Investment Strategies V – The Global Recession and Financial Management


In prior postings, I have argued against taking the advice of your asset allocation manager. I have also offered a time-phased investment strategy.

Below, I review data on the global recession to determine which phase we are in. I then update my investment strategies.

The Global Recession

How did we get into this mess? The real estate collapse in developed countries coupled with the credit freeze lead to an asset loss of $50 trillion, a sobering number inasmuch as global GDP is only $55 trillion. The “wealth effect” of that loss caused a drop in consumption outlays that in turn launched the global recession. The wealth effect was joined by income losses resulting from employment cutback to depress consumption further.

Recently, stock markets have recovered some of their losses. The situation as of August 13, 2009 is presented in Table 1. From stock market highs to their lows earlier this year, stock markets lost $36 trillion. In the last few months, markets have recovered somewhat and losses have been pared to $23.68 trillion.

Table 1. – Stock Market Losses and Recovery (in US$ trillions)

  Index Index Hi-Low Hi-Low Index Hi-Now Hi-Now
Index High Low % Loss $ Loss Now % Loss $ Loss
DJ Eurstoxx 50 4,543 1,810 60.2% $7.21 2,643 41.8% $5.01
Nikkei 225 (Japan) 18,239 7,569 58.5% $2.59 10,412 42.9% $1.90
S&P 500 (US) 1,558 683 56.2% $10.35 1,010 35.2% $6.48
S&P Asia 200 6,749 3,145 53.4% $6.85 4,346 35.6% $4.57
S&P Lat Am 40 59.51 21.00 64.7% $0.85 39.54 33.6% $0.44
TSX (Canada) 14,984 7,591 49.3% $0.81 10,808 27.9% $0.46
Total $28.66 $18.85
Total Adjusted* $36.00 $23.68

* My original figure was $28.66. A comment from a reader with a

Bloomberg terminal said the global  total was $36 trillion.

While there is some indications that the real estate cycle has hit the bottom. Sellers have accepted they must take lower prices if they want to sell, so sales are up. But real estate prices are not recovering. I estimate global real estate losses at $16 trillion. That means global asset losses are still $39.68 trillion, a very sizeable number.

The US Situation

Job losses continue worldwide. As indicated in Table 2, US payroll employment continues to fall.

Table 2. – US Net Job Losses (in thousands)

2008 2009 2008 – 2009
Jobs July – Dec. January February March April May June July Total
Net Losses 2,300 741 681 652 519 303 443 247 5,886

Source: US Department of Labor

In short, 2.3 million jobs were last in the last half of 2008. Add to that the 3.6 million jobs lost so far this year for a total of 5.9 million jobs lost. Note that as long as Table 2 figures are positive the number unemployed will continue to grow. At $70,000 per job, 5.9 million job losses mean an income loss of more than $400 billion.

In sum, the wealth effect and income losses resulting from growing unemployment continue to depress outlays. Table 3 indicates that consumption expenditures are running at 98% of what they were in the second quarter of 2008.

Table 3. – US: Change in Consumption

Percent of Same Quarter Prior Year
Outlay 2008 – 1Q 2008 – 2Q 2008 – 3Q 2008 – 4Q 2009 – 1Q 2009 – 2Q
Personal Consumption Expenditures 104.5% 104.4% 103.6% 99.9% 98.9% 98.0%

Source: US Bureau of Economic Analysis

There is one more troubling point to make about the US situation. Last February, the US Congress passed a $787 billion stimulus bill. It has taken some time to get the money spent, but there are now indications at least some of the money is being spent and jobs are being generated. Let us suppose that $200 billion are now being spent and that every $70,000 creates one job. That would mean the creation of nearly 2.8 million jobs. And yet, the number of unemployed continues to grow. What would the situation be like in the US without the stimulus package?

The Global Outlook

It is extremely interesting to compare what is happening in developed countries to emerging market nations. This is done in Table 4. The differences between the developed and emerging nations is striking. Compare the Developed nations’ aggregate growth rates with those for Emerging nations.

Table 4. – IMF Growth Projections (percent change over prior year)

Actuals Projections
2007 2008 2009 2010
World output (annual GDP growth) 5.2 3.4 0.5 3.0
Developed nations 2.7 1.0 -2.0 1.1
  United States 2.0 1.1 -1.6 1.6
  Euro area 2.6 1.0 -2.0 0.2
  Japan 2.4 -0.3 -2.6 0.6
  United Kingdom 3.0 0.7 -2.8 0.2
Emerging nations 8.3 6.3 3.3 5.0
  Africa 6.2 5.2 3.4 4.9
  Developing Asia 10.6 7.8 5.5 6.9
    China 13.0 9.0 6.7 8.0
    India 9.3 7.3 5.1 6.5
 Western Hemisphere 5.7 4.6 1.1 3.0
    Brazil 5.7 5.8 1.8 3.5

Source: IMF

What should you get out of Table 4?

The global recession was created and will be played out primarily in developed nations. The growing middle classes of emerging nations are the engines of growth and recovery for the global economy.

Investment Implications

Consider first my “time-phased” investment approach.

Phase One: put your assets in dollars or close substitutes;

Phase Two: invest in high-yield securities;

Phase Three: bet against the dollar via commodities and emerging market.

We are definitely beyond the panic state where all assets should be in dollars. Things are still very bad. Like John Mauldin, I anticipate a very slow and painful recovery in the US, Europe and Japan. That would suggest a Phase Two investment approach. But I like Phase Three better. Why? Several reasons:

1. John Reese wrote the following in his weekly commentary for Validea.

A recent T. Rowe Price study looked at four different investors, who started investing in stocks in 1929, 1950, 1970, and 1979. Each invested $500 a month in a fund indexed to the S&P 500 for 30 years, reinvesting all dividends in the fund.

The two investors who started right before major bull runs produced great returns over the first decade. “However,” Price’s Christine Fahlund noted, “they were accumulating fewer shares at a higher average cost during these robust decades. Moreover, their average returns over the next 20 years were much lower than the returns earned over the subsequent 20 years by the other two investors [who started investing right before big bear markets]. Thus, despite their strong starts, their ending balances after 30 years were remarkably less than half that of the two investors who began investing at the start of bear markets.”

I added the emphasis. The point John makes continuously is that it is very difficult to get timing right and most investors get it wrong.

2. The dollar is still very strong since many still hold it for safety. But as the Treasury increases its sales of US government debt instruments, it will get weaker. It is time to start betting against the dollar.

3. Look again at the data in Table 4 above. You should have some investments now in emerging nations. Why do I say now? Because the Goldman Sachs and Morgan Stanley traders view the stock markets of developing nations as commodities to be run up and down whenever they feel like it. You are now still ahead of most of the traders.

4. Commodities: We need food and oil. You can’t lose on either. The traders will be back on both soon.

Investment Vehicles

In an earlier posting, I suggested the following. It is still a pretty good list.

Fund Name  3 Yr 5 Yr Objective Ticker Type
Emerging Markets Overall          
BLDRS Emerg Mkts 50 ADR 31.28 Diversified Emerg Mkts ADRE ETF
iShares MSCI Emerg Mkts 29.96 Diversified Emerg Mkts EEM ETF
Bernstein Emerging Markets 35.82 41.18 Diversified Emerg Mkts SNEMX M
Latin America          
T. Rowe Price Latin Amer 49.61 34.07 Latin America PRLAX M
iShares SP Latin 40 45.10 31.05 Latin America ILF ETF
South Africa
iShares MSCI South Africa 29.50 South Africa EZA ETF
iShares MSCI ex-Japn 24.68 21.63 Asia EPP ETF
Matthews  Pacific Tiger 19.51 30.82 Asia MAPTX M
Guinness Atkinson Asia 26.45 34.82 Asia IASMX M

I am not an investment adviser and nothing I say should be taken as a recommendation to buy or sell an asset.

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