Potential themes for 2013
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.)
In no particular order:
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.
2. The debt ceiling will be raised.
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.)
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.
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.
6. The student loan bubble may pop or the government may enact a bailout this year. The debt is about $1 trillion and delinquency rates are on the rise. The popping of this bubble will be ugly, but it might promote the restructuring of tuition increases. The reasoning is simple: Student loans require little to no underwriting, so debt is abundant and anyone can take a loan. Consequently, the cost of education rises unhindered. Just like housing valuations burst when the mortgage market tanked, so could education costs when student loan supply slows down. This could be a good thing in the long term, especially for the majority of families that can no longer afford the average cost of a four-year college education without taking out a loan.
7. Companies will continue to make things that improve or meet our quality of life and return money to investors commensurate with the risk they are taking. When those returns come will be difficult to determine, while the risk of partial or total loss will remain if companies don’t meet expectations. This has never changed in the history of modern capital markets.
8. There will likely be a new manufactured economic crisis that the media and politicians will exploit and some folks will overreact to, subsequently making very bad decisions with their money.
9. Some asset classes will rise, some will fall. Diversification will still be the middle ground, which works for most.
10. The world will not end.
I hope I’m right about at least #10.
Your turn to opine.
Michael Dubis is a fee-only certified financial planner and president of Michael A. Dubis Financial Planning, LLC. He is also an adjunct lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at email@example.com. This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this website or that of the author’s. Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio's performance are based on historical data and one should not assume that this performance will continue in the future. THIS COMMUNICIATION MAY NOT BE USED BY YOU AS A RELIANCE OPINION WITH RESPECT TO ANY FEDERAL TAX ISSUE DISCUSSED HEREIN AND IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY YOU FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON YOU BY THE INTERNAL REVENUE SERVICE.
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