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Short-Term Trends Can Have Long-Term Consequences

There are short-term trends that can have implications for the long-term investor’s investment portfolios.  The first trend and outcome for 2014 is Americans are earning less and have less money to spend.  With less disposable income, we will see less spending. This will dampen an improved U.S. economy this year. This is my theme for predictions and outcomes for 2014. I hope most Americans understand that the U.S. economy is very heavily dependent on consumer spending, which makes up 71% of the U.S. GDP number.  So if average Americans are not out spending money, then the economy doesn’t do well.

Unfortunately, the strongest piece of evidence we just experienced of a consumer shutdown showed up in our paltry holiday season spending.  Going into the 2013 holiday season, The National Retail Federation had predicted that holiday sales would rise by a positive 3.9%, but instead they dropped 3.5%.   U.S. families had less money in their pockets in 2013, so they spent less on holiday shopping.  Most economists are expecting the same in 2014.  Real medium household income was at its lowest level in 2013.  In fact, real medium household income has declined by a total of 8% since 2008; at the same time there has been a movement of income away from the middle class toward the high income at a record high level.  Normally these extremes in income dispersion foreshadow financial market and economic calamities.   The current income dispersion and record extremes are well above levels thought to have even prevalent prior to the 1929 U.S. stock market crash and the Great Depression.  I believe 2014 will face tremendous difficulty all because U.S. income, the foundation of real economic growth and wealth distribution, will continue to get worse.

The second trend and outcome for 2014 is higher taxes.  When the government raises taxes, it reduces the amount of money that people have in their pockets.  Tax season and April 15 are only a few months away.  Millions of American families are going to find out that they have much higher tax bills than expected.  Congress allowed 55 tax breaks to expire at the end of 2013; added on top of that are the 13 major tax increases of 2013.  It’s not going to be a pretty sight.
The third trend and outcome of 2014 will be higher interest rates regardless of what the Federal Reserve or media outlets say.  Higher interest rates mean higher debt problems which means less money for consumers to spend in the U.S. economy.   On December 31, 2013, the 10-year U.S. Treasury note rose to 3.03%.  The majority of 2013 it was in the 1-2% range.   The reason why the yield on the ten-year is such a critical benchmark to watch is because mortgage rates and other loans in our economy are influenced by it.  The Fed says interest rates are not going up, but they are.  The National Association of Realtors reported beginning in September of 2013 it witnessed the largest drop of signed home contracts in over 40 months and that is one of the early signs of weakness.  This was followed by December 2013 with mortgage applications collapsing an astounding 66%, which is a 13-year low.

Here is the last trend and outcome for 2014:  The U.S. stock market has shown a whole host of signs that the irrational stock market bubble we are in is going to burst.  Right now the medium price to earnings ratio on the S&P 500 has reached an all-time record high.  This while margin debt at the New York Stock Exchange has reached its highest levels ever.
So the bottom line is that Americans and U.S. investors are going to need to traverse a number of land mines in order to find peace of mind and long-term sustainable growth.  Investing in 2014 will require the height of risk management and mental flexibility because investors can’t stay in one place for too long.  The traditional buy and hold investing doesn’t work anymore.

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