Protracted recession and it's effects

[Rich_by_the_Bay]

Because of the way this thread is squirming around, I re-read the OP and can't quite define what the question is, if there is one.

It seems the OP's proposition is that we are looking ahead at a prolonged anemic market and that if that occurs some may have to work longer or save more, well, I agree with that. Hard not to.

I think the gist of much of the push-back is that many are not as confident that the market will stay bad for a long time. Where's the beef?

 

[Abreutime]

My belief is the US and various regions throughout the world are going to move through a protracted recession.

How long? Are you making a prediction about GDP growth, or some other amorphous standard? Do you not believe in the 2nd quarter growth numbers?

Let me qualify my reasons:

There is a worldwide liquidity crises and this will effect housing over the long term as risk management kicks in at lending institutions, thereby limiting mortgages and loans to worthy clients and good investments. Means testing will limit the purchase price of houses moving forward. This will hurt those individuals who overpaid for housing as house prices are not going to rebound to previous heights. The long term effect will be poorer citizens.

I don't understand how an unwinding of the last 2 years housing runup leaves us worse off than we were 2 years ago. It makes some indivuduals worse off, those who bought at the top, but I'm just not seeing the aggregate long-term deterioration of wealth.

The "war on terror," (whether you believe in it or not) has strained the US treasury. Coupled with recent bailouts of Fannie and Freddy, and a potential for the bailout of the Fed Deposit Insurance Corp, the Treasury will become increasingly restricted on what it can do to help the economy.

Like give out money in cash stimulus payments?

US household debt is out of control. The consumer will become increasingly strapped and unable to spend their way out of recession as it has in the past. (Default to the Fed argument above).

The result: This limits the next rally in equity markets moving forward. Markets will probably be choppy for years, reacting to news and limiting gains to the 6% range long term but near zero medium term (1-2 years).

Government spending is part of the GDP pie. The government, with its low borrowing costs, has been spending its way out of the recession, even if consumers are unwilling to do so.

This will be an ER stress test. As I have a ways to go until I retire I look forward to studying the effects on the ER population as a study for whether long term ER is viable.

Granted, those with millions or secure pensions will do fine. But ER on a budget looks like a wash.

How do you intend to study it? Seriously. Every 5-10 years, people talk about the "new investment world," and the "paradigm shift" that takes place. And later, all the old rules of economics still apply; the cycles repeat themselves.

I think oil still has another leg up, lets just see where that plays out.

If you truly think it has "another leg up," it seems obvious to me that you should profit from it.

 

[Canadian Grunt]

Because of the way this thread is squirming around, I re-read the OP and can't quite define what the question is, if there is one.




I am not really asking a question. I am slowly moving towards the following statement.

The 4% withdrawal rule that seems so sacred may not work moving forward. In other words, many ER's who do not have sufficient capital and are relying on growth will find that in the long run their capital is diminished and their standard of living lowered or they are forced back to work.

I believe this is the gist that has recently been made by Scott Burns and William Bernstein.

Now don't get me wrong, I am an early retirement proponent. However, I think we all need to reassess the viability of ER moving forward.

I can't really frame this thread as a question because the quality of the discussion is lost.

 

[youbet]

1) there are plenty of ways for even the best plan to fail.

Oh sure...... You have to pipe up and remind me of that!

 

[Canadian Grunt]

I don't understand how an unwinding of the last 2 years housing runup leaves us worse off than we were 2 years ago. It makes some indivuduals worse off, those who bought at the top, but I'm just not seeing the aggregate long-term deterioration of wealth.


Are you kidding me?


If you are under water and bought high in a diminishing real estate market, or entered into a sub-prime mortgage do you think you are going to come out ahead? How can you save for retirement when all your free cash is going to service the mortgage?

Then there is the bail out of Freddie and Fanny by the US government. Who pays for that? Tax payers. You now owe more whether it's on your books or the treasury books.

You may not be, but many people are now poorer from the whole Financial and Sub-prime mess.

 

[Abreutime]

Because of the way this thread is squirming around, I re-read the OP and can't quite define what the question is, if there is one.

I am not really asking a question. I am slowly moving towards the following statement.

The 4% withdrawal rule that seems so sacred may not work moving forward. In other words, many ER's who do not have sufficient capital and are relying on growth will find that in the long run their capital is diminished and their standard of living lowered or they are forced back to work.

I believe this is the gist that has recently been made by Scott Burns and William Bernstein.

Now don't get me wrong, I am an early retirement proponent. However, I think we all need to reassess the viability of ER moving forward.

I can't really frame this thread as a question because the quality of the discussion is lost.

You seem to be questioning the validity of the 4% rule, not all of ER.

 

[Abreutime]

I don't understand how an unwinding of the last 2 years housing runup leaves us worse off than we were 2 years ago. It makes some individuals worse off, those who bought at the top, but I'm just not seeing the aggregate long-term deterioration of wealth.

Are you kidding me?

If you are under water and bought high in a diminishing real estate market, or entered into a sub-prime mortgage do you think you are going to come out ahead? How can you save for retirement when all your free cash is going to service the mortgage?

Then there is the bail out of Freddie and Fanny by the US government. Who pays for that? Tax payers. You now owe more whether it's on your books or the treasury books.

I am not kidding. Please re-read my post. I specifically point out that the people that bought at the top are not better off. In the same way that people that bought at the top of the tech-stock bubble did poorly, in every bubble there will be winners and losers, depending on the timing of the purchase/sell decision. Housing prices are still higher than they were only 5 years ago. Do you disagree?

Also, sub-prime borrowers do not automatically default, and are not universally worse off. I don't know why you think borrowers are worse off being offered a mortgage than not being offered a mortgage.

I do not like government involvement in private enterprise, but it would be unwise to allow Fannie and Freddie to fail. The ensuing chaos, I believe, would have worse financial ramifications than paying for their excesses through our taxes. Hopefully, this will be a lesson in creating government entities where there is no compelling need. Do you think Fannie and Freddie should be allowed to fail? What do you think would be the resulting effects?

You may not be, but many people are now poorer from the whole Financial and Sub-prime mess.

You may have been, but many people did not get killed in real estate. Many people who have made long-term purchases in real estate have done well for themselves, and mortgages have enabled many to leverage these returns. What were your opinions about the stock market in 2000-2001?

 

[Canadian Grunt]

Government spending is part of the GDP pie. The government, with its low borrowing costs, has been spending its way out of the recession, even if consumers are unwilling to do so.[/quote]


The US government is spending away the wealth of the country. Issuing debt that is gobbled up by third world countries (Saudi Arabia, China, Dubai...need I go on?) Eventually the piper will have to be paid in the form of higher taxes.

If you truly think it has "another leg up," it seems obvious to me that you should profit from it.[/quote]

I have a substantial investment in Trusts and Canadian Oil stocks that pay dividends. This is my hedge for higher oil related costs in the future. I will bring your attention to the price of oil after Dec.

 

[REWahoo]

Canadian Grunt, you need to leave the

at the beginning of the information you are quoting in order for it to display correctly. If you need some assistance learning how to use the quote function on the forum I'm sure one of the mods will be happy to assist you.

 

[Canadian Grunt]

Also, sub-prime borrowers do not automatically default, and are not universally worse off. I don't know why you think borrowers are worse off being offered a mortgage than not being offered a mortgage. [/quote]


I think you are miss informed on sub-prime mortgages. When they reset there is a substantial increase in the cost of funds. This often creates the default because many borrowers maxed out their mortgage in the belief that house prices would go up and they could qualify for a prime mortgage based on equity.




I do not like government involvement in private enterprise, but it would be unwise to allow Fannie and Freddie to fail. The ensuing chaos, I believe, would have worse financial ramifications than paying for their excesses through our taxes. Hopefully, this will be a lesson in creating government entities where there is no compelling need.
You may have been, but many people did not get killed in real estate. Many people who have made long-term purchases in real estate have done well for themselves, and mortgages have enabled many to leverage these returns. What were your opinions about the stock market in 2000-2001?[/quote]

2000-2001 was a tech melt down. This is broad based and there is the added component of weakened banks and a housing melt down. In 2001 the housing market was moving up based on the cocooning effect started by 9/11 and increased by the opinion that housing was a safe haven for investment.

 

[Abreutime]

Government spending is part of the GDP pie. The government, with its low borrowing costs, has been spending its way out of the recession, even if consumers are unwilling to do so.

The US government is spending away the wealth of the country. Issuing debt that is gobbled up by third world countries (Saudi Arabia, China, Dubai...need I go on?) Eventually the piper will have to be paid in the form of higher taxes.

So we are borrowing money, as a nation, to invest in our future. And this will need to be paid for in the future. It sounds like capital markets are working efficiently, assuming that the US has better investment options than third world countries. Having the US as a borrower, with its low cost of capital, seems like a cheap way for the country (citizens and businesses) to invest. We'll pay the money back when the investments abroad become better than investments at home. What am I missing?

FYI: In order to quote something, this tag "

" needs to go in front of the quoted passage, followed by the same word preceded with "/".

 

[Canadian Grunt]

Canadian Grunt, you need to leave the

at the beginning of the information you are quoting in order for it to display correctly. If you need some assistance learning how to use the quote function on the forum I'm sure one of the mods will be happy to assist you.

Yea, I am struggling with the quotes when I parse a statement for simplicity.


Help!

 

[Abreutime]

Also, sub-prime borrowers do not automatically default, and are not universally worse off. I don't know why you think borrowers are worse off being offered a mortgage than not being offered a mortgage.

I think you are miss informed on sub-prime mortgages. When they reset there is a substantial increase in the cost of funds. This often creates the default because many borrowers maxed out their mortgage in the belief that house prices would go up and they could qualify for a prime mortgage based on equity.

I think you are conflating sub-prime borrowers (those with low credit scores and higher expected rates of defaults) with adjustable rate mortgages. Many sub-prime borrowers did not get screwed over by rate increases, because they didn't choose the mortgage with the lowest initial payment and make faulty assumptions about the future.

I do not like government involvement in private enterprise, but it would be unwise to allow Fannie and Freddie to fail. The ensuing chaos, I believe, would have worse financial ramifications than paying for their excesses through our taxes. Hopefully, this will be a lesson in creating government entities where there is no compelling need.
You may have been, but many people did not get killed in real estate. Many people who have made long-term purchases in real estate have done well for themselves, and mortgages have enabled many to leverage these returns. What were your opinions about the stock market in 2000-2001?

2000-2001 was a tech melt down. This is broad based and there is the added component of weakened banks and a housing melt down. In 2001 the housing market was moving up based on the cocooning effect started by 9/11 and increased by the opinion that housing was a safe haven for investment.

Um, the tech meltdown took everything down with it. You think only tech stocks like Pets.com were affected?!? Do you consider BRK a tech stock? How about DIS? How about BAC? Every person invested in the equity market was affected, just like every person invested in real estate is affected by the change in asset prices. Those that bought at the top lost terribly, and those that bought at the ground floor did very well.

 

[Canadian Grunt]

So we are borrowing money, as a nation, to invest in our future. And this will need to be paid for in the future. It sounds like capital markets are working efficiently, assuming that the US has better investment options than third world countries. Having the US as a borrower, with its low cost of capital, seems like a cheap way for the country (citizens and businesses) to invest. We'll pay the money back when the investments abroad become better than investments at home. What am I missing?

FYI: In order to quote something, this tag "

" needs to go in front of the quoted passage.

Borrowing money for infrastructure works but you have to pay it back. The US government is borrowing for items that are used before the borrowed funds are paid back. This is what gets so many third world countries into trouble. Those stimulus checks were a total waste of funds. The 10 Billion a month spent on the War on Terror will not be returned to the economy. Debt servicing will soon become an issue in the US as they print off more money, creating a lower dollar and increasing inflation.

 

[Abreutime]

Borrowing money for infrastructure works but you have to pay it back. The US government is borrowing for items that are used before the borrowed funds are paid back. This is what gets so many third world countries into trouble. Those stimulus checks were a total waste of funds. The 10 Billion a month spent on the War on Terror will not be returned to the economy. Debt servicing will soon become an issue in the US as they print off more money, creating a lower dollar and increasing inflation.

The national debt and loose Federal reserve policy are related, but not the same. We can run a federal deficit without heavy inflation. Check out the eighties.

The national debt as percent of GDP is lower than it was in the mid-nineties under Clinton.

 

[REWahoo]

Yea, I am struggling with the quotes when I parse a statement for simplicity.
Help!

When you use the "quote" button, the contents of the post you are replying to show up in the reply box with a short bracketed "quote" code at the beginning and end of the quoted material. The bracketed information must remain for proper formatting. Delete whatever information you wish from the quotation, but don't remove those codes or the [] enclosing them.

 

[haha]

I don't understand how an unwinding of the last 2 years housing runup leaves us worse off than we were 2 years ago. It makes some indivuduals worse off, those who bought at the top, but I'm just not seeing the aggregate long-term deterioration of wealth.

What I believe you may be overlooking here is leverage. Whenever loans are written against collateral, the quality of the loans is hostage to the continued quoted value of the collateral. Those loans are assets on someone’s balance sheet; or assemblages of the loans are assets on many balance sheets.

So property value that starts at x, goes to x+.4x, and back to x can cause a great deal of havoc, which should be clear from the recent Fannie-Freddie debacle.

Ha

 

[Abreutime]

What I believe you may be overlooking here is leverage. Whenever loans are written against collateral, the quality of the loans is hostage to the continued quoted value of the collateral. Those loans are assets on someone’s balance sheet; or assemblages of the loans are assets on many balance sheets.

So property value that starts at x, goes to x+.4x, and back to x can cause a great deal of havoc, which should be clear from the recent Fannie-Freddie debacle.

Ha

Can you expand on this some more? I'm trying to come up with how the wealth is destroyed when going from x to x+y and back to x. Aren't we roughly just back at x? How exactly are we worse off from when we started?

 

[Nords]

Funny how people can be so narrow minded. My point is that moving forward ER may not be possible for some as the long term rate of return will be diminished to the point that a viable ER may not be achievable. Of course now I am going to hear about the how I did it crowd but I am not talking about now just looking forward.

I see a you're doing a lot of agonizing and a lot of carping at other posters but I don't see much of a constructive plan from you.

If you're asking "What should I do?" or "Will this work?" then you're going to get a better quality of answers than if you're just kvetching.

But, hey, if you're not going to find what you're seeking at Bogleheads then maybe you & Rodmail can find it at Raddr's board:
Raddr's Early Retirement and Financial Strategy Board :: Index

Or perhaps you should start up your own blog, where you get to choose the quality of the comments...

 

[haha]

Can you expand on this some more? I'm trying to come up with how the wealth is destroyed when going from x to x+y and back to x. Aren't we roughly just back at x? How exactly are we worse off from when we started?

For the time being ignore defaults. The problem comes from the fact that the mark to market value of the loan assets falls. Since these assets are owned by leveraged financial insttutions, many of these institutions become insolvent. Then credit runs scared, and many other institutions that may be solvent become illiquid. Given time, illiquid progesses to insolvent. This is the credit cycle.

Credit is like love- one day it's everywhere, the next you can't find it at all.

The process I described above is how every bank in Texas failed in the mid-80s. Oil went up, the ag markets went up, bankers made loans, oil explorers spent it on wells, ranchers spent it on cattle. Then these markets went down. along with real estate. The cash flow from projects that the money was spent on couldn't cover the loan service, and the collateral couldn't be sold at anywhere near the face value of the loans, so down went the banks.

As Howard Cosell once said,
"Down goes Frazshah!"

Ha

 

[CaseInPoint]

I am not really asking a question. I am slowly moving towards the following statement.

The 4% withdrawal rule that seems so sacred may not work moving forward. In other words, many ER's who do not have sufficient capital and are relying on growth will find that in the long run their capital is diminished and their standard of living lowered or they are forced back to work.

I believe this is the gist that has recently been made by Scott Burns and William Bernstein.

Now don't get me wrong, I am an early retirement proponent. However, I think we all need to reassess the viability of ER moving forward.

That's exactly right, and you are also right to expect to be met with criticism for saying so.

ER people are a diverse bunch, but many make their decision to stop working based on exaggerated optimism, or out of necessity. For example, maybe the stress of the the work world is simply too much to bear, etc., and they're just losing it at work. It's easy to justify why someone is better off relaxing than working.

I agree that the 4% SWR may not be applicable these days, and I would add that it depends on other factors, as well, like one's level of expenses, savings, etc.

The more you research it, the more you'll find that not every ER is well thought out, and that there is a lot of willingness to live on the edge of poverty. Still, for others, ER is great and they live very well. Just depends on their specific situation and expectations.

Either way, suggesting that anyone who retires early may be mistaken in their assumptions, or that someone may not be as well prepared to retire as they hoped for, would constitute fighting words around these parts, that's for sure.

 

[haha]

Either way, suggesting that anyone who retires early may be mistaken in their assumptions, or that someone may not be as well prepared to retire as they hoped for, would constitute fighting words around these parts, that's for sure.

The most vocal ER cheerleaders have COLA pensions, usually taxpayer supplied. That is an cheap viewpoint for them to hold.

My own POV is that a reasonably good job that isn't tearing you up is better than retirement, at least until you are old. I was not a contented worker, I admit it and have no apologies for that. But I also admit that very early ER is an exercise in thin-ice skating, unless one is quite well fixed and has no taste for heavy spending. There are plenty people here who also fit that description.

But people ride motorcycles, climb mountains, sleep with tarts- why not retire early if you want to? Not everyone is extremely risk averse, and the modern job environment can really suck.

ha

 

[MasterBlaster]

CaseinPoint:

You just may be right about the coming apocalyspse. If we move into a few decades of no growth or very slow growth then we are in trouble. Ask me in a few decades and I'll let you know.

However, your statements about SWR depending on expense and savings isn't really accurate in that you may be confusing a withdrawal rate with a "safe" withdrawal rate. The SWR only depends on how fast you decumulate a nestegg and its' long term viability. It is independent on the size of the nestegg or your expenses and is measured in percent per year.

Ha:

I concur. Any paying job that allows one to defer ER nestegg decumulation moves one into a more secure position. SWRs and asset allocation are ways to cope in ER but they will never give you the security of a secure job along with a large nestegg. Security and ER freedom are in many ways a trade-off.

 

[unclemick]

Absolutely. If Canadian Grunt knows to a substantial certainty that we will have 4.5% CPI inflation long term with 6% nominal returns from equities, then he should just go out, snap up as many inflation protected securities as possible that pay more than 1.5% real yield and be done with it. Simple as that. Today's low return bond environment can still provide that in the US (not sure about the case in Canada though).

So what is there to argue about? You can beat the market without all that crazy volatility.

Hmmm - I seldom hesitate a chance to razz a Canadian - BUT I did endure the fun filled period 1966 -1982 starting out my investing career - so the faint voice of Yogi Berra's - 'it's De Ja Vue all over again' is echoing in my mind.

Probably won't repeat my efforts of yore - raw land, timberland, rental real estate, mining stocks, collectible and bullion gold, silver platinum coins, foreign closed end fund fixed income, Vanguard Trustee's International, warrants, preferred stock, convertible stock/bonds, and last but not least after 1970 - Psst Wellesley. I skipped commodity futures, single malt scotch LLC's, art, guns, stamps, but tentatively started collecting semi precious stones but the 'oooh why don't you mount that(for me)' put the lid on that idea. Paid my dues on many -and did so so on others.

This time around - defense is the SEC yield and offense is three yards and a cloud of dust until Mr Market beats the crap out of everyone dollar cost averaging for 15 to 20 years and the sun finally comes back out.

Now I expect the environment for rental real estate cats to become more competitive before too long. I suspect value ala dividends and interest to get some attention. TIPs and inflation protected securities are new this time around and I suspect they may moderate some of the high yield and high interest speculation of the 70's and 80's. And no I ain't gonna try STRIPs - zero coupon bonds.

Defense is SEC yield(Target 2015 = about 3+%) and offense is 5% variable of whatever the portfolio gives me. Note that Vanguard changes the mix as the clock ticks on.

heh heh heh - as an EX engineer I enjoy reading the Bogleheads and remember when the 2nd and 3rd decimal place used to thrill me a lot. As an ER I don't 'do' numbers anymore - handgrenades yes/numbers no. .

 

[laurence]

The most vocal ER cheerleaders have COLA pensions, usually taxpayer supplied. That is an cheap viewpoint for them to hold.

My own POV is that a reasonably good job that isn't tearing you up is better than retirement, at least until you are old. I was not a contented worker, I admit it and have no apologies for that. But I also admit that very early ER is an exercise in thin-ice skating, unless one is quite well fixed and has no taste for heavy spending. There are plenty people here who also fit that description.

But people ride motorcycles, climb mountains, sleep with tarts- why not retire early if you want to? Not everyone is extremely risk averse, and the modern job environment can really suck.

ha

And then there is the question, what is ER? The people who retire at 32 with 400k to a foriegn country are one extreme, and then there are those of us who will be happily labeling our retirement at 55 with 1)paid off house 2) couple mil in the bank 3) company pension 4) SS only 7 years away (we hope) as ER and see the ice as plenty thick. I enjoy my job at times, but 36 years of working will be enough!

So what does the OP mean by ER? What scenario is under threat? Not everyone can ER, even with good intentions and fiscal discipline. Health issues and/or a disability may derail my plans.

I was into some conspiracy books for a while, "Creature from Jekyl Island" -things like that. All stating we were being manipulated by a cabal of dark hooded masters and/or financial disaster was looming. But again and again, when it got to the (usually) very thin chapter on what you should do to save yourself, the advice was always the same. Pay off debt, save money, diversify, keep expenses low....