Economic impact on you?

[aberkowitz]

Isn't that why the market is said to be ahead of the economy?

I don't get your response, I get Exits.

That line is a bit out of context- I was using that to respond to another point about how people invest.

Understand- only retail investors believe that the market is ahead of the economy. Retail investors live and die with the movement of the Dow Jones Average, and generally ignore the impacts on broader indexes like the Wilshire and the Russell small cap index. The S&P isn't a bad measure of overall stock performance, but I don't even think 50% of retail investors could tell you what it is comprised of and how it's put together!

Most economists will tell you that the stock market is a backdated measure of performance. Historically, the major stock market averages have been 6-12 months behind some of the major leading indicators of the direction of the economy which include consumer good orders, housing starts, claims for unemployment (which is different from the general unemployment number that we all know and love), and changes in major commodities and materials prices.

Go ahead and look at this recent downturn. Unemployment claims have been starting to go up since late last year into early this year (one reason democrats wanted to extend unemployment in the May stimulus package), materials prices started to go up in the early part of 2008 and then violently spiked over the summer, and housing starts have been down since early to mid-2007. All the while, the stock market hasn't really done much. It went down during the first quarter when Bear Stearns went out of business, but then rebounded in May to hit its 2008 high point (I'm using the S&P 500 as my main data point here). Commodities prices but huge pressure on the indexes in July, but they came back some in August. It wasn't until the end of September and into October that index levels came crashing down- off over 35% for the year with the vast majority of it coming in the last 5 weeks.

Now ask yourself- when did you feel like the US economy was heading towards a recession, or at the very least a pretty steep downturn. A few people may have said March 2007, more might have said the summer of 2007 when the housing markets collapsed, and probably almost all people would have said yes by March 2008 when Bear collapsed and banks were in trouble. All the while the S&P had barely moved off it's all time highs (within 5%). Can you really make the claim then that the stock market is a leading indicator of anything?

 

[Exit]

I am a believer in the random walk theory, so I dollar cost average in until retirement. I don't market time because I know I don't know when it will go up and down. Last time I looked last week I was at about -35% for the portfolio and I am still investing in a 401K fund which is buying stock mutual funds at a pretty low price with 6% company matching funds. The market will come back someday and as long as I don't need the money right now, I figure it will all come out in the wash. If the market doesn't come back, we will all be in soup lines and nothing much will matter anymore anyway. I am glad big businesses like your company could dodge this bullet due to their superior market knowledge. I am thinking of the market leading the economy in a longer term sense. I think the market has behaved so erratic and the declines have been so great and so fast, that the general economy is right now like a deer caught motionless in the headlights of an on-comming semi. I think the general economy will be be following the stock market. I just think it hasn't fully happened yet and according to theory it will take about six months to fully react. Then again, I am just an ignorant individual investor, so take it with a grain of salt.

 

[Exit]

Chicken and the Egg Economic Leadership

I had to leave yesterday during my posting, so I will try to explain what I think the 6-months lag in the economy versus the stock market means to me.

I think the stock market and economy are linked, and maybe which leads which is something like which came first, the chicken or the egg.

This thread, through the informal polling of Audioholics members, indicates that the economy has only just begun to affect some members and their businesses, and only a third or so at that. I think we will see contractions in consumer spending (that I have described in this thread on a personal level in previous posts) and business spending that have not yet shown up in the official economic indicators. I think this will be in response to the panic, turmoil and losses in the stock market already taken place, so hence the stock market leading the economy in this perspective.

I think, unless the economic recovery package is put in place so rapidly and effectively that it preempts the negative broad economy reaction, the downward spiral economic reaction will likely begin soon if it has not already. I think the extent of it will become evident in the next six months as theory suggests. I hope this will not happen and I will be wrong. After all, anything can happen in this economy, and you can not write-off Bernake, Paulson, Congress and the President quite yet.

I think the presidential candidates additional taxation policies, if implemented, will drain more money out of the economy at the wrong time and would be at best a substantial hindrance to the economic recovery plans. I think this will become evident when the new president gets in office and there may be a change to a “no new taxes” plan, but that is probably wishful thinking. From my readings, I believe there are, however, provisions in the current tax code that will effectively raise tax rates through bracket creep and the Alternative Minimum Tax (AMT) to name a couple. These types of hidden tax increases could be equally damaging to an economic recovery. I don’t have all the economic numbers to support my views, but I am already making substantial spending cuts and I am guessing I am not alone.

In response to the market and perceived economic conditions, we are cutting back for the holidays. Our families are going to a “pick a name” gift giving system whereby we end up giving only two or three gifts per family versus previous dozens. I expect other families will be doing this too. I think this is a delayed economic reaction to the leading stock market, but someone else may wait until the Christmas season sales numbers are posted after Christmas eve and say it is the economy leading the market. Hence the chicken and egg analogy. Maybe it depends on who is the insider and who is the outsider in any given situation.

 

[fredk]

Fascinating thread!

The economy has so far not impacted me in any way, but then I am extremely conservative financially. I pay my credit card off montly, and the only things I will ever buy on credit are a house or car. The last big vacation I went on was a once in a lifetime trip to Australia that I paid for with savings.

The future? That really depends on what is going on now. While it is true that there is a psychological component to any economic turn, up or down, there are things going on now that have nothing to do with what the average guy thinks about the economy.

Inter bank lending has ground to a halt because banks have realized that they no longer know how to assess lending risk (given the non-transparent nature of recent financial instruments).

Both the US government and people have racked up record debt. The recent sharp increase in bancrupcy rates is an indication that many are at and some are beyond their their ability to meet their debt obligations.

If interbank lending does not start up again the above will be a catastrophy because there will be no credit available when people need to re-finance debt.

Interbank lending will also affect the borrowing capacity of companies and can have negative consequences even for healthy companies.

Years ago I had a finance prof who took a couple of weeks to go through an example of how you can fail by being successful. It all has to do with cashflow; having enough cash in the sort term to fund your opperations. Companies that have great products in a great market can still go bust if they grow too fast.

The same think can happen if access to credit is cut off. Even if that good company dosn't go bust it effects hiring and capital spending which filters through to the rest of the economy.

Courtesy of the dirty thirties, everyone now knows that cutting off access to credit. Hence, countries worldwide are backstopping banks and offering additional loan and savings guarantees. The thing is, nobody knows what happens when you attempt to pump credit/money into the system when it has had a severe shock like that of the 30s.

If you want a glimps of what may lay ahead for the US, look back to the 80s in Canada when we had a housing bubble and out of control government debt. It took Canada almost 20 years to recover and get its house in order. And that was without the unusual financial crisis created by this sub-prime mess.

IMHO anyone who tells you they know whats going to happen is either misleading you or not as smart as they think. We are heading into truely uncharted waters.

Oh, and the Press? They are also a trailing indicator. You will know that we have hit bottom and are on the rise when everyone in the press is telling you that the world is about to end.

 

[fredk]

On access to healthcare:

In Canada, if you need access to a specialist, you will wait. If you need to see a doctor, regardless of how much you earn, you have good access.

Canada also delivers its healtcare at a much lower cost than the US and many other first world countries AND ITS GOVERNMENT RUN!

On socialism:
Socialist Canada now has the healthiest banks in the world thanks to socialist bank regulation. Sucks to be us dosn't it. Actually, we got lucky on this one. 10 years back there was a lot of pressure on the government of the day to follow the US lead on bank deregulation. That government decided that the average person on the street was very much against this deregulation and that it would cost too much political capital, so they backed off.

IMHO its all about balance. Give all the power to one group, be it communists or bankers and they will promptly abuse that power to their personal benefit. Its about human nature not political leanings.

I like to think we are striking a nice balance in Canada. If the economy tanks and I loose my job, I still have access to a doctor, and if I have a genuine medical emergency I will be in an emergency ward getting the care I need without having to worry about incurring crippling debt.

I see that taxes I pay for health care as insurance I can draw on should I really need it.

FWIW I am not a plolitical fanboy I have voted both Liberal and Conservative (democart/republican). I have seen competent and incompetent politicians in both camps.

It was the tax raising conservatives that set the wheels in motion for our current good economic standing. Without that additional tax revenue, we would never have been able to eleminate yearly deficits (additional debt each year). It was the next liberal government that did the hacking and slashing to government spending needed to reduce spending to more reasonable levels (to get us off the high tax addiction), though they did steal the basic ideas directly from the conservative play book. In this case it was all about good execution.

I have also seen a conervative govenment (Harris conservatives in Ontario) I voted for fail miserably because they could not execute: they were incompetent.

I am currently worried that the present conservative government has blindly cut taxes before they reduced government debt, to appease their core constituents and buy undecided votes. I am afraid they may have put us right back where we were in the early 80s.

Competence and incompetence do not have party afiliations.

 

[Exit]

New conservatism?

I guess I never thought about out-of-the-USA audioholics readers and what you think about the election and all the economic turmoil here. I wonder how big a percentage of audioholics you represent here? I think it is great you find the thread interesting, because isn’t that the reason we invest our time writing it? – to be interesting and make you think about perspectives you might not otherwise have thought. I think people really have their minds set about politics before they read this thread and most likely no one will change their ideas because of something said here. It is however nice to find a place to voice ideas and concerns about this economy where you can get an intelligent back-and-forth dialog going on.

On a side note, is anyone up on what US financial options are federally guaranteed. I almost exclusively have been putting money in stock mutual funds for so many years that I am not well informed on safer alternatives. I know credit union and bank accounts are insured up to $100,000, or maybe I heard it was revised to $250,000. What I was wondering if a Credit Union purchased CD is federally guaranteed. I have got one which is a year duration that started in July at 3+ percent APR and I was thinking about cashing it in. I want more short term liquidity for the next year, so I was going to take the penalty hit and put it in a local credit union savings account. I heard a commercial for a bank on the local radio saying it was paying 5+ percent APR so the hit may not be that big if you can put it into an account with that kind of APR. I was also thinking that a Federal Guarantee may not guarantee you can get your money right now if there is a bigger problem in the financial system. I think I am more comfortable with a local credit union than most other places right now. It probably is a little too conservative, but I am feeling pretty conservative right now with meeting my cash flow at tax time.

 

[Exit]

A slender thread.

I guess I will go to the credit union tomorrow and start asking questions and maybe start making changes. Mostly I posted this to keep the thread alive in the new posts category for a while longer to get more inputs.

The other audioholics thread "Tax Plans",

http://forums.audioholics.com/forums/showthread.php?p=472513#post472513

is shorter, but maybe has more views from the upper income bracket perspective on how proposed tax increases might impact them. It helps give balance to the issues and reinforces my feeling that maybe the best thing is to not raise taxes on anybody right now, if that were to be a choice in the upcomming election. It would be great if everyone were to send this message through the initernet, "It's the economy stupid" - No new taxes on anybody right now!

 

[Exit]

Got my credit union answers from a coworker and the internet, so I am good on that.

 

[Exit]

Economic Bright Side? No Pun Intended.

There may be a bright side to this economy. I just read a blurb that says retailers are getting un-nerved by the stock market and economy and are slashing the prices on high-end HDTVs all the way down under $1000. Don't know if it is true or not, but if you have the money and you want one, it may pay to start shopping around. If anyone finds out it is true, tip us off.

 

[Davemcc]

In Canada, if you need access to a specialist, you will wait.

My doctor just scheduled me for another test...next April.
That's just for a test, not even to see a specialist. Depending on the results, it may be a year before I get to see a specialist.

Canada also delivers its healthcare at a much lower cost than the US and many other first world countries AND ITS GOVERNMENT RUN!

No really, can you tell? Maybe it's just cheaper because people die waiting for treatment, not because it's more efficient. Any Americans want in on this kind of system?