Market Philosophy

[MC2]

What I'm saying is a lot of economic growth has been funded by central banks and govt debt…. Just in the last 14 years the economy has received stratospheric funding through debt….. Then the 2017 20% corp tax cut which was significantly funded by federal debt yet. Then we have trillions of dollars of covid relief... again all funded by more government debt.
…Growth significantly funded by government debt. .

Not to interrupt your narrative, but the budget deficit is falling fast, and is $571 billion dollars smaller in the first 5 months of fiscal ‘22 compared to fiscal ‘21. On track to see the deficit fall by $1 Trillion this year.

Monthly Budget Review: February 2022

The federal budget deficit was $475 billion in the first five months of fiscal year 2022, CBO estimates. That amount is less than deficits recorded during the same period in the two prior fiscal years.

www.cbo.gov

Also, what’s a better investment than owning tiny parts of the most profitable companies in the world? Shoving the money under a mattress?

 

[Andy_ROC]

Not to interrupt your narrative, but the budget deficit is falling fast, and is $571 billion dollars smaller in the first 5 months of fiscal ‘22 compared to fiscal ‘21. On track to see the deficit fall by $1 Trillion this year.

Monthly Budget Review: February 2022

The federal budget deficit was $475 billion in the first five months of fiscal year 2022, CBO estimates. That amount is less than deficits recorded during the same period in the two prior fiscal years.

www.cbo.gov

Also, what’s a better investment than owning tiny parts of the most profitable companies in the world? Shoving the money under a mattress?

I would expect the deficit to be dropping compared to 2020 and 2021. Covid stimulus reduction. But lets not confuse deficit with debt.

 

[Harvey]

What I'm saying is a lot of economic growth has been funded by central banks and govt debt around the world and I believe it puts the long term health and growth of the economy at risk. Look at debt to GDP ratio of the USA over time in the chart I posted. Just in the last 14 years the economy has received stratospheric funding through debt. Huge sums of money injected by the Fed to recover from 2008. Then the 2017 20% corp tax cut which was significantly funded by federal debt yet. Then we have trillions of dollars of covid relief... again all funded by more government debt.

Yes the SP500 value is reflective of decent earnings growth yet the PE is still near historical highs. Growth significantly funded by government debt. What happens to earnings and the market when the central banks stop pumping money into the economy? I just don't think a lot of people are mentally or financially prepared for that day of reckoning.

The only thing saving us now from a serious credit crisis are low interest rates. If/when interest rates go up (and I don't recall the number but I read it somewhere) the total of all the US government tax collections won't be enough to service the federal debt. Could be a pretty bumpy ride and why it's good to diversify. Personally I think paying down your home is never a bad thing to do. It's a real asset you own and its value isn't likely to vaporize like paper in the next financial crisis. Most importantly it still puts a roof over your head and the more you own the less likely some bank can take it a way if you hit hard times.

So if all of that comes to pass exactly as predicted where should one have their money?

Not not that I'll do anything differently but I'm curious as to what you do differently if doom is real.

I'm not doubting what you're saying I just don't know how you would respond to it. I'm not buying gold.

 

[tirolski]

Personally I think paying down your home is never a bad thing to do. It's a real asset you own and its value isn't likely to vaporize like paper in the next financial crisis. Most importantly it still puts a roof over your head and the more you own the less likely some bank can take it a way if you hit hard times.

If ya don’t pay yer taxes on yer home ya won’t own it very long either, just saying.

 

[jasonwx]

Picked a hell of a year to retire

 

[DomB]

Not to interrupt your narrative, but the budget deficit is falling fast, and is $571 billion dollars smaller in the first 5 months of fiscal ‘22 compared to fiscal ‘21. On track to see the deficit fall by $1 Trillion this year.

Monthly Budget Review: February 2022

The federal budget deficit was $475 billion in the first five months of fiscal year 2022, CBO estimates. That amount is less than deficits recorded during the same period in the two prior fiscal years.

www.cbo.gov

Also, what’s a better investment than owning tiny parts of the most profitable companies in the world? Shoving the money under a mattress?

Budget deficits and public debt levels are not quite apples to apples. You would need deficit levels to fall for a long time (and then turn negative - i.e. balanced budgets) to have a shot at lowering debt.

I am in the camp of never stop investing if you can, but I also believe that Andy has a valid point. There are periods of high inflation where stock market growth is lower, which I think is what he is pointing to. So we may not be getting the 10.5% historical return over the next ten years.

Then again, we may, and so for that and other reasons I keep investing when I can.

Also, someone was discussing what to do for the risk free return on paying a mortgage versus investing. The logic almost always says invest. In a handful of times I had 'windfalls' (never lucky enough to have an inheritance : ) ), some of those times, I split the money between paying down debt and investing. It isn't the logical choice but it does have the peace-of-mind factor.

 

[DomB]

So if all of that comes to pass exactly as predicted where should one have their money?

Not not that I'll do anything differently but I'm curious as to what you do differently if doom is real.

I'm not doubting what you're saying I just don't know how you would respond to it. I'm not buying gold.

That's the potential issue. I am not quite old enough to remember, but that is the problem with 'stagflation' scenarios of the 80's.

 

[Harvey]

we may not be getting the 10.5% historical return over the next ten years.

It's true once your timeframe is shorter, it gets more complicated.

So who has gold? Convince me I'm being a bonehead. I always rejected it because the long term return was low.

 

[DomB]

It's true once your timeframe is shorter, it gets more complicated.

So who has gold? Convince me I'm being a bonehead. I always rejected it because the long term return was low.

Oh, no, I actually think I agree with you like 95-100%. I have basically two things: equity indices (domestic and world) and intermediate bonds. I bought one stock out of belief and probably won't sell it, but it just reinforced the lesson I learned to never buy individual stock.

I am no expert, but I don't think there is a real alternative in an inflationary environment. Perhaps one could reevaluate their asset allocation, but the models I have seen show that over the long haul 75/25 does pretty well (recognizing conventional wisdom is to have a higher portion of bonds when you have that shorter timeframe).

The other answer is we all knew rates go up and down (though some of us may have forgotten in the past 30 years when they have largely only gone down other than relatively minor blips) so we should just keep doing what we do.

 

[DomB]

Oh the final thing I will say on shorter time frames, folks talk about the 4% rule over 30 years; another piece of protection is that you could change your withdrawals on market conditions. In the traditional study, they increased withdrawals for inflation. What you could do is set your withdrawals for the following year based on stock market performance. After a good year you could go up some bracket above 4% and in a bad year you would go down some bracket below 4%.

I haven't read into it much, but it makes a lot of sense and like the potential for social security, being able to sell down a larger house, etc., is another safety factor people can build into their planning. Another plug by me for folks to google Bogleheads wikipedia.