If It Feels Bad, Do It!

“I’m earning nothing on my savings account. I think I need to get more into stocks.”

“My next-door neighbor made a killing on Facebook and Apple. I’ve missed the boat and think it’s time for me to get involved.”

“How am I supposed to retire on the 2.5% coupon my bonds are paying?”

How are you feeling about your investments these days? Are you upset because you haven’t quite kept up with your friends? Are you emboldened to take more risk following such consistently positive market returns of late? Or do you remain distrustful of the stock market following the tumultuous not-too-distant past?

Emotion is every investor’s constant foe. It’s hard to add to or even maintain positions when the market is tanking. Conversely, it’s also hard to sell investments that are “working.” Accordingly, my rule of thumb “Do what feels bad” usually seems to produce the best investment results over time. This mantra is a short way of saying that it’s never best to get too comfortable in your views, especially when they become the overwhelming consensus. When investor sentiment becomes universally positive or negative, it very often means that the consensus is wrong. Therefore, it always pays to question the conventional wisdom and to think outside the box.

Today, a consensus is beginning to emerge about the direction of the US economy. Many believe that we are finally reaching the point of escape velocity in the US even as other global economies continue to struggle or weaken. Most economists now believe that US economic growth is set to accelerate next year to perhaps 3% or more. So, as a good contrarian should, I keep asking myself the same question: If we do indeed reach escape velocity of 3%+ next year, what has been required to finally get us to that point?

Those of you who have seen me speak have probably heard me say that I could shove a trillion dollars down the throat of a dead horse and get him to take a lap around the track. Well, I keep coming back to this nagging concern. If things are so darn great, why has the economy required so much assistance?

As we enter the fifth year of the economic recovery, more and more stimulants have been required to perpetuate the lackluster growth we’ve enjoyed. Will $65-a-barrel oil finally be the one stimulant that gets us to escape velocity? I certainly hope so. But if not, where does that leave us? As you read the following list, try to imagine the economy’s reaction when/if some or all of these stimulants are removed.

  • A doubling (from $9 trillion to $18 trillion) in gross federal government debt outstanding since the beginning of the recession (December, 2007)
  • A $3.5 trillion increase in the size of the Fed’s balance sheet since the beginning of the recession
  • A 200%+ increase in stock prices (as measured by the S&P 500 since the low in March 2009)
  • A drop in the consumer savings rate to today’s level of around 5% from the post-war average of about 8.8%.
  • The placement of Freddie Mac and Fannie Mae into conservatorship, effectively providing a government guarantee on the large majority of new and existing mortgages
  • A yield on the 10-year Treasury bond of 2.25% (and mortgage rates as low at 3.375%)
  • A $40 plunge in the price of oil over the past six months to five year lows

The latest stimulant, falling oil prices, is being attributed to a combination of global economic growth concerns (outside the US), a surge in supply (especially inside the US), conservation initiatives (likely only a small effect), and hedge-fund speculation. Most pundits are saying the surge in supply is most responsible. In any event, everyone is excited because lower energy prices can add hundreds of dollars per year ($750 per average household, according to HIS Global Insight) to consumer disposable income. And the really great thing is that everyone benefits! (facetiousness intended – there are obviously many people/entities who suffer from lower energy prices, including individuals looking for a job within the energy industry).

The moral of the story is that it pays to question the consensus opinion. Is it possible that the plunge in oil and interest rates is telling us something completely different? Is it likely that the remedy to a massive financial crisis and debt bubble is as simple as global quantitative easing by the world’s central banks? Is it likely that the global experiment called “Quantitative Easing” will be a complete success without any negative side effects? If not, what will be the effect on growth if and when the aforementioned stimulants are removed. I’m just sayin’… What would feel bad right now in your investment world? Do it!

Peace,
Michael