Expectations

Wide Open
Part of the reason for my fewer than normal updates lately has been my visit to western Canada for my son's wedding.  It is always a great joy for me to meet people there.  For a guy that lives in Southwestern Ontario, and spends a certain amount of time in Toronto, I am simply overwhelmed by the openness, and friendliness of western Canadians.  

Family
I suppose it is because the region where I was visiting is more rural, as a whole, that I seemed to find more people who work for a living rather than living to work (although not, perhaps if I was to spend time at Fort McMurray!).  Probably because of the wedding, there was a large emphasis on family, especially on their part.  People came from far and wide out there to attend the wedding, while few from my family in Ontario could interrupt their busy schedules.

Old Theme
While there, I found myself engaged in a particular conversation over and over again.  I may not notice something if it happens only a couple of times, but several times within a few days I found myself discussing the expectations of people, and how those expectations seem to have changed over the last number of years.  The actual conversations took different form, and involved different people, but each time the theme was the same.  That theme was, in short, immediate gratification.

The Lost Art
Whether it was the store owner, the retired worker, the corporate adviser, or simply, parents, I was surprised when the same theme kept coming up.  In each case, I found myself discussing the seeming loss by people to see any benefit in "paying their dues" or adopting a longer term approach as a means of achieving their goals.

Debt
We also see much of this in the media these days.  Apparently we taught our children everything we know.  The willingness of people to accept debt in order to get what they want today is what resulted in the last Great Recession.  Credit, in itself, is not so bad, but neither is saving first, before making a purchase.  I come from a humble family, and growing up, the family home was the only thing we purchased on credit.  If I wanted to buy anything, I had to save, not just ten, or twenty percent of the purchase price, I had to have an amount of cash equivalent to the total.  Think how much money I saved myself in interest payments!       

No Worries?
What I learned growing up was how to live within my means.  We need to budget not just for our expenses, but for our savings, as well.  Most people I talk to have very little in investments, other than the family home.  "No money!", they say.  Imagine if they took all of the money they have already paid in interest and could use that to create an investment account!  Most people point to their credit card when I ask if they have an emergency account.  No wonder Mark Carney of the Central Bank is so worried about household debt levels in Canada.   

A Line In The Sand
I understand the Banksters have done everything they can to get us into as much debt as possible, and how easy and harmless it is made to seem when it comes to not paying off that credit card balance at the end of the month.  Yet, there comes a point when one must draw a line in the sand.  If we are smart, that line is a whole lot less than our total income.  Understand that the world is currently in a deleveraging cycle which could last for a decade, or more.  Everyone is going to be demanding a larger share of our wallet.  We need to ask ourselves where that money is going to come from.

As for my son, everything I have seen would indicate his bride is as prudent with money as the rest of her family - one of her many great qualities!

Which way is your level of debt heading?

I am not really sure why I haven't posted anything here by Mr. Rogers prior to this.  From what I can tell he is one of the smartest people in the room.  His expertise is more in the area of commodities than equities, but that would make him an expert in commodity companies at the very least.

It would seem like common sense, but politicians and even too many economists believe the solution to too much debt is more debt.  Mr. Rogers disagrees.  He also talks about when the economic collapse will come, rather than if it will because of the snowballing debt world wide.  He states that competent people are supposed to be allowed to replace the incompetent ones who lost all their money.  Failing to do so, he says is "Absurd economics and absurd morality."  It reminds me of the author Stephen Covey who used to say we can't talk our way out of things we have (mis)behaved our way into.

Do you think Europe will survive intact?

The Japanese Experience

Click To See Larger Chart

Automobiles
I don't know if people are aware of the story, but there is a particular reason Japanese auto imports grew to dominate the North American industry.  The single biggest reason, in my opinion, was product.  They made a better car for less, and targeted the entry level buyer.  Their target market was key, since they were limited by North American quotas at the time.  Why target the lower-priced entry level when they could have tried to go after the higher-end, more expensive category?  After all, that is what the North American car makers would do, and they did - SUV, gas guzzlers anyone?

Demographics
No, the Japanese were smarter than that, or were they?  The answer is yes, and no.  The Japanese learned from their own experience that customer loyalty was important.  Satisfied customers tended to buy again from the same company.  Not only did they buy from the same company, they tended to trade up, as well.  After paying off their first car, they tended to buy a more expensive one the next time.  If Japanese customers did so, what made them believe the U.S. customers would do the same?  Demographics, plain and simple.  With an older average Japanese population, it was expected the North American population would follow a pattern similar to that of the Japanese consumer.  And it did.  Brilliant, yes; original, no.

Same Old Same Old
Now, the question is, are we going to learn from the Japanese experience.  I don't mean their auto industry, but their economy.  Sure, there are some fundamental differences in the Japanese and U.S. economies, but let's take a look at Japan over the last two decades.  Their problems really began in the late 1980's.  There were a number of banks misbehaving, and a housing bubble that burst (sound familiar?)  For much of the last two decades, Japan has been trying to stimulate itself out of recession.  The central bank continues to buy government bonds to provide liquidity to the government, and the economy.

So?
Is it working?  By all accounts, Japan's economic course is unsustainable.  While growth has never  recovered, to any great extent, the government debt continues to rise.  The last data point in the chart above was 2008.  Their debt level as a percentage of GDP has only increased since then.

Again?
No, we have tried giving our money to the rich (one percent) with the expectation of jobs, in return.  Clearly that didn't work.  So whose idea do you think it was in the first place?  Now, we are being asked to believe that when it comes to governments, we can borrow our way around the trouble caused by, among other things, too much government debt from bailing out some of the richest corporations on the planet.  And whose idea do you think that was, and is?

Micro Economics
We need to do as they say, and not as they do.  We need to live within our means, and concentrate during these difficult times on reducing debt, and not just maintaining the status quo.  For you and I, reducing expenses is easier than increasing revenues, although we could all use some additional investment income.  The Japanese experience should teach us it is going to take a very long time before things actually begin to start to get a whole lot better!

Do you think we will learn from history?

The Case For Market Volatility

Click Here To See The Video

Signs of Struggle
With an economy which generates almost 18 trillion (US) dollars of goods and services, the European Union is the largest economy in the world.  In the video, Larry Berman gives the litany of problems facing that economy, and consequently, the world economy, as well.  The level of European debt, demographics, and fiscal austerity all add up to a struggling economy and higher than usual stock market volatility for a very long period of time to come.

Volatility; Not Demand
Sovereign debt levels world wide mean political and economic volatility unlike anything we have seen in generations. All this, just at the time the Baby Boomers are beginning to ease back on their spending as their need for housing, and everything that facilitates going to work every day decreases.

New Paradigm
We have just experienced the peak of a period of economic growth unlike anything the world has ever seen.  The engines are low on fuel.  I hate to be the bearer of bad news, but we are not going to see the markets return to all time highs (at least not new highs after adjusting for inflation).  Still, the financial services industry continues their steadfast and unwavering support for the Buy and Hold approach despite the fact it makes a better marketing strategy than it does an effective portfolio management strategy.  As long as they receive sufficient participation, they aren't going to be the ones to tell us the bad news, let alone admit the hoax they have funded all of these years at their clients' expense.

The alternative to Buy and Hold?  Buy lower, and sell higher.  What a concept!

Have you, or are you making changes to your approach?