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Economic Outlook for 2004
Old 12-13-2003, 09:20 AM   #1
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Economic Outlook for 2004

I recently read CSFB's economic assessment for 2004. The report indicates similarities with 1984 and
1994 and in summary, suggests that economic outlook in 2004 sits on five historic pillars:

1. a further considerable acceleration in CAPEX
2. a leap in export growth courtesy of a globally synchronized recovery
3. a deceleration in consumer spending
4. an imminent peak in earnings momentum; and
5. a significant risk of [upward] interest rate volatility

What do our arm chair experts think about this and what implications (pitfalls/opportunities) do you see for making new investments or realigning portfolios at this point in time.

Doug
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Re: Economic Outlook for 2004
Old 12-13-2003, 09:51 AM   #2
 
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Re: Economic Outlook for 2004

Hello Doug! I think the ""five pillars" are mostly BS
but here is my input anyway.

Re. "a leap in export growth" , maybe, but I doubt if
France, Germany and Russia will be anxious to help.

I don't see a "deceleration in consumer spending"
as a big factor next year. Ditto "imminent peak in earning momentum."

Now, "significant risk of upward interest rate
volatility", that's an easy call with rates sitting where
they are. Nevertheless, I am betting on not much change, at least until after the 2004 election.

I view most of this as little more dependable than
my local weather forecast. They said sun today
and I have not seen it yet.

John Galt



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Re: Economic Outlook for 2004
Old 12-13-2003, 10:43 AM   #3
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Re: Economic Outlook for 2004

I don't change my portfolio based on the economy. I will make changes based on our personal situation - the clock has seen 59 1/2 pass and 62 is coming (IRA and SS) so some adjustments may be made in our balanced index funds.

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Re: Economic Outlook for 2004
Old 12-13-2003, 11:07 AM   #4
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Re: Economic Outlook for 2004

I plan to hold a relatively conservative mix of assets through thick and thin, and like unclemick, I will make changes based on our personal situation. I'm making those changes now, in fact, in preparation for retirement next year. The most important tools for me have been FIRECalc, Quicken Financial Planner, and Portfolio Survival Simulator. With those three programs I'm able to get some excellent information. The outlook for next year isn't a factor for me.
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Re: Economic Outlook for 2004
Old 12-13-2003, 05:53 PM   #5
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Re: Economic Outlook for 2004

FWIW, I shortened up my bond durations, lightened up on US equities, increased my exposure to Asian equities, and am keeping a lot of cash until some of these things play out.

I'd love to be more bullish on the US economy, but I just don't see much upside given the fed's ultraloose monetary policy, the prez's spending binge, historically high consumer debt, overbought equities, etc.

For those of you sticking with your asset allocation, what gives you optimism?
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Re: Economic Outlook for 2004
Old 12-13-2003, 06:09 PM   #6
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Re: Economic Outlook for 2004

Charles DeGaul and John Bogle -

"God looks after Drunkards, Fools, and The United States of America"

'When all else fails, the simplest solution is often the best - hold a balanced index appropriate for your situation and stay the course'

Thus the impersonal computers at Vanguard are selling into rising markets and buying into falling markets to hold my selected stock/bond ratio.

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Re: Economic Outlook for 2004
Old 12-13-2003, 06:23 PM   #7
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Re: Economic Outlook for 2004

I took that approach with my IRA (mostly at Vanguard). Those assets are almost back to their 1998 levels. So far, market timing has worked better for me as long as I try to time based on macro-level stuff rather than micro-level / short-term trends.

It's always seemed to me that combining asset allocation with timing based on pretty blatant indicators makes more sense than simply trusting historical behaviour.

An analogy might be that you'll probably be safe taking your trusty old route driving to the store, but if you see a truck coming towards you, get out of the way!

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Re: Economic Outlook for 2004
Old 12-13-2003, 10:08 PM   #8
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Re: Economic Outlook for 2004

Quote:
For those of you sticking with your asset allocation, what gives you optimism?
Hi wabmester,

Here's how I look at it: I have neither optimism nor pessimism. My only goal is to do as well as the market. If I thought I could do better than the market through timing, I would certainly do so, but that is highly unlikely over long periods (like the 30-40 years I hope to be alive). On the other hand, I believe that it is very likely that I will under-perform the market if I try to beat it. Timing is a zero-sum game before transaction costs and taxes are factored in. After taxes and costs, the vast majority lose over long periods. I don't like those odds.

If it were possible to rely upon macroeconomic indicators to predict market returns, everyone would act upon them simultaneously and they would no longer be reliable.

So for me it isn't a matter of trusting historical behavior; it is believing that the businesses I buy will continue to make profits, and the businesses and governments that borrow my money will continue to pay their debts. That's where the real money is. The rest is all a mirage, in my opinion.
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Re: Economic Outlook for 2004
Old 12-14-2003, 03:28 AM   #9
 
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Re: Economic Outlook for 2004

I have complete confidence in my own abilities.
All others are suspect. Nuff said!

John Galt
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Re: Economic Outlook for 2004
Old 12-14-2003, 04:40 AM   #10
 
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Re: Economic Outlook for 2004

Now here is an example of how your thinking can
mutate as you get well into your ER years.

I used to say that I could accept a low (but safe)
rate of return as long as I didn't lose any of my base.
This was when you could get 7-8% on bank CDs.
When CD rates dropped below 3%, I found that
I was willing to take some market risk as long as the
interest checks kept coming. Absent default, as long as I never have to sell it shouldn't be a problem when
interest rates rise, as they surely will at some point.
Also, I locked in some long term (but callable) bond
money at rates which look great in today's climate.
This money may be coming back to me over the next 2 years if interest rates stay low, in whcih case I will
have to find a home for it.

John Galt
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Re: Economic Outlook for 2004
Old 12-14-2003, 07:23 AM   #11
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Re: Economic Outlook for 2004

Quote:
Timing is a zero-sum game before transaction costs and taxes are factored in. After taxes and costs, the vast majority lose over long periods. I don't like those odds.

If it were possible to rely upon macroeconomic indicators to predict market returns, everyone would act upon them simultaneously and they would no longer be reliable.
What Bob says here is true for all investors as a group. They can't beat the market because, by definition, they are the market. But, somewhat paradoxically, the thing that makes the market as efficient as it is, is that a significant number of participants are always trying to beat it. I'm one of those myself, to a degree, in that I keep the bulk of my assets in low cost stock and fixed income investments, but do some "active" or "tactical" shifting of my asset allocation in response to macroeconomic conditions. Specifically (but greatly simplified) my long term target allocation is around 60% equities and 40% fixed income. But at times like the present, when I think that within the next year or two the prospects for equities are better than for fixed income, I shift that to perhaps 65%/35%.

Without going into a detailed explanation, I think that the benefit that I get from this is a reduction in portfolio volatility for a given long-term asset mix. I can therefore invest a somewhat higher long term average proportion in stocks than I otherwise would. (Actually, a good part of this is in "equity equivalents" such as high yield bonds and REITs, which I believe reduces volatility even more.)

In several posts I have recommended the weekly column on personal finance by Jonathan Clements in the Wall Street Journal. One of the rare cases in which I slightly disagreed with him was over the benefits of asset reallocation. He says that it reduces portfolio volatility and "may" increase return. I agree that it is beneficial (especially for retirees) in that it reduces portfolio volatility, but for most people will only increase their return if they are lucky enough to do their reallocation at precisely the right time -- that is, when the returns on one asset category relative to another are at a peak. For many people, asset reallocation actually reduces long-term returns by preventing their asset mix from shifting towards the higher returning assets (especially, small cap stocks).

For example, when stocks were booming in 1999 and 2000, I was cutting back on them. In retrospect, that may look brilliant, but at the time it meant that I wasn't getting the full "benefit" of the run-up in stocks. When stocks eventually dropped, the "paper value" of my assets lost less, but there was less to lose. What I did accomplish, however, was less volatility, and thus less disappointment from the market drop.

So even if you do the "right" thing and lighten up now on long-term bonds, you won't know precisely the right time to shift money back into them. And people who "park money in cash" waiting to see what will happen will experience less volatility, but will also experience lower long-term returns.
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Re: Economic Outlook for 2004
Old 12-14-2003, 01:34 PM   #12
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Re: Economic Outlook for 2004

Quote:
3. a deceleration in consumer spending
5. a significant risk of [upward] interest rate volatility
I don't know why they would predict #3, a deceleration in consumer spending. If spending held up through all the layoffs the past 3 years, why would it slow down now?

#5 risk of upwards interest rate is one that has stalled my desire to invest more in bonds. Our bond funds and TIPS mutual fund total only about 16% of the pie (no, the other 84% are not all equities!). Long term, I think I really need to increase the bond funds allocation. But doing so right now seems questionable. Like if you were going to set a ladder up to go to the roof, would you set the bottom of the ladder onto quicksand, just to say that you are not a market timer? I don't profess to know the best solution. But after the big bond run of the last few years, and with interests rates so low now, I am reluctant to make a bond investment.
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Re: Economic Outlook for 2004
Old 12-14-2003, 07:57 PM   #13
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Re: Economic Outlook for 2004

Quote:
. . . So far, market timing has worked better for me as long as I try to time based on macro-level stuff rather than micro-level / short-term trends.

It's always seemed to me that combining asset allocation with timing based on pretty blatant indicators makes more sense than simply trusting historical behaviour.

An analogy might be that you'll probably be safe taking your trusty old route driving to the store, but if you see a truck coming towards you, get out of the way!
It seems to me like many investors are at least a little bit like me. We say we believe in regular rebalancing and proper allocation, but we might "cheat" a little from time to time and do some market timing moves ourselves.

For example, several years ago I had studied a number of articles that led me to decide that I wanted to include about 10% of my equity investments in foriegn markets. After researching various options to accomplish this, I chose a couple. But it seemed like a particularly poor time to make those investments, so I waited till I thought the timing was better. I made a similar move when I decided that I needed more small cap representation in my portfolio. It turns out that my timing decision for the international investments worked out well. My small cap timing decision did not.

When it comes time to rebalance, I also consider the question, "Do I still believe the target balances I had last year are the ones I want today?" My beliefs about the coming risks of the various investment intruments will affect the answer to that question. And if that isn't market timing, then it is certainly a close relative of it. If I don't ask that question, it amounts to believing that I will never learn more about investing than what I knew when I first started and that my understanding of risk and aversion to it will never change.

But after many years of investing, I have not found a way to effectively time markets based on macro economics, micro economics, or any other crystal balls. I fooled myself into thinking I was a pretty smart investor in the early 90's. But for every dime I made because my timing was right, I eventually lost two nickels with bad timing.

If you have a long history of beating the market using some indicators, I would love to hear about it and how you do it.
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Re: Economic Outlook for 2004
Old 12-14-2003, 10:44 PM   #14
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Re: Economic Outlook for 2004

Quote:
If you have a long history of beating the market using some indicators, I would love to hear about it and how you do it. *
Well, there haven't been too many signals as blatant as the current interest rate risk.

I bought gold for the first time in my life near the beginning of the year when it looked like the dollar had no where to go but down, but that wasn't a huge bet.

Liquidated 90% of my equity holdings in Aug 1999 when I decided my returns were good enough and the market stopped making any sense to me. I missed another 6 month run, but I had no regrets.

But I'm no market genius. I'm aware of the studies that have shown that stock market timing fails because most of the market's return comes from a very few strong upside moves (95% of the gains come from 1.2% of the days, according to the Towneley study, for example).

So, I'm almost convinced that I should just allocate my assets and forget about them, but I'm dubious of a strategy that is based on historical data, especially data that only goes back 80 years or so when I'm trying to look forward 40 or 50 years.

I also worry that market behavior has fundamentally changed, and now that almost everybody is in the market, the only stock market strategy that makes sense should be based on behavioral finance rather than historical returns. Since I'm not (yet) an expert on human behavior, I'm really tempted to sit on the sidelines until I better understand how the game is played.
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Re: Economic Outlook for 2004
Old 12-15-2003, 03:19 AM   #15
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Re: Economic Outlook for 2004

Although I am a novice compared to most of the members, I do believe that history can be a good teacher and generally agree that sticking to an allocation with some annual rebalancing makes sense. However, isn't it true that small caps historically lead market recoveries and then will lag as large caps start to do better? If you buy into that and given the market run up this year, wouldn't it be a good time to perhaps shift some of your small cap % to large cap at this time?
Also, if you have some intermediate-long term bond funds, wouldn't you want to shorten duration given the interest rate outlook?

Another interesting question to me is what is the right thing to do if another 9/11 event happened, sell equities immediately and buy back at a lower level?

Doug
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Re: Economic Outlook for 2004
Old 12-15-2003, 03:57 AM   #16
 
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Re: Economic Outlook for 2004

I have no equities, but I can tell you what I would do if there was ever another 9/11. Nothing!

John Galt
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Re: Economic Outlook for 2004
Old 12-15-2003, 05:42 AM   #17
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Re: Economic Outlook for 2004

Quote:
1. *However, isn't it true that small caps historically lead market recoveries and then will lag as large caps start to do better? *If you buy into that and given the market run up this year, wouldn't it be a good time to perhaps shift some of your small cap % to large cap at this time?

2. Also, if you have some intermediate-long term bond funds, wouldn't you want to shorten duration given the interest rate outlook?

3. Another interesting question to me is what is the right thing to do if another 9/11 event happened, sell equities immediately and buy back at a lower level?
1. Yes, small caps have outperformed large caps over the past year, and it is reasonable to expect that large caps will "catch up." The trouble is, you don't know when the switch in relative performance will occur. If a person sells small caps now and they continue outperforming for a while, then they "lose" some of the gain they otherwise would have made. Over the long term, small caps have outperformed large caps. So about the only thing that is fairly certain is that if you hold more small caps, you have more risk, but also more probable gain over the long run. Reducing your holding of small caps will probably reduce the volatility of your portfolio, but quite possibly will do so on the up-side.

2. Here again, it is reasonable to expect that interest rates will rise and cause long term bond prices to fall. But how fast will this process occur? If it doesn't happen too fast, a person could still make more total return with long term bonds because of the higher yield that they are currently paying. That's why some rational people continue to accept the higher risk of holding long term bonds. (I think that a good compromise is to hold long term TIPs.)

3. Over a span of, say 20 years or more, it is very likely that more events will occur that will cause the stock market to "crash." (I am not predicting this because I am psychic -- simply because I understand the concept that over time, the improbable becomes the inevitible.)Hopefully, the crash will be temporary. One thing is certain, however. When it does, stock prices will drop virtually instantaneously in response to it, and nobody will be able to profit from the event by selling and then buying back (unless they had prior knowledge that allowed them to sell just before the event). Even having stop loss orders on securities is of no value in a case like this, because there is no guarantee or liklihood that the sale will occur at the "trigger" price that is stipulated in the stop loss order.
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Re: Economic Outlook for 2004
Old 12-15-2003, 07:44 AM   #18
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Re: Economic Outlook for 2004

I look at it this way - when tuna fish goes on sale, buy tuna fish - provided you like tuna fish. I.e. if something you're watching reaches a price you like, buy them.

REITS and Con ED got hosed due to interest rate jumps in 99 - 2000 so I bought some.

Again only in my hobby stock play money. Balanced index is the horse I rode in on.

But if Mr Market and your sense of value coincide then ?
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Re: Economic Outlook for 2004
Old 12-15-2003, 12:23 PM   #19
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Re: Economic Outlook for 2004

I really appreciate all of you guys; the wisdom here can definitely keep us newbies from getting off track

Doug
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Re: Economic Outlook for 2004
Old 12-15-2003, 02:16 PM   #20
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Re: Economic Outlook for 2004

For what it's worth, I followed an efficient frontier/bernstein link from somewhere (thought it was here...but can't find it now) and went to the http://www.tamasset.com/newsletter.html page. It has a couple of newletters on 10 common mistakes, and two of them are:

2. They shift from stocks to bonds.

3. They extend bond maturities and/or settle for lower quality to gain higher yields

This is in the September/October newsletters.

Note that I don't trust random newsletters on the web, but this site seems to be reasonable given my tendency toward asset allocation/indexing.

Wayne
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