conjunction with low unemployment, investors should look for an exit. Today, the unemployment rate is low, but not as low as in 2000 or 2007, and the 10-y minus 2-y rate is still a healthy +1%. It will take several sizable Fed rate hikes before the rate differential inverts (chart below). This does not look like the start of a bear market.

Fed Funds Rate

It is obvious that when the Fed raises rates, the bull market dies, but often when it comes to the market, what is obvious, is obviously wrong. In fact, three of the last four bull markets occurred while the Fed raised rates – the latest bull market being the exception (chart below). The Fed has lots of room to raise into a growing business cycle. Bear markets do not start when low rates are being raised.

Industrial Production
Except for a five-month period in 2002, a rising industrial production has coincided with a rising SPX. The chart below demonstrates this strong positive correlation. Bear markets do not start with rising industrial production.

GAAP Earnings

The Generally Accepted Accounting Principles (GAAP) earnings enjoy a positive correlation with the S&P 500. The GAAP earnings started rising two quarters ago, and the current quarter is shaping up to be positive also. Bear markets do not start with rising GAAP earnings.

Technical Indicators
The 8-month moving average remains above the 12-month moving average, the MACD is rising, the ADX is displaying a bullish pattern, and the RSI and stochastic are elevated, but they can remain elevated for long periods of time (chart below). This is not how bear markets start.

Investor Sentiment
Bull markets climb the proverbial “wall of worry.” There is a lot of geopolitical and intramural politics to worry about, and which are feeding the bull market. Bear markets do not start when there is fear around. They start when investors are confident and throw caution to the wind. The AAII investor sentiment indicator stands at a fearful 24% bullish sentiment, and 34% bearish sentiment (red and blue arrows respectively on the chart below). Bear markets start when bullish sentiment is over 50%, and bearish sentiment is under 30% (red and blue oval on the chart below). This is not how bear markets start.

In conclusion, the evidence presented paints a picture of a bull market that is still fearful and healthy. That is not to say that a black-swan won’t fall out of the sky and ruin the picnic, but judging from what we can and do know, a bear market is not imminent.

Social Security Rules

My Comments: For millions of us, Social Security is critical for keeping our heads above water. If you are just now entering the transition to retirement, what you read here is basic information you need to be aware of.

Wendy Connick / May 12, 2017

Calculating your Social Security benefits can get…complicated. It’s not just a matter of looking at the number on your Social Security statement and figuring that’s how much you’ll get. A number of different rules will have an impact on determining your final, actual benefit check, so it’s important to understand these rules and how they may affect your benefits.

Rule No. 1: Your base benefits are determined by your 35 highest-income years

When calculating your benefits, the Social Security Administration only looks at your 35 highest-income years. If you worked more than 35 years, the rest of your work history (and the money you paid into Social Security) simply doesn’t count toward your benefits calculation.

Rule No. 2: Social Security retirement benefits come in three flavors

Setting aside disability benefits, there are three kinds of Social Security benefits paid out during retirement: basic retirement benefits, spousal benefits, and survivor benefits. Retirement benefits are based on your earnings; spousal benefits are based on your spouse’s or ex-spouse’s earnings; and survivor benefits are based on your deceased spouse’s earnings. Spousal benefits can be up to one-half of your spouse’s full retirement benefits, while survivor benefits can be up to your deceased spouse’s full retirement benefits.

Rule No. 3: You can’t get both spousal and retirement benefits

If you are eligible for spousal benefits and standard retirement benefits based on your own earnings, you can’t get both types of benefits — you can only claim one. If your spouse earned significantly more than you did, this could result in your never actually getting your own retirement benefits.

Rule No. 4: Taking benefits early will cost you forever

If you start taking your Social Security benefits before “full retirement age” (which is typically either age 66 or 67, depending on your birth date), then your monthly benefit amount will be permanently reduced. Start taking benefits at age 62, the earliest possible start date, and your benefits will be reduced by as much as 30% for the rest of your life.

Rule No. 5: Claiming your benefits late results in larger monthly checks

If you wait until after full retirement age to claim your Social Security benefits, your monthly benefit check will increase by 8% for every year you wait. However, these credits stop accruing once you hit age 70 — meaning that it doesn’t make sense to wait longer than that to claim your benefits.

Rule No. 6: Working while receiving Social Security benefits may reduce your benefit checks

If you earn more than $16,920 per year (in 2017) while also receiving Social Security benefits and are under full retirement age, your benefits will be reduced by one dollar for every two dollars that you earn above this base amount. Once you’re above full retirement age, your earnings will no longer limit your benefits. What’s more, the Social Security Administration will credit you for the benefits you didn’t receive in previous years due to earning extra money, and will add that amount to your future benefits.

Rule No. 7: Social Security benefits are capped

For 2017, if you claim your Social Security benefits at full retirement age, the most you can get is $2,687 per month. You’ll get the maximum if your Average Indexed Monthly Earnings during your 35 highest income years was at least $8,843 (indexed means that your earnings are weighted to account for inflation). If you wait until age 70 to claim your Social Security benefits, then the most you can get in 2017 is $3,538 a month. The average Social Security benefit for 2017 is $1,360 per month.

Rule No. 8: Your Social Security benefits may be taxed

If one half of your Social Security benefit plus your other taxable income for the year plus nontaxable interest is equal to or greater than $32,000 (for married filing jointly) or $25,000 (for unmarried taxpayers) then your Social Security benefits will be partially taxable. Just how much of your Social Security benefits will be taxed depends on how much taxable income you have for the year. Nontaxable income, such as distributions from a Roth account, doesn’t count toward this threshold.

Putting it all together

It’s best to get familiar with the Social Security rules well before you’re ready to retire. If you wait until you want to start claiming benefits, you may miss some important opportunities to bump up your benefits. Still, it’s better to learn these rules late than to never learn them at all.

An Overvalued Stock Market?

My Comments: Dr. Doom here again. And boy, do I love this first chart. Many of my colleagues have been encouraging our clients to sit on the sidelines now for about two years or more. And we’ve been blasted because the DOW and the S&P just keeps going up.

Unless you believe the world has been reinvented, it will turn down. At least for a while. And if you have money critically placed to help you in your retirement, my suggestion is to play the odds that the market will turn against you.

There are ways to protect yourself and still make money, but that’s for another day when I change from Dr. Doom to Mr. Happy.

Steve Hunt | April 12, 2017

Since Donald Trump became the 45th president of the United States of America, the S&P 500 has jumped more than 8%. However, at least five different major financial indicators, along with a chorus of financial experts, agree: The stock market is alarmingly overvalued.

We’ve seen these historical moments before: a great boon before a great crash. President Coolidge’s era of excess in the 1920s led directly to the Great Depression. The dotcom boom in the 1990s was followed by a recession. The mortgage bubble burst us into the 21st Century’s Great Recession.

In March 2009, the S&P bottomed at 666. Today it’s trading around 2,300. This marks one of the longest bull markets in history, sparked largely by the Federal Reserve’s low interest rates. In the last decade, the Fed has shouldered a massive amount of debt to keep the economy afloat after the housing crisis, rolling out multiple rounds of quantitative easing. The national debt doubled between 2007 and 2017, from $9.2 trillion to $18.9 trillion.

Moreover, the Committee for a Responsible Federal Budget, a non-partisan group advocating for responsible government spending and debt reduction, predicts that the federal budget could increase by $5.3 trillion in the next decade, raising the deficit by as much as 25%.

Still, consumer confidence was at a 16-year high in March. Investors appear to be displaying optimism for the American economy by investing in stocks, an attitudinal response to President Trump’s rhetoric of unbounded economic expansion.

Unfortunately, the surge in the stock market does not reflect an economy grounded in reasonable economic growth. Financial strategist Michael Pento points out that historically, a recession has occurred in the U.S. about every five years and we’re long overdue.

Generally speaking, when the stock market is overvalued at the extreme levels we are seeing now, a sharp reversal occurs. The bubble bursts. The last time stocks were identified as being riskier than they are now was in 1929 and 1999.

Here are five financial indicators that show an overvalued stock market.

1. According to CAPE the Stock Market Is Overvalued By 75%
Case Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio is a widely respected valuation measure of the U.S. S&P 500 equity market, originated by Nobel Prize-winning economist Robert Shiller. Though CAPE shows the stock market as overpriced since the 1990s (the 10-year CAPE average is 16, meaning that for every $1 a company makes, an investor pays $16), it hasn’t been this high since 2002 and 2007, directly before the last two crashes. For reference, the ratio was at 45 before the dotcom bubble burst in 2002. As of April 11, 2017, the ratio stood at 28.75.

Shiller recently warned against the dangerous “narrative” sparked by the Trump administration. Markets are rising based on unrealistic optimism over future prospects, despite the fact that the market bubble resembles the days leading up to the 1929 crash. Shiller warns that “something is not quite right with the supposedly strong and expanding U.S. economy.”

2. Corporate-Equities-to-GDP Ratio Is At Third-Highest Point in History
There are two primary “Warren Buffet Indicators,” named as such because the famous billionaire identified them as his favorite market valuation tools. One measures corporate equities against gross domestic product (GDP) and the other measures market-cap to GDP.

In December 2016, Wall Street jumped to 27.9 times the corporate earnings of the past 10 years, which registers as extreme on CAPE. It’s only been higher twice since 1950 – in 1999 at the height of the dotcom bubble and in late 2015. As of March 2017, the corporate-equities-to-GDP ratio was 125.3.

3. Wilshire 5000-to-GDP Ratio Is At Third-Highest Point in History

The Wilshire 5000-to-GDP is Buffet’s other favorite indicator – a market-cap weighted index of all U.S.-headquartered stocks traded on the major exchanges. A reading of 100% shows stocks valued fairly – anything over that reflects stock market overvaluation. The Wilshire index as a percentage of U.S. GDP is at 130%, much higher than the 45-year average, which stands around 75%.

4. Goldman Sachs S&P 500 Valuation Shows Stocks Overvalued By 88%
According to Goldman Sachs’ valuation of the S&P, the market is in the 88th percentile on an aggregate basis and in the 98th percentile on a median basis.

5. BofA S&P 500 Valuations Show Stocks Overvalued on 17 Out of 20
As of December 2016, Bank of America showed that the S&P is above average prices along 17 different measures, with overvaluation standing at more than 20% for nine of those.

Looking at the data across these five different metrics, it would be hard to make an evidence-based case for an accurately valued stock market. Instead, what some analysts are calling “Trump hope” seems to be spurring the rush into the rising S&P. It might be weeks, or it might be months or years, but at some point there’s a whole lot of hurt waiting to happen.

Considering the larger picture of growing consumer and national debt, paired with continuing global and civil tensions, the S&P’s performance is an incomplete picture at the very least and a red flag of looming economic collapse at the very worst. Either way, investing too heavily in rising stocks now could easily be considered a bold display of misplaced confidence

Medicare Statistics

My Comments: Medicare is a critical element for retired Americans. These statistics are not jaw-dropping but re-affirm our need to be very careful about making changes to Medicare.

I’m not convinced the folks in Congress have my best interests in mind when they talk about making changes.

Consider yourself enlightened.

Maurie Backman | Apr 20, 2017

You’re probably aware that Medicare provides health coverage for seniors 65 and older. But did you know that Medicare has several distinct parts, each of which provides its own set of services?

Here’s a quick breakdown:
• Medicare Part A covers hospital visits and skilled nursing facilities.
• Medicare Part B covers preventative services like doctor visits and diagnostic testing.
• Medicare Part D covers prescription drugs.

There’s also Part C, Medicare Advantage, that offers a host of additional services. Whether you’re approaching retirement or are many years away, here are a few key Medicare statistics you should be aware of.

1. There are 57 million Medicare enrollees in the U.S. 
A good 16% of the U.S. population is covered by Medicare, but it’s not just seniors who get to enroll. Younger Americans with disabilities are also eligible for coverage.

2. About 11 million people on Medicare are also covered by Medicaid.
Though Medicare offers a wide array of health benefits for seniors, it doesn’t pay for everything. In fact, about 20% of Medicare enrollees rely on Medicaid to pay for services Medicare won’t cover, such as nursing home care.

3. Net Medicare spending totaled $588 billion in 2016.
That’s about 15% of the federal budget. And that number is expected to rise to nearly 18% of the budget in about a decade’s time.

4. The standard Medicare Part B premium amount in 2017 is $134.
Many people assume that Medicare enrollees don’t pay a premium to get coverage, but it isn’t true at all. While Part A is generally free for most seniors, Part B comes at an estimated cost of $134 per month. That number may also be higher depending on your income, or lower if you were collecting Social Security as of earlier this year and had your Part B premiums deducted directly from your benefits.

5. Poor health can be 2.5 times as expensive for Medicare enrollees.
A 2014 report by the Kaiser Family Foundation (KFF) revealed that the typical Medicare enrollee who identified as being in poor health had out-of-pocket costs that totaled 2.5 times the amount healthier beneficiaries faced. This is just one reason it’s crucial for Medicare enrollees to capitalize on the program’s free preventative-care services. Catching medical issues early can often result in a world of savings.

6. A single hospital stay under Medicare can cost almost $4,500 out of pocket. 
Here’s some more discouraging news out of KFF. Back in 2010, Medicare enrollees who had a single hospital stay incurred $4,475, on average, in out-of-pocket costs.

7. Medicare enrollees 85 and older spend three times more on healthcare than those aged 65 to 7.  It’s probably not shocking news that older seniors spend more money on medical care than those a decade or more their junior. But what may be surprising is just how much those 85 and over wind up spending. According to KFF, in 2010, Medicare enrollees 85 and older spent close to $6,000 to cover their healthcare needs.

8. In 2015, 243 medical professionals were charged with Medicare fraud. It’s not uncommon for members of the medical establishment to engage in Medicare fraud, whether it’s in the form of inflating bills, performing (and charging for) unnecessary procedures, or billing for services that were never rendered. The good news, however, is that officials are getting better at identifying and prosecuting Medicare fraud. In fact, in 2007, the Medicare Fraud Strike Force was created to put a stop to fraudulent activity that eats away at the program’s limited financial resources.

9. More than 17 million Americans are enrolled in a Medicare Advantage plan. Medicare Advantage is an alternative to traditional Medicare that offers a number of key benefits, such as coverage for additional services (including dental and vision care) and limits on out-of-pocket spending. Between 1999 and 2016, 10 million Americans signed up for a Medicare Advantage plan, and enrollment now represents roughly 30% of the Medicare market on a whole.

10. A good 38% of Medicare funding comes from payroll taxes.
Nobody likes paying taxes, but without them, Medicare simply wouldn’t have enough money to stay afloat. Currently, the Medicare tax rate is 2.9% for most workers (which, for salaried employees, is split down the middle between worker and employer), but higher earners making more than $200,000 a year pay an additional 0.9%.

Getting educated about Medicare can help you make the most of this crucial health program. It pays to learn more about how Medicare works so that you can take full advantage when it’s your turn to start using those benefits.

A Message for My Children and Grandchildren

Slow Economic Growth Will Be Around For A Long Time

My Comments: I have my doubts that Hillary Clinton could have fixed this, but with 45 in the WH, there is virtually NO chance this problem will be fixed.

And the longer it takes to fix it, assuming it can be fixed, the very people who voted for 45 are going to be the ones first affected by our governments inability and unwillingness to find a remedy.

The headwinds faced by the next two generations are staggering. There is very little I can do to help those following in my footsteps to increase their chances of success. All I can do is write blog posts like this and hope there are a few people paying attention.

Steven Hansen on March 26, 2017

The Trump Administration has targeted 4% economic growth.

The consumer is tapped out, and trends show they cannot increase their contribution to GDP growth.

Does this mean the slack will be taken up by government and business spending?

The White House website reads:
To get the economy back on track, President Trump has outlined a bold plan to create 25 million new American jobs in the next decade and return to 4 percent annual economic growth

Elected officials have very shallow and misguided views of economic gearing. I have no problem with people setting goals pushing the limits of what MAY be possible. However, USA economic growth of 4% year-over-year is likely impossible without massive deficit spending. Economic dynamics are simply not there for the consumer segment of the economy to expand spending.

Life Cycle Spending

The life-cycle hypothesis says consumers save during earning years and dis-save when they retire. The logic of this hypothesis implies that retirees spend at the same rate as they did when they were working. This ain’t true. Good posts on this subject were published by the Richmond Fed.

One assertion:
Consumption may be lower for young people than the model predicts if they are credit constrained. They may wish to borrow against expected higher future earnings but can do so only if lenders extend the credit to them. Uncertainty may play a role as well. Since young individuals don’t know exactly what their future earnings potential will be, they may hesitate to accumulate a lot of debt for fear that they won’t be able to pay it off.

Uncertainty plays a role at the end of life as well. Since individuals do not know exactly how long they will live, it is hard for them to smoothly draw down their wealth throughout retirement. Retirees may also save more than predicted because they wish to leave some of their wealth to their descendants. Finally, the drop in consumption at the end of the life cycle could be due to “hyperbolic discounting.” Behavioral economists have advanced the idea that individuals have trouble planning for the future, which leads them to save too little to maintain their level of consumption after retirement.

No question millennials are saddled with significantly more education debt not faced by previous generations. There are now more than 75 million millennials, making it a larger demographic group than the boomers. Because our politicians have shifted the bulk of costs of university education to the students, millennials are now carrying $1.4T of student loans. Roughly this pulls $100 billion of spending from this group annually which is now used for student loan repayment. Just the effect of student loans are a 0.5% headwind on GDP.

Being a boomer, I get a front row seat to retirement issues. I have friends who thought they were going to get a pension after retirement. Most are getting less than expected due to cutbacks. The corporation I worked for never had pensions but actually a really good 401(k). I got to ride the markets where investing was brainless as it was real hard to lose. But just in time for many boomers retirement, there was the great market crash of 2008. Many thought their 401(k) or IRA was the engine for retirement income – the reality is that the retirement accounts themselves became part of retirement income. From my perspective, the majority of boomers are tapped out, with little or no ability to increase spending [and most likely are figuring out ways to shrink spending].

Saving or Lack Thereof

An even larger drag on the potential of ever seeing 4% growth comes from a historically low savings rate. Consider that consumers can only spend more if they make more money, borrow money, or save less. Median incomes have been stagnant for the last 17 years, and the saving rate is at the lowest level seen in the last 70 years. As far as borrowing money, where does the money come from to pay back the loan (if there is no additional income or little savings)?
• Before 2000, it was not uncommon to see 5% GDP growth. Since 2010, the USA was lucky to see 2.5% growth.
• Before 1980, consumers were saving over 10% of their income. Since 2000, savings have been averaging 5%.

Yet, the consumer portion of the economy has been growing (also meaning the business portion of the economy is contracting). The graph below plots disposable personal income portion of GDP. [note that consumer income and expenditures have historically grown at the same rate].

Note in the above graphic that there is significant variation from period to period. Most of this variation comes from changes in the savings rate from period to period. The graph below removes savings from disposable income.

 

 

 

 

 

 

Note since 2000 that the consumer segment of the economy stopped growing – but between 1967 and 2000, the consumer was the growth engine for the economy. To get to 4% economic growth, one would need to get more money into the hands of the consumer.

How Can the USA More Than Double the Rate of Growth?

“___________________________ [fill in the blank]. The real question is NOT whether the USA needs to see 4% growth, but how to improve the quality of life for the median American.”