Direction of US Economy

[James5v]

I was wondering if someone much more knowledgeable than I could address these issues.

1. Oil prices are over $90.00 but gas prices do not reflect this increase. Why?

2. How bad is the banking system?

3. How does the average middle class person maintain his standard of living, i.e. two SUV’s, two children in high school, large house note, high gas prices, etc.?

4. When will the deflation of house prices be reflected in the stock market?

5. When or if all of the above create a Bear Market?

I would really appreciate some feedback for I am at a lost. I am only 20% invested in mutual funds and have been slowing moving out of the stock market during this year. I am retired and have been decreasing my risk but do not like the poor 4.5% return but at least I’m not loosing money.

Thanks,

James

[MasterBlaster]

James5V:

Here's my take on your questions...

1) Gasoline prices have been going up where I live. However gas prices reflect many things including consumer demand, seasonal factors and refinery utilization and capacity. As I understand it the price of gas is only based about half on crude oil. Much of the increased price for crude just relects the weakness of the dollar. Priced in Euros, the price of crude hasn't done much.

2) How bad is banking ? It's really bad but the fed won't let many banks fail, especially the big ones that are deemed too big to fail. They can also lean on their politicians to help pay their "fair share"

3) Debt, at the expense of the future, ditto for govenment spending. One has to wonder if individuals and the economy has the capacity to generate enough cash flow to service all that debt. Somethings gonna give... stay tuned on this one.
4) Maybe never, are they linked ?

5) The bear market comes when people with good credit start thinking they better quit spending... just in case

If you hang around investment channels much you will realize that there is always something on the horizon to worry about. You are never totally safe.

When you look at your returns, subtract the inflation rate off of them to put the "real" return in perspective. In this light, you are probably getting a similar deal now than you had before.

If you believe Ben Stein, then you will be missing out on the great bull market of 2008-2009. Of course many people think that he's full of beans. Personally I use my Lucky Astrology Mood Watch to make my important decisions.

[James5v]

Thanks for the well thought reply.

Myself and several friends have been predicting a major decline for several years as we watch the market continue to move up. While it is nice to see your profits go up a percent or so in a day, it is much easier to sleep at night knowing most of my funds are either in CD's or MMF.

I am concerned that once people realize their prime asset, their home, is decling rather quickly in value, it would have an effect on their spending. Also, when they have difficulty selling their home, I would think this would have an effect.

I appreciate the information on oil prices relationship to gas prices; however, I will not be surprise by $4.00 gas in the near future.

I don't want to sound paranoid, but I am wondering if maybe the bad news will wait till after the Christmas season as to protect the retailers.

James

[brewer12345]

I'm sure that the tinfoil hat crowd will pipe up any minute now to tell you how bad things really are. But bear in mind that nobody really knows, at least until we have the benefit of hindisght. What most of us have done is to diversify as widely as possible in order to mitigate any nastiness tat comes down the pike.

If you stay mostly in cash or CDs, you run the risk of being eaten alive by inflation and taxes.

[dex]

My greatest fear is that when something bad happens it will be blown out of proportion by the general media and all the stories about how people are being hurt.

[brewer12345]

Quote:

Originally Posted by dex My greatest fear is that when something bad happens it will be blown out of proportion by the general media and all the stories about how people are being hurt.

You mean like the mortgage/banking stuff, the Amaranth mess, the effects of the 2005 hurricanes on the economy, the impact of $60/$70/$80/$90 oil, etc.? Its practically a certainty that they will continue to do so.

[James5v]

I guess there is no free ride. Right now, in my position the danger of inflation eating away slowly is better than the danger of being wiped out quickly.

I just hope the Fed Res lowers interest rates by .25% as is expected so we should have at least a small appreciative rally. Of course, then the markets will begin to worry about something else.

[unclemick]

1948 - The Norwegian widow was by the mailbox when I got off the bus - Truman beat Dewy - and was about to go ahead and 'lose China to the Red Menace' - the the Russians would get the atomic bomb. But in a few years I would get my Red Ryder BB gun and the world would be safe for a while.

Today on the Vanguard Personal Investor's webpage:

current yield 2.91% for Balanced Index Fund - aka 'da Policy Portfolio, the trusty 60/40, sorta like a lot of live forever pension funds, etc.

or badda bing for you value investors - Pssst Wellesley 4.42% current yield(love to say that one!).

So if the Dems get elected next year - and we lose Iraq - Daisy still sells BB guns.

heh heh heh - the heck with tin foil hats - I'm a retired rocketman - I want gold coated Kapton film.

[James5v]

Of course, if the Rep win, the party of small government and less spending, we will bankrupt the country after we invade Iran.

BTW, I lean toward Libertarianism, go Ron Paul.

I read a report that while Warren Buffet pays 17% tax rate, his secretary pays 35%. Is there something wrong with this picture?

[unclemick]

If you feel you can follow the economic cycle - handgrenade wise - get the latest Zweig edited version of Ben Graham's Intelligent Investor for moral support.

I won't do this but - as an intellectual exercise - I 'might' lefthandedly look at the Target lifecycle series or Lifestrategy funds and throttle down and later up stock% of portfolio as I perceived the economic cycle.

Of course - old timers might like mixtures of Wellington, Wellesley, Dodge and Cox(when open) or other value funds with short/intermediate term fixed.

But alas in my old age - the thrill is gone - let those Vanguard computers impersonally rebalance my Target Retirement.

heh heh heh - still got a few Norwegian widow stocks though. .

[laurence]

Seriously, take a look at Wellesly, it's a great compromise fund for an ER type. If the dividends are enough to pay the bills, you can ride out a dip until the balance comes up again. If the doomsayers are right about what's going to happen, then like UncleMick says, a gun will be a lot more useful than the cash/CD's/gold, Gold, GOLD! they are telling you to buy.

Think of how much the dollar has fallen compared to other currencies when you think you are safe in a MM. One thing for me is my international fund is rockin' the house right now. If you are really concerned, keep ~30% in MM/CD's and put the rest in some sort of investment (like Wellesly or Wellington) that will help stave off the dogs of inflation. That way you have a nice large...er...bucket...of money to see you through any lean time.

[REWahoo]

Chronologically, Laurecnewill may be only a whippersnapper but he offers some good advice. Retired and roughly your age, I consider myself a very conservative investor - have a big chunk (~40%) in Wellesley.

I'm more frightened of being out of the markets than being in them....

[twaddle]

Nothing against Wellesley, but it's just a basic 40/60 fund, folks.

If your concern is that rising oil prices and the falling dollar might lead to increased inflation, then a 60% allocation to nominal bonds (with an implied inflation estimate of just north of 2%) won't be a good inflation hedge.

If your concern is that the economy is going to tank, then buying a 40% allocation to stocks at peak earnings probably isn't going to protect you against a downturn.

If you want to make a short-term directional bet on the economy, use puts and calls on broad indices.

[James5v]

I appreciate the information you guys are giving. I have been in the Wellington Fund. Right now I am about 20% in the market with a S&P Index Fund, Laudus International MarketMasters Fund, and the Janus Contrarian. They have all done well particularly the last two. However, 80% is in cash or short term investments.

I guess I am more afraid of the doomer than the inflationers, however, you make a good point about the extreme weakness of the dollar.

[laurence]

Quote:

Originally Posted by twaddle Nothing against Wellesley, but it's just a basic 40/60 fund, folks. If your concern is that rising oil prices and the falling dollar might lead to increased inflation, then a 60% allocation to nominal bonds (with an implied inflation estimate of just north of 2%) won't be a good inflation hedge. If your concern is that the economy is going to tank, then buying a 40% allocation to stocks at peak earnings probably isn't going to protect you against a downturn. If you want to make a short-term directional bet on the economy, use puts and calls on broad indices.

Absolutely, my comments are meant as a long term position not to (dirty) market time a recession or to make a recession play. I don't think it's probable we are heading into a recession, but hey, you usually don't see them until too late.

[haha]

Quote:

Originally Posted by James5v I read a report that while Warren Buffet pays 17% tax rate, his secretary pays 35%. Is there something wrong with this picture?

Yes. His secretary is way overpaid.

ha

[youbet]

Quote:

Originally Posted by haha Yes. His secretary is way overpaid. ha

Exactly what I was thinking, but I lacked the courage to say it!

[James5v]

It is acutally due to a very unfair tax law in the US. The upper 1 or 2 % of the population get away with very little taxes.

I would prefer some kind of user tax. The more you spend money the more you pay. Of course, I live a rather simple life without a SUV.

Drug peddlers would certainly not like that type of tax. It would be very difficult to hide from it.

But I would not consider such a thing unless the income tax law was first taken off the books. If not, you would be looking at the government having a bonanza.

[MasterBlaster]

Quote:

I read a report that while Warren Buffet pays 17% tax rate, his secretary pays 35%. Is there something wrong with this picture? It is actually due to a very unfair tax law in the US. The upper 1 or 2 % of the population get away with very little taxes.

Headlines like this want to make me throw up. Not because I feel like Warren doesn't pay enough taxes but because of the ignorance behind these statements.

As I recall Warren is a very frugal kind of guy and may live on an income (at least for this reported year) less than his secretary even though his wealth is vast.

Laws like the AMT see that people who cash out their investments will pay plenty. If Warren cashes out more than say $150k or so then he'll be required to pay AMT taxes. It just isn't true that someone with very large capital gains can pay a 17 percent tax rate on large payouts.

So your little editorial, is very deceptive and was made by some pol trying to win gotcha points. There is more to the story than you know.

[James5v]

BTW, I neglected to say that Warren Buffet is the one who is complaining about this. He took a poll in his office and found he paid the smallest percentage of anyone there. That is why he is now saying the some type of user tax would be the best type of tax and the most fair.

Buffett blasts system that lets him pay less tax than secretary - Times Online

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