Letters to the Editor (Volume 2003, 4th Issue)
(Dennis in Michigan)
I’ve worked through the previous two recessions (82 and 91), but this time around I lost my job and have been thoroughly frustrated in my ongoing job search. I worked hard to secure an education and harder still to make a decent living for my family. Why is it that the effects of this most recent recession in 2001 have harmed me so much more? The truth is that I have been looking for work for more than a year and there is literally nothing out there. I keep hearing that things are going great guns in the economy but I am hurting big time and there seems to be no relief in sight.
Wow, Dennis! There is no easy way to answer your question, or more importantly, to ease your pain. As Thomas Paine put it so eloquently, “These are the times that try men’s souls.” Not much solace, but as you’ll see by the following graph, you are not alone…
Since the end of 2000, our economy has shed more than 2.3 million jobs. In that same timeframe, our labor force has expanded by 2.4 million people. The net result is that this recovery, while quickly reversing (we should have a net job gain for 2003 – just barely), it has been most painfully felt on the job front. That, in nutshell, is why you and several million other Americans have been experiencing so much pain. The good news is that by all indications, the job outlook will brighten considerably over the next several months. In the meantime, keep your spirits up, continue to remain positive, and pray!!!
Do you think the current problems that are coming to light with some mutual funds will affect the average investor's faith in the stock market? Does it make sense for an investor to get out of mutual funds and try to "go it alone" by making diversified investments? If so, any suggestions on a good diversification strategy?
(You might want to make a link for questions on the website? Or maybe I'm just missing it.)
The second question first… Actually, the way it's set up is that there are several email links included, but we’ll work on clarifying that issue.
Now for the first question…
The recent problems coming to light with some mutual funds points directly to improprieties in terms of fund managers ignoring their guidelines as outlined in their prospectuses and improper trading practices (inappropriate booking of trades and abusing intra-day trades). These concerns and others are being addressed via the SEC and in other judicial proceedings. Only time will tell how pervasive these problems really are. The average investor is a bit skittish, but this will subside as the economy continues to improve.
The short answer, without attempting to offer investment advice, lies in what is referred to as the Efficient Market Hypothesis. EMH dictates that overall the market has consistently performed better than any individual investment or investor. The trick is to get as broad a based index fund as possible (total market, Wilshire, etc.). It's very much akin to Vegas in that in the long run, the house never loses. There are many pretenders, but the fact is the Law of Probability stands squarely against you. Too put it simply, the stock market is awash with analysts, whose job it is to gather news quicker than the next guy. With such a large market, and such a huge number of analysts, it's impossible to consistently ‘beat’ the market, diversified or not. Anomalies occur, but they are quickly devoured and addressed by the market forces in general. Brokers are of little help because it is merely their job to make transactions; whether buying or selling. This is not to say that one shouldn't be aware of what is happening in the market in general, but it is more important to understand when you will require your assets, in the way of liquidation, than in focusing on what you should, or should not be investing in.
The question begged is why participate in the equities/stock market at all (should one opt for debt/bonds)? This is an entirely different kettle of fish...again, to put it simply if you want the highest return possible (over a period of time), your best bet is in equities. Businesses borrow money in order to build their stock value - the overall required rate of return for equities has to be higher than debt because debt is used to build equity... Also, the equity markets demand a higher rate of return because they are more risky (the last to be paid in the event of bankruptcy - yet another reason to avoid individual stocks).
From the point of view of the personal investor, studies show that long-term yields in equities are two to two and one-half times that of long-term government and AAA corporate bonds.
(Bob in Livonia, MI)
Where does all of this lead?
While I find the newsletter/web site very informative and educational, my primary concerns and interest in reading things of an economic/financial nature is to divine what will happen in the months and years ahead. Having said that, I have one specific question in mind – what is likely to happen to the dollar over the course of the next year?
(I hate to come across as so frustrated, but the truth of the matter is that what seems to be happening out there has no rhyme or reason – all of those in the media and elsewhere seem baffled – why is that? There is nothing cogent coming from the Fed or elsewhere…)
Well, Bob, you’re question really requires a mountain of analysis and commentary, but the short answer is very simple: The dollar will continue to depreciate in the months ahead. The two reasons for this lay in the worsening trade balance ($41 Billion for the month of September), resulting in a depreciating Dollar on the Foreign Exchange Markets. This has already been evident, but again, given the significant trade deficit, the dollar should and likely shall continue to depreciate…
The reason why you are hearing such diverging, disjointed dialogue is because the analysts have never seen the likes of the current economy and since it does not fit within the framework of their old paradigm, they continue to flail wildly. Perhaps they should refocus and consider the validity and applicability of The New Paradigm in Economics…
(Opinions expressed on this web page are those of a faculty member or employee and do not necessarily reflect the position of University of Detroit Mercy)