Last week in the Wall Street Journal I read that several municipalities are considering filing for bankruptcy because they are cash strapped and can’t meet their bond payments. The following chart highlights the fact that from 1970 through 2008 (adjusted for inflation) U.S. government spending has risen 221% versus 32% for median household incomes.
Instead of drawing from the latest headlines on the current state of the economy or stock market, I am providing some longer term perspectives from professionals whom I admire.
“Come 2010, only 16 cents of every dollar of global economic growth will come from the U.S., nearly half the level of 1980. While GDP is tied to the American consumer, S&P profits are boosted just as much by corporate spending and overseas growth.”
– Kopin Tan, Barron’s, December 19, 2009
“Advocates of the new normal cite the large U.S. indebtedness as one of the factors behind slow future growth. However, there’s a vast cache of unused purchasing power in the rapidly growing middle classes in emerging economies, especially India and China. These rising middle classes represent the largest untapped markets the world has ever known and will drive demand in the next decade. And they want quality goods and brand names that are produced by firms based in the U.S.”
– Jeremy J. Siegel, Kiplinger’s Personal Finance, December 2009
Greece is a member of the European Union (EU) (i.e. an economic and political union of 27 European nations). Greece’s population and economy are both very small in comparison to the entire union of nations; however, it is having a dramatic impact on all EU nations.
Fears of the Greek government not being able to pay off its debts is rooted in the fact that this country has a history of out of control spending, and the inability to get its financial house in order. This has resulted in investors worldwide concerned that Greece can only meet its obligations via other EU nations bailing them out. Unfortunately, Germany, France and other EU members’ are struggling from the recession. As such, they are concerned that if they guarantee or take on Greece’s obligations, then other economically challenged EU members will consider doing the same.
Do emotions affect our investment decisions? Yes! Ironically, we react differently to declining stock prices as compared to declining home values.
Almost everyone’s home has decreased in value over the last two years. However, we don’t receive monthly statements showing the decreased value. Also, it can be a cumbersome process to list our home, eventually sell it, and move, versus simply making a phone call or placing sell orders online. Most importantly, I’ve heard many clients state, “I would be crazy to sell my house in this environment.”
This same thought process may not transfer over to our investments. It is much easier to exert what we consider “control” in an emotional period by moving all or some of our investments to cash. It gives us sense of relief in the short-term and very little effort is needed when compared to the sale of a house.
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