The Fiscal Cliff, and Other Dangers

Some people have recently accused me of being a “Perma-Bear”. For those that are not familiar with that term, it generally refers to someone that is perennially negative about the prospects for the stock market (or consistently “bearish”). As it has been used to describe me, this could not be further from the truth. I consider myself more of a “realist”.

Over the past several months, my commentaries have provided backdrop for my prognostications. But don’t be fooled into thinking I am either alone in my beliefs, or that my bearish stance has been formulated on my own. There is a strong body of evidence, and a litany of respected industry leaders who are in agreement that trouble is on the horizon.

First Things First
Let’s first get some things out of the way. The stock market can be a complicated beast. I liken it to a young child with behavioral problems. You know what is expected from the child, and you typically know how they will react to typical stressors like hunger, fatigue, and boredom.  But you also never know at any given time if you are going to witness a little whimper, or a major meltdown. The same can be seen with the stock market.

You know intuitively that in the face of economic pressures, that the stock market should show signs of cracking. But unlike that fragile child, the stock market has the uncanny ability to hang on in the face of economic challenges well beyond what would typically be expected. Likewise, the market will also tend to overshoot expectations to the upside as well. Witness the late 90’s, when it seemed to clear to everyone that there was absolutely no reason for the stock market to be trading at such lofty prices. Yet it continued to march forward, presumably because nobody wanted to jump off that gravy train and sell out. But when the masses came to their senses, the aftermath was extreme.

The point is, despite that fact that the economy is at one of the most fragile points we have seen since WWII, the stock market continues to forge ahead. The only explanation we can muster is that there is so much hope (and prayer) that the Fed will pull (another) rabbit out of its hat, that investors are simply hanging on to the bitter end with their eyes closed. It sort of reminds me of the song lyrics made famous in the 60’s by Dusty Springfield…”Wishin' and hopin' and thinkin' and prayin'”. And we will continue to forge ahead until all hopes have been dashed and the Fed runs out of options. Now, time is the biggest question.

Facing the Headwinds
Where exactly does one start when looking at the headwinds facing the current economic “recovery”? For the moment, I am going to forego discussion of Europe and focus strictly on the U.S. pressures. The world is a complex place, and it is no longer simple enough to look at world economies within a vacuum. But to keep this commentary to a manageable level, let’s just focus on domestic issues for now.

Unemployment
Last week’s employment announcement of 163,000 new jobs in July was certainly a positive surprise, as the trend had been significantly less in the preceding several months. But what was less talked about was the fact that unemployment actually ticked back up to 8.3%. Essentially, even with a positive “surprise” in job growth, the economy is still not creating enough new jobs to keep pace with population growth. Even worse, if we did not have so many people leaving the “active workforce” through layoffs, forced retirement, and lack of work, the stated unemployment rate would be even higher. At the current rate, it would take more than 10 years to get back to any sort of “typical” unemployment rate. It is estimated that we need to see job growth of around 200,000+ per month, every month, to make a dent in the unemployment rate, a figure that seems well out of reach at this point.

To See Associated Unemployment Chart, Click Here

Maybe the most alarming statistic is the average duration of unemployment benefits of those currently receiving benefits. The previous all-time high (post-WWII) average duration for benefits was 21 weeks, back in 1983, with the average duration since 1950 hovering around 14 weeks. The current duration is…38.8 weeks. And this is DOWN from 41 weeks just last year! The implication is that we have more people on unemployment than almost any other time in history, receiving benefits for nearly twice as long as ever before. 

GDP

A few weeks ago, Q2 GDP (essentially the value of all final revenues in the U.S.) estimated numbers were release. The estimate was for growth of just 1.5% (annualized). This comes on the heels of 2.0% growth in Q1. Clearly, the recovery that we had been experiencing since 2009 has fizzled out. For most people that don’t follow GDP numbers, we’ll put some perspective to it. Since 1945, annual GDP growth has averaged around 3.2%. The trailing 10-year average GDP growth is 1.7% (2003-today), and we currently stand at 1.5% growth.

To See Associated GDP Chart, Click Here

What this suggests is that there is little impetus for an improvement in the aforementioned unemployment rate, since both improvements in unemployment and GDP have slowed considerably at the same time.

The National Debt, The Fiscal Cliff, and Interest Rates
There is a lot of media fixation these days on the so-called “Fiscal Cliff”, a series of Bush-era tax cuts set to expire at year-end, while the government is simultaneously preparing for spending cuts agreed to in last year’s debt-ceiling agreement. Though it goes without saying that these moves could have serious and widespread implications for the economy, there is a much larger problem concerning our national debt that is creating its own “cliff”, so to speak.

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Robert Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with an added focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.