I stopped in Chickasha, Oklahoma the other day and pulled into a McDonalds to purchase a small Coke. Chickasha is not a destination… it is a place you stop to get a Coke on your way to your destination. It is the county seat of Grady County and home to the annual “Festival of Light.” Other than that, it is just a good place to stop and get a Coke. Well, it used to be… not any more.
I stepped up to the counter to order my small Coke and the young lady behind the counter said “that’ll be 27¢.” Thinking I misunderstood her, I glanced at the register and, sure enough, it said 27¢. I said to her, “Twenty-seven cents? How small is this Coke?” She replied, “That’s the senior rate.” OUCH!! That really HURT!! I’m only 56 years old, but apparently I was ancient to this teenager.
I’m sure the McDonalds cashier was unaware of the prodigious power she possessed. She probably had no idea that she could trash my fragile ego with four simple little words… “that’s the senior rate.” But after I let it bother me for a minute, it hit me that the Baby Boomers are moving into the next chapter. The chapter that may bankrupt this country.
The graph below, from www.calculatedriskblog.com, illustrates the Baby Boom bubble. I was born in 1954, almost at the very peak of the bubble.
There were about 80 million births between 1945 and 1965, and this generation has had a massive effect on our country and our economy as it has aged. They caused thousands of schools to be built, as well as millions of new and bigger homes. They bought gas-guzzling SUVs and faithfully contributed to their 401K plans, fueling the demand for mutual funds and helping to drive the stock market higher.
The McDonalds cashier in Chickasha made me remember that the first babies born after the end of World War II are turning 65 this year. That mass of humanity is going to begin saying, “I want my Social Security check…” “I want my Medicare benefits…” and “I’m not putting any more money into my 401K, I’m gonna start taking money OUT of my 401K.” For the next twenty years, these demands will increase dramatically. Meanwhile, medical technology keeps providing ways for us to live longer, so the cost of maintaining our health will become an ever increasing financial burden.
This is the sort of gigantic financial event for which a country needs to have saved… kind of like setting aside funds for years to help pay for your children’s college education. Not only has our county not saved for this event, both the Bush Administration and the Obama Administration have borrowed and dramatically increased the amount we owe.
According to the Congressional Budget Office, federal debt this year will reach its highest level (relative to GDP) since World War II. They also project that the budget deficit this year will be approximately $1.3 trillion, adding to the massive debt. The graph below illustrates the deficit each year as a percentage of GDP. Not only do they predict significant deficits for several years, but they predict we will not have a year with a surplus for the rest of this decade. We will keep spending more than we make every year… year after year.
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This is not the financial condition our country should be in when McDonalds starts giving me the “senior rate”.
On September 20th, the National Bureau of Economic Research announced that the most recent recession, which officially began December, 2007, ended in June of 2009. The NBER is not telling you that the economy is much better, or that we are experiencing a recovery of any significance. Their announcement merely states that the summer of 2009 is when we hit bottom.
This news is small consolation to the 9.5% of America still seeking employment or the 338,000 homeowners whose homes were subject to a new foreclosure filing in September (the 18th consecutive month in excess of 300,000 foreclosure filings). However, it DOES appear that the economy really has stopped getting worse. Industrial production is up over the past year. Consumer spending is slightly picking up. If it can be called an “economic recovery,” it can only be described as a modest one. Below is an updated chart which I have included in several Investment Commentaries.
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This chart shows the number of monthly new foreclosure filings for the past 6 years. I’m ready to go out on a limb and say it is finally running out of steam. Although August posted the 18th consecutive month above 300,000, the trend appears to be leveling and I think we may see the first month under 300,000 before the end of the year. It appears that the worst may be behind us.
We said last month that we thought the stock market might stage a rally prior to the November election. We confess we weren’t expecting one of the best September stock market increases in history. The S&P 500 increased almost 9% in September… which means if you invested in the S&P 500 at the end of the ’90s, September almost got you “back to even” after 10 ¾ years.
With interest rates at very low levels (the ten-year Treasury Bond interest rate is below 2-½ %) the stocks of many companies still look relatively inexpensive just because their dividend yields are higher than the ten-year Treasury Bond interest rate. Although the economy is still facing some serious headwinds, the modest recovery and low interest rates are still allowing BCWM to slightly increase our equity exposure.
The elections next month will almost certainly result in some loss of power for the democrats in both the Senate and the House. This will likely bring back congressional gridlock, making it difficult to conduct legislation. In my experience, the stock market seems to react positively to “gridlock.” Gridlock allows investors to be less nervous about the effects of new legislation (like health care reform) and therefore causes less uncertainty. Stock markets tend to react positively to a decline in uncertainty.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.