No Country For Old Men.

May 27, 2013

"You never know what worse luck your bad luck has saved you from."
Cormac McCarthy, No Country for Old Men

. . .
Growing old? Happens. You can no more outrun age than prevent the moon from rising.
If you're lucky, age is accompanied by an inverse relationship in the amount of risk you must assume. The older one becomes, the fewer chances one must take. Serves to make life more comfortable, at a time when comfort is due.
Bloomberg recently ran a piece on an 80-year old Japanese man who scaled Mt. Everest. The exception, of course. Many of the seniors I know refuse to scale the steps to our offices.
So, how do you think seniors have felt these last few years as the Fed drove down interest rates and so the corresponding levels of yield on their bonds and fixed income instruments? Probably quite the punch to the gut, considering that the Fed's race to the bottom was preceded by a semi-catastrophic stock drop.
Now? Seniors face the dilemma of seeing rates rise. Which means that the value of their portfolios will drop. If they're lucky enough to own the bonds and hold till maturity, no big deal. But, if they own mutual funds or other bond-centric vehicles, the coming interest rate phoenix could represent yet another broadside to balance sheets.
The United States, under Fed Chairman Ben Bernanke, has been no country for old men.
Like Cormac McCarthy's novel (adapted for the silver screen by the Coen Brothers), older Americans may have expected a softly sloping entrance into their golden years, yet volatility awaits unexpectedly around every corner. Blowing randomly through their lives, like tumbleweeds in a western town.
Yet, we've seen this movie before. Consider the early nineties. We were just stepping out of the 1990 recession. Stocks proceeded to rise, headily, for the next decade, even amidst a nothing-special economic backdrop.
During the nineties, dividend-paying stocks rose 460 percent. That, despite Timothy McVeigh's domestic terrorism, a brutal war in Yugoslavia, currency crises in Mexico, Russia and Asia, and the impeachment proceedings against a sitting American president.
Perhaps we could learn more by considering the decade's stock-market steroids. Those variables that sent equities into our hearts before sending them into the stratosphere.
Technology, and all of the decade's computer-driven productivity enhancements exploded as the internet entered our homes and offices, permanently changing the means by which we accessed and shared information. Palm Pilots were affixed to people's belts, much like cell phones would soon be to their ears.
Wall Street's new financial instruments were widely adopted, enabling companies and investors alike to spread risk like marmalade.
The decade was the beneficiary of relatively tame inflation, and an activist Fed chairman who was not afraid to let bubbles expand.
If you close one eye and squint the other hard enough, the current decade resembles the nineties. True, unemployment and underemployment are much worse now. And, one could argue that the team in the White House at that time was more free-trade and business friendly.
But, five years into this rally, most investors still refuse to believe. Still refuse to participate. Those older investors, remaining entrenched in conservative, low-yielding fixed income investments, refuse to reallocate to equities in the least. Because this thing has to end soon, right?
Yet, just when you thought the market's sprint may soon end, no less an institution than the Fed's Bank of New York hints otherwise.
A recent report by a couple of New York Fed economists (here) suggests that the hidden driver behind the current rally is the expansion of the market's multiple. In other words, while the marginal stock market values are back to their historical highs, the real, inflation-adjusted values remain well below.
The Fed economists completed a survey of other Fed banks, analyzing 29 models that forecast market multiple movements. These results? The 29 models they looked at revealed that this market, as the price-to-earnings multiple continues to expand, has room to run. In fact, most of the models they considered show that the S&P 500 may achieve historically high returns over the next five years.
This rally has proven to be durable. And the equity risk premium (the difference between risk-free Treasury yields and the stock market's dividend) remains at record highs. In other words, why would you invest in risk-free Treasury bonds when you can get more for your money in dividend-paying stocks? These record-low yields and current dividend levels should, by all accounts, extend into the foreseeable future. Which would likely serve to extend this bull market into the foreseeable future.
So, while everyone blames this market's continuing rise on the Fed's evil money printing plot (and it sure has contributed), the real story here may be an expansion in the market's P/E multiple.
Or, so says the Fed.
But, if the rally persists long enough for CEOs to find their collective risk-taking grooves and begin reinvesting in their companies, rehiring, and generally spending the massive amounts of cash in the coffers, then this market would almost certainly move higher.
All the while, most investors want to remain conservative because of the continuing signs of potential weakness. But remember, investing is not about what happens today, or what happened yesterday. Investing is about what could happen in the future.
Yes, much of the economic data has been weak. Or, barely good enough. But, perhaps the market is predicting good things ahead, up around the next curve?
All of which leads me back to my original point. Can seniors survive in this low-yield guessing game the Fed is forcing them to play? Dare they reallocate a bit of their nest eggs into the alluring attraction of equity market returns? Dare they too cast their bets on what lay ahead?
"And now, in my old age, don't set me aside. Don't abandon me when my strength is failing." -Psalms 71:9
And yet, in an effort to jumpstart the economy, and make younger investors feel wealthier as markets rise, that must be exactly how the Fed's efforts have left seniors feeling. Abandoned. Left to meander aimlessly across this desolate, low-yield landscape.
One man's meat is another man's poison. Perhaps easier swallowed when spooned out by your government, but poison nonetheless.

Securities offered through Dempsey Lord Smith LLC – Dempsey Lord Smith LLC, Rome, GA Member FINRA / SIPC / MSRB.

Advisory Services offered through Dempsey Lord Smith, LLC, an SEC Registered Investment Advisor. Clearing through and accounts held at Charles Schwab & Co., Inc.

Dempsey Lord Smith, LLC nor Hyde Park Wealth Advisors LLC provides tax or legal advice and you should consult your accountant and/or attorney if considering an investment of this type. Hyde Park Wealth Advisors LLC is not controlled by or a subsidiary of Dempsey Lord Smith LLC. Investing in Alternative Investments come with a variety of risks that could result in a complete loss of principal investment.

Alternative Investments offered as private placement securities are offered only to qualified accredited investors via confidential private placement memorandum. Income and returns are not guaranteed and there are no assurances investments will meet their stated objectives.

© 2024 Hyde Park Wealth Advisors. All Rights Reserved