Dec 16, 201301:00 PMFinancial Perspectives
with Michael Dubis, CFP
How did I do on my predictions for 2013?
(page 1 of 2)
At the beginning of the year, I wrote a piece titled “Potential themes for 2013.”
It’s very easy for people to make predictions about the future, especially when they don’t look back to see how they did.
I don’t want to be guilty of this because it’s good to learn how and why our insight may have failed or succeeded and grow from there. Below is a recap of the potential themes I wrote about earlier this year (in italics), along with a report card on how I did.
I prefer to work with what we know and course-correct when life happens, but there seems some logic behind the following potential themes for 2013.
(Disclaimer: I’m not good at making predictions; the reality is that no one successfully predicts anything on a consistent basis, let alone is able to then profit from it. Most folks who are perceived as smart are often just lucky or have said the same thing for five, 10, or 20 years and were finally able to be right. As they say, “Being early is the same as being wrong.” Feel free to agree or disagree and opine intelligently why.)
Probably my best theme all year. Glad I kicked off my themes with the above disclaimer!
1. As long as interest rates stay low, investors will continue to look for yield and higher returns elsewhere (right or wrong), which means an ongoing bid-up of the prices of riskier asset classes.
Pretty much spot on from a theme standpoint, although from May through most of the summer, interest rates shot up significantly and we temporarily saw a mass exit of the bond market. The search for yield resumed in the fall and will likely continue for the sole reason that income investors have few options (unfortunately).
Demographically speaking, there’s simply a huge demand for income as baby boomers continue to retire en masse while interest rates are still at historic lows. I don’t see that changing anytime soon.
And as long as the Fed can maintain the policy of quantitative easing (which tends to force interest rates downward), many investors will unfortunately continue to chase yield.
2. The debt ceiling will be raised.
This was too easy. When approximately 35% to 45% of the U.S. budget is financed, not raising the debt ceiling would have led to a serious global economic and market drop.
3. The U.S. will not become Greece. Greece has a low tax participation rate and can’t print its own currency. The U.S. has a high tax participation rate and can print its own money. The U.S. alone makes up about 40% of the world’s equity markets; Greece makes up less than 2%. The U.S. will not default on its debt while it can currently honor its bills. (I did not say the U.S. won’t inflate, though, nor did I say the U.S. won’t have difficulty honoring its bills in real terms, because those scenarios are entirely likely in the long term.)
Another softball. It seems a distant memory, but about a year ago the media were running wild suggesting that the U.S. economy was similar to that of Greece. Silly.
4. The U.S. will continue to lose pole position to other countries. This is not meant to be anti-U.S. sentiment. I’m a strong optimist about this country’s future. Rather, it’s simply a mathematical reality considering how our GDP is used on taxing, spending, and investing. Because of its high debt levels and need for massive deleveraging and spending cuts, the U.S. will have less capital to invest in productive enterprises and consequently will experience lower growth compared to other countries that don’t have our levels of debt deleveraging. Other countries without as much debt will have the opportunity to grow their countries relative to the U.S. and other indebted nations.
The economy in the U.S. was at stall speed if you measure our measly GDP and CPI, whereas many emerging and developed economies exceeded ours.
But our stock market was essentially the global return leader.
I maintain that debt is the ultimate long-term economic constraint for growth, and as economies with less need to pay down debt can use their resources for investment, they will continue to gain global market share.
I guess I’ll need longer than one year to see if this plays out.
5. I don’t think this will happen, but if the mortgage deduction is eliminated, mortgage rates may either stay the same or even fall. Investors of mortgages offer a certain interest rate for a certain supply-and-demand balance of mortgages. If the mortgage deduction is eliminated, all other market conditions being equal, there will be less demand for mortgage refinancing and home purchases. If they wish to continue to put money in this type of debt, investors will offer lower yields to match lower demand. One of the largest buyers of mortgages is the Fed.
This didn’t happen.
Grade: A, for suggesting it won’t happen