These are perilous times for investors and that would include those individuals who merely wish to save a bit of money for the future. Back when inflation was not the rage of the decades of Federal Reserve happiness, a four percent return on investment was considered good. Assuming one did hot have to enter inflation into the equation, four percent return would double your money in about twenty three years. Of course it helped if one could start about the age of twenty and save some of one’s income, say five or even ten percent, if possible. And it was advisable to add to one’s savings each year as well as add a portion of those windfalls that came one’s way. Thus in forty five years one could retire comfortably without future worry. But after World War Two once the fifties arrived and economic growth was strong even in recessions, the world of investment began to change. The beginning of the sixties saw the change in income tax as Kennedy asked for tax reform that lowered income taxes. Suddenly the race was on to more and better profits for individuals and corporations. Where the thirties saw the public largely avoid the stock markets and rely on bank passbook accounts now the stock market was our friend again. Where some merger activity was accomplished during the conservative fifties, the sixties were known as the Go-Go years. An investor by the name of Ling started buying corporations through leverage and eventually acquired Temco and Vought Aircraft. It was rumored that he was making a bid for International Telephone and Telegraph and would name the resulting merged entities Ting-A-Ling Corp.
The years have seen all manner of changes but the one constant has remained the use of other people’s money to buy other corporations. For a while it was the merger of stock holders and management parachutes for the losers. Other time is was the large deal made through venture capitalists and other monied interests whose immediate desire was not the long term earnings from years of running a enterprise efficiently but the immediate arbridge of the deal. The only real profits most of these individuals and institutions seemed interested in was that of the deal and not that of the enterprise. As real estate investors have learned how to flip distressed housing with a little paint and prettiness so the corporate enterprise dealer learns how to flip the corporations. Add them together, break them apart or simply pass them back and forth as new deals, what ever makes money for the deal. This reliance on finance and debt means that these deals are filled with debt. One of the golden rules of finance is that any company that is debt free is waiting to be plundered. Obtain control through stock purchase, usually by borrowing he money, and take the entity over. Issue new debt, take a piece of the pie and then sell off the stock. The new management style is no longer that of making a profit producing goods and services at a profit but buying firms that produce goods and services at a profit.
This behavior has continued for so long that few seem to know any more how to actually run a firm that makes goods and services. We hear about shareholder value but the problem with that concept is that the only shareholder value that is ever realized comes with either the issuance of dividends or the selling of the sock for profit. And so many of our industries are in great disarray, spread over the globe and thus subject to the whims of other investors or governments. We have the classic case of economies of scale becoming to large to be reliably managed. The larger the economy of scale the more likely the possibility of monopoly exists. With the excessive debt that has been issued by governments, corporations, and consumers, where does one look to invest? The Federal Reserve and other central banks have succeeded in pushing interest rates down to almost zero, so passbook savings is out as is certificates of deposit and treasuries. One could buy the government bonds of other countries with higher coupon rates but a word of caution is in order, they may default and leave you with no recourse to recovering your principle. The same goes for state and municipal bonds. The fact is that the world has entered an economic crisis that will cause the crash of financial instruments like the waves of an angry sea upon the rocks. There are hundreds of trillions of dollars of debt of every kind, shape, and form that cannot and never will be repaid simply because there is not enough GDP in the world to service it all. That dept is roughly one hundred times the worlds collective GDP.
Normally in the recovery after a recession the pull of commodities, that is those raw resources lead the way. Along with that we start seeing an increase in personal consumption. And housing starts increase measurably by a substantial amount. After that manufacturing returns to fill all those new consumer demand orders. But what do we know about today’s recession? Well, first it is not a recession but a depression. Unemployment is high (look at the population in the workforce, it is the lowest in 28 years. Look at wage compensation, the amount is lower. Look at consumer spending, far less and consumer debt is contracting in general. Look at commodity prices, at their lows in a good many years. Look at oil, price is below fifty and likely to stay there for a few years because demand is reduced and supply is increased. If you want the leading indicator for a depression ending, look to energy. Industry runs on energy and when energy use increases the demand increases and the prices increase from their lows. So if there is an investment sector worth investigating, it is energy. The values of stock in that area have not fallen far enough to make wise investment. It may take the rest of this year and we could see lower stock prices next year, but energy is the one sure bet when any economic recovery returns to the world stage. After that watch the commodity prices and personal spending.