Here are two links to very interesting articles on the web this weekend. The first is from Mr Rob Peebles of PrudentBear doing his Market Summary on August 22. The second is a Reuters report of a speech given by San Francisco Fed President Robert Parry on August 21:
I Have No Choice
Fed Says It's Nowhere Near Raising Rates
For the relevant (for our purposes) part of Mr Peebles' article, scroll down to the subhead "A shortage of choices". Read the quote from the fairly typical American in her early 50s. "I don’t have a choice but to invest. ...If I don’t, I won’t be able to retire. I’m not necessarily perfectly at peace with it, but I feel like I don’t have any choice but to be in the market.”
Mr Peebles points out, quite rightly, that this is an amazing statement. He then goes on to explain with both perception and wit WHY it is an amazing statement. By "market", of course, the lady quoted above means STOCK market. In the context of the past three and a half years on US stock markets, the statement that one HAS to be in the market in order to retire is especially ironic. It is fairly common knowledge that US corporate pension plans are now grossly underfunded and that they got that way, in large part, through their tenacity in "being in the market" all the way down from their 2000 peaks.
Why do so many people in the US, and elsewhere, cling to the assertion that they HAVE TO be in the market? One reason is a very old one. They want to get the value of their portfolios back to where they were (or at least much closer to where they were) in the heady days of the turn of the century. Another reason is that they cannot find a way to make a positive (let alone a decent) rate of return in the traditional areas of actual saving, as opposed to "investment".
This is where the second link comes in. As everyone knows, the Fed dragged its controlling interest rates down from 6.5% to 1.75% in 2001, to 1.25% in December 2002, and to their present level of 1.00% in June 2003. Historically, stock markets and interest rates go in opposite directions. When stock markets were falling, interest rates were rising. This gave a positive rate of return to anyone who did not want to go on throwing "good" money after "bad" into the stock markets but preferred to stick it in a savings account or in a money market fund.
Every rule has an exception, and in the US the two big exceptions to this rule have been in the 1930s, especially the early 1930s, and in the period since the end of 2000. In the 1930s, stock markets actually fluctuated quite widely but interest rates went down and stayed down. This was the era of the depression, of course, when cash, not yet having been debauched by seven decades of rampant deficit spending, was still king. The problem for the Fed in the 1930s was that no matter how low interest rates went, there was no demand, outside government, for loans. The Fed spent the entire decade pushing on a string.
Compare this with the era since 2000. Interest rates have been hauled down even more savagely than they were in the 1930s. The stock markets have been fluctuating while maintaining a downward path, but with the exception of the Nasdaq, the carnage has not (yet) been anything like as severe. The MAJOR difference is in the appetite for borrowing. In the 1930s, it was all but eliminated outside government. Since 2000, it has continued to increase, and the private borrowing binge has now been ramped up by a government dive into deficits of historically unprecedented magnitude.
On August 21, the Treasury reported their "debt to the penny" at $US 6.7865 TRILLION. This was up $US 12 Billion on the day, up $US 35 Billion since the start of August, and $US 558 Billion since the start of fiscal 2003. The last number, the increase in Treasury debt over fiscal 2003 so far, has never been approached in a FULL fiscal year in the history of the US.
Now, the President of the San Francisco Fed, Mr Robert Parry (see the link above) is assuring all and sundry that the Fed is "nowhere near raising rates". Why? Well, according to Mr Parry, the main reason is that US inflation remains "low". Please read the preceding paragraph again.
Ever since the August 12 FOMC meeting at which they did nothing, the Fed has been bending over backwards to assure everyone that they are NOT going to start raising rates even though the economy is "recovering". Let's have a look at this "recovery", using the US government's own figures.
On August 22, the US Commerce Department released its index of leading indicators:
What Rose?
What Fell?
On top of that, almost the entire much vaunted "rise" in the US second quarter GDP figures came from housing and mortgage related financial activities and from government (DEFICIT) spending.
Every week, the REAL picture of the US economy gets worse. Every week, more and more people succumb to the conviction that they HAVE to be in the markets, there's no other way to remain "solvent" and to provide for the future. Every week, more and more highly placed people at the Fed rush out to assure everyone that the recovery is HERE and that they have NO plans to raise interest rates.
Nobody in the US, either in the public or private sector, can afford higher interest rates. Nobody in the US, either in the public or private sector, can afford to "compromise" their lifestyle by curtailing their borrowing. Nobody in the US, either in the public or private sector, can conceive of anything so esoteric as "savings", after all, there's no return on those.
And so, everyone continues to borrow and to "invest". While refinancing has died in the US, new mortgages are burgeoning and people are turning away from fixed rate mortgages towards Adjustable Rate Mortgages (ARMs) at lower rates. In Australia, first time home owners have been priced out of the market despite the $A 7000 grant which the government continues to offer. What is going on right now is a renovation boom to end all renovation booms. US stock markets are still rallying with the Dow having hit a new 2003 high this week and the high-tech sectors sporting annual gains of 50% plus. And the $US hit a four month high on August 22. Here in Australia, although the market has been more subdued, the past month or so has seen the resurrection of the "day trader".
Market interest rates are rising inexorably. Americans (and Aussies) have seen this and are scrambling to borrow while they still can. A patina of "prosperity" is stretched very thinly indeed on top of a vast and bottomless ocean of red ink.
To say that one has "no choice" but to be in the market in the present situation is the verbal equivalent of being frozen in the headlights of an approaching train. The REAL choice is to get off the track or to be obliterated. That's why Gold, and silver, and Gold stocks, are proving so resilient to the rising markets, the rising expectations, and even the rising Dollar.