SUMMARY - "PIG" :
The Contrarian's View is published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. Material in this publication may be freely quoted provided proper attribution is given to its source. Subscription rate: Free on the Internet through the World-Wide Web service at Assumption College. Using your favorite Web-browsing program, Open URL http://www.assumption.edu. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! Phone: (508) 757-2881
My first credit card was an American Express "corporate" card, paid for by my company for those business expenses where cash was inconvenient. I didn't use it much. I paid cash ($1600) for my first car, a 1963 Volkswagen beetle with sunroof.
In the mid-1960s, I think it was, the large banks suddenly "discovered" the consumer credit market, and started mailing out large numbers of unsolicited credit cards. There were numerous stories at the time about dogs and pet iguanas getting mailings, but obviously the majority of the solicitations reached their intended targets, as credit-card use expanded very rapidly. I and my compatriots were no exception, as we were rising stars in the computer industry and thus were considered to be very good credit risks. Since the cards were free, I signed up for one, a Visa card with a Boston bank, as a convenience for those times that other forms of payment would be inpractical. I didn't use it much, mostly to pay for things ordered by mail from companies that disliked personal checks.
Only when I bought my first house did I take on debt big-time, putting 30% down for a 15-year mortgage.... because I didn't want to be paying for a house for the rest of my life. (My wife and I are now on my third and her second house, none of which had a mortgage of more than 15 years, the last terminating in August 1994.) My wife shares my reluctance for buying things on credit, but we do occasionally use a credit card in emergency situations or in cases where we must pay well "up front" for merchandise not yet delivered or services not yet used (figuring, if we don't get it, we can let the credit-card company fight with the non-supplier).
I stll relish the one time we used a credit card to great advantage, back in 1979 when we moved from the country to Worcester, the financial backwater of America. We had negotiated purchase-and-sale agreements for the two houses, but we were short on cash during the move, and there was one thing we needed right away for the new house: a fence. Our two puppies, then six months old, had outgrown the chicken-wire pen I had rigged up at the old house, and since these were going to be large dogs, they needed a heavy-duty enclosure at the new place. So we trotted off to a fence-installer and charged just the right thing, using up all but $4 of the card's credit line. By the time the credit-card bill came we had passed papers on both houses, thus freeing up our savings which were used in the transition, so we were able to pay off the credit card bill in full. (And I'm sure the bank thought we would be carrying a balance for years.)
Our credit habits reflect the period in which we grew up, one in which the use of consumer credit was not widespread.... charging goods at the local stores might have been the extent of it.... and when home mortgages, though they were long-term, still required hefty down payments (20% or more for a conventional mortgage) with monthly payments not exceeding 28% of your income. Even loans on new autos required 10% or more down and seldom ran more than three years.
Long-term trends sometimes progress so slowly that you can easily overlook their taking place, and so it is with the increased use of credit that's occurred during the past generation. But when I compare the credit available to a recent college graduate of the early 1960s, namely, me, and that available to young people still in college today, the contrast is truly stark. For one thing, very few students now entirely pay their own way through college, either with their parents' or their own savings, or with part-time and summer jobs. "Financial aid".... tuition discounts.... is an increasingly important factor in deciding where to go to college, as are grants and scholarships and, most especially, student loans. Today's college student can easily graduate with one year paid for, and three years still owed in the form of student loans which must be paid back from employment earnings. I know that if I had graduated with a debt burden equal to my first two years' earnings, it would have taken me a decade to dig myself out of that debt hole, and it would certainly have delayed my first house purchase and saving for the future.
Even while they're still in college, students are encouraged to get hooked on the credit drug. Why would banks even think of extending credit to students with no means of supporting themselves? Beats me, but their reps are here several times a year, offering free tote bags or whatever to the kids that sign up. Guess the banks think their parents will make good on the debt if their kids run into trouble paying it. (They're probably right.)
When the students graduate, they already have established credit histories which can be used for further borrowing when they get jobs. A car is a must; no problem, financing is 0% down for four years or more. When it's time to go house-shopping, realtors and finance companies have nothing-down, cash-back-at-closing deals with monthly payments up to 40% of your pay and mortgage periods of 30 years or more.... with the implication that in 30 years, your house will be worth a lot more than you paid for it, in effect "sticking it" to the mortgage lender, just as the previous generation did.
Those of us who have spent our lives using credit cautiously can easily lose sight of how many people today live at the edge of solvency.... they can meet their credit payments as long as everything is going just right, and their jobs keep them on an ever-ascending financial path. Previous generations had to deal with periodic financial panics and severe recessions or depressions, making them cautious of whom they lent their money to (banks, in the case of savers, and borrowers, in the case of banks). But after Federal insurance was legislated for savings deposits, in effect backing banks with the taxing and borrowing power of the government, the fear of bank failures became virtually nonexistent.... as the public calm in the recent failures of S&Ls demonstrates.... and people have become extraordinarily lax in their lending standards.
The problem with government "guarantees" of bank deposits is that they are also implied guarantees that money can be lent with impunity, because the lenders will be protected even if the borrowers default. It has taken sixty years for the public to learn how to play by the new rules, but they have learned well, and people now carry with nary a consequence levels of debt that would have triggered a depression two generations ago. Just how far credit can be stretched before something snaps is hard to say; Japanese banks were writing 100-year, three-generation home mortgages before asset deflation set in.
Our only experience in trying to tame the credit monster occurred in 1979, when the Carter administration imposed credit contols to try to cool off inflation by curbing people's ability to borrow for the purchase of real assets. The economy promptly, and precipitously, began to descend into the 1980 recession. The credit controls were removed after six months, and the economy snapped back. That gives you a clue as to how much our economic health depends on the continued expansion of credit; the Feds had met the credit monster face-to-face, and the Feds blinked.
Certainly the credit expansion during the past decades has contributed to the inflation in asset prices. What would houses sell for today if everybody had to put 25% cash down, and could not take on mortgage payments greater than 28% of the primary wage-earner's salary (typical in the 1960s; illegal today). Would the price of a new car have risen from one-tenth that of a new house in the early 1960s to one-sixth today without increasingly-generous credit terms?
The increasing use of credit has been essential for the public to maintain (or attempt to maintain) its standard of living in the face of declining real incomes since the mid-1970s. Now we see a sign that the public's willingness to take on additional borrowing is near saturation, in the behavior of our elected officials whose election, after all, reflects the current public mood. In other words, people don't want to go further into debt, therefore neither should the government.... as we see in the battle over raising the Federal government's debt ceiling.
The credit bubble can be extended further by interest rates slowly trending downward, as more debt can be taken on for the same cost; but when rates rise again, as they inevitably will, then we may suddenly find ourselves in a real pickle. Just as the stability of our banking system depends on the confidence that the government will (and did) bail out the banks in time of trouble, so too does continued economic expansion depend on the confidence of the public that people will continue to (be able to) repay their debts. If that confidence erodes and is then lost, we will enter uncharted territory. A stock-market crash while confidence in credit remains strong is merely a historical oddity, as we saw in 1987; but a stock-market crash when confidence in credit has peaked can lead to a credit crash and depression, as we saw in the years following 1929.
Even if you live your life frugally, you are not immune to the irresponsibility of others who live on the edge. My wife and I, for example, both have jobs in education, I as a college computer systems manager and she as a high-school librarian. In a sense, we have "maintenance" jobs; we do not appreciably add to the progress of society, except to the extent that we pass on knowledge of that progress to kids. Our jobs exist because people grow old and die and need to be replaced by the younger generations. And what is the first thing to be deferred when the going gets tough? Maintenance.... although people would probably prefer to defer maintenance on things before they do it to their kids.
If students were not able to borrow their way to a college education, enrollments would drop sharply; all colleges would have to pare back expenses, and many would be forced to close their doors. After all, who can afford a college education if you can't get a job following graduation to pay for it? I am an "overhead" expense, definitely subject to paring. In my wife's case, high schools must have librarians to receive accreditation (and must have libraries under state law), so this offers some protection; but she is not immune, as was demonstrated during the early-1980s tax revolt, when her position was for several years in a row cut in April, then restored in July.
Examine your own situation. You may use credit responsibly, but is not your well-being inextricably entwined with the lives of others to whom the continued expansion of credit has become a way of life? Would your job and financial situation survive a credit crash caused by the behavior of others?
A defect of human nature I've never been able to understand is why a public which, by and large, believes in paying its bills as long as it's able to, elects politicians who spend much more than they get in revenues, run up an unconscionable debt, and lie about it while they're doing it. If this is an incurable defect, then some pain lies ahead of us, for there is no free lunch.
I have commented before about how demographic trends (that is, the baby-boomers saving for retirement) favored money pouring into something. With the U.S. stock market bucking the worldwide deflationary trend in assets that appears to have settled in everywhere else, it would seem that the only show in town is stocks, so this is where the money is rushing, in a full-blown manic frenzy that appears to have no end.
But just because the baby-boomers need to fund their retirement is no assurance that their money has to be put into stocks. That money could equally well have gone into bonds, or emerging-country funds, or commodities, or gold, if any of those markets had caught fire the way blue-chip and technology stocks did in 1995. But success begets further success, and the flow of money into stocks is likely to continue unabated until some event.... unforeseen, and it may not really matter what it is.... frightens away new money. Then stocks will finally correct; the correction will frighten the newcomers; they will panic and the market will crash or be closed (now a virtual certainty); and the newcomers will rediscover the joys of money-market funds and bank CDs with the 40% of their money that's left.
In the meantime, we're in the "safe period" in stocks (due to year-end and tax adjustments) that typically extends into the second week of January. "Timer's Trend" remains bullish, and those of you who follow it faithfully will probably tack on another few percent to your gains this year before the next sell signal arrives.
If it's so "safe", you may ask yourself, why didn't I follow the indicator myself with my retirement funds? Believe me, I seriously considered it.... but I just couldn't bring myself to do this, because it goes against my grain. The extreme level of overvaluation in stocks means risk is also extreme; any unpleasant surprise (like, suppose Saddam Hussein had invaded Saudi Arabia last summer after all) might put them in the tank faster than I could respond. I guess I truly am a contrarian; I simply am not willing to take on enormous risk and buy stocks I know are overvalued just to play the same momentum-chasing game everybody else is playing.... at least, not with my retirement.
Stock prices respond primarily to interest rates and expected earnings. Right now, the Federal Reserve is stuck between a rock and a hard place, because it knows that stocks are on a roll, and everything else isn't. It can lower interest rates by, maybe, a quarter-percent in response to the reduction already achieved by market forces; but if it aggressively lowers them further, it risks driving the stock-buying frenzy to even more absurd levels, from which the inevitable correction would be even more devastating.
For the time being, computer arbitrage seems to have kept stock prices rising in tandem with bonds. In theory, if short-term interest rates were to decline to one-half of one percent, where they currently are in Japan, the Dow should soar to over 15,000. But as we all know, in Japan the Nikkei Dow did not rise from 39000 to 113000 in response to declining short-term rates there; instead, deflation took hold and the Nikkei Dow now trades at less than half its high. It is when a market goes bananas, in the face of intense worldwide deflationary forces, that an accident can.... and will.... occur.
A. "Phoenix" -real portfolio, begun on October 1, 1995.
Original cost: $ 8,090.45
Present value: $ 8,506.65
Increase: $ 416.20 [5.14%]
Yield: $ 353.02 [4.34%]
The performance of this portfolio and its predecessors ("Hedger's Delight", "Present and Future Income", "Crapshooter's Folly") from January 1987 to the present is +19.23%, for a compound annual rate of return of 2.00%.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG" :
Portfolio cost: $ 4,025.00
Present value: $ 4,735.88
Increase (decrease): $ 710.88 [17.67%]
COMMENT on "PIG": There is no change from the last issue. I missed the last meeting, and will be missing the December meeting also, so I can't tell you what's under consideration for purchase.
C. Fidelity IRA - real portfolio, includes commissions:
SUMMARY - IRA:
Original (1983-86) cost: $ 8,326.19
Present value: $19,131.78
Increase: $10,805.59 [129.79%]
Current yield: $ 886.19 [4.49%]
The performance of this portfolio (including its predecessors) from January 1, 1987 to the present is +74.45%, for a compound annual rate of return of 6.45%.
F. CREF Pension plan; I switch between indexed stock/bond/money funds:
Date Sold Bought
13Mar92 stock @ 56.65 MM @ 13.41
29Apr92 MM @ 13.48 bond @ 31.19
19Jun92 bond @ 32.14 MM @ 13.55
29Jun92 MM @ 13.57 stock @ 56.74
24Jul92 stock @ 56.76 MM @ 13.61
29Oct92 MM @ 13.72 stock @ 58.61
23Dec92 stock @ 61.48 MM @ 13.78
16Jan95 MM @ 14.83 equity-index @ 26.44
20Jan95 eq-index @ 26.19 MM @ 14.84
Values, 27Oct95: stock, 85.70; MM, 15.51
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993: 3.08%; 1994: 4.07%
Gain, January 1 through September 30, 1995: 3.34%
Total gain since January 1, 1988 (7.75 years): 127.93%
Compound annual rate of return: 11.21% (My long-term target: in excess of 15%)
Gain shown excludes the impact of additional monthly cash contributions.
Buying CREF stock on January 1, 1988 and holding it gained 179.14%, for a compound annual rate of return of 14.17%.
COMMENT on "Timer's Trend" : We're again on a BUY signal, so if you mechanically follow these, ride it for all it's worth, to the battle cry of Dow 10000! (We should live so long.)
{, } = "Timer's Trend" (4% and 10% exponential) SELL ({) or BUY (}) signal
=============================TIMER'S TREND===========================
Mon 25 Sep 95 . I # | 4769.93 | .+ *
Tue 26 Sep 95 . I .# | 4765.60 | .+ *
Wed 27 Sep 95 . I# . | 4762.35 | + *
Thu 28 Sep 95 . I . # | 4787.64 | .+ *
Fri 29 Sep 95 . | .# | 4789.08 | .+ *
Mon 2 Oct 95 . I #. | 4761.26 | .+ *
Tue 3 Oct 95 . I# . | 4749.70 | + *
Wed 4 Oct 95 . I# . | 4740.67 | + *
Thu 5 Oct 95 . I # | 4762.71 | + *
Fri 6 Oct 95 . I #. | 4769.21 |+. *
Mon 9 Oct 95 .# I . {| 4726.22 |+. *
Tue 10 Oct 95 . #I . | 4720.80 + . *
Wed 11 Oct 95 . I . # | 4735.25 |+. *
Thu 12 Oct 95 . I . # ]| 4764.88 |+. *
Fri 13 Oct 95 . | . # }| 4793.78 | + *
Mon 16 Oct 95 . | #. | 4784.38 | .+ *
Tue 17 Oct 95 . | .# | 4795.94 | . + *
Wed 18 Oct 95 . | .# | 4777.52 | . + *
Thu 19 Oct 95 . | #. | 4802.45 | .+ *
Fri 20 Oct 95 . I# . | 4794.86 | + *
Mon 23 Oct 95 . #I . {| 4755.48 | + *
Tue 24 Oct 95 . I# . | 4783.66 |+. *
Wed 25 Oct 95 . #I . | 4753.68 + . *
Thu 26 Oct 95 #. I . | 4703.82 |-. *
Fri 27 Oct 95 .# I . | 4741.75 | - *
Mon 30 Oct 95 . I # | 4756.57 |-. *
Tue 31 Oct 95 . & . | 4755.48 |-. *
Wed 1 Nov 95 . I #. | 4766.68 |-. *
Thu 2 Nov 95 . I . # | 4808.59 |+. *
Fri 3 Nov 95 . | .# | 4825.57 |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Mon 6 Nov 95 . | .# | 4814.01 | .+ *
Tue 7 Nov 95 . I# . | 4797.03 | .+ *
Wed 8 Nov 95 . | .# }| 4852.67 | .+ *
Thu 9 Nov 95 . | # | 4864.23 | .+ *
Fri 10 Nov 95 . | #. [| 4870.37 | + *
Mon 13 Nov 95 . I #. {| 4872.90 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 14 Nov 95 . I# . | 4871.81 | + *
Wed 15 Nov 95 . I .# | 4922.75 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 16 Nov 95 . | . # }| 4969.36 |~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 17 Nov 95 . | . # | 4989.95 | .+ *
Mon 20 Nov 95 . | #. | 4983.09 | .+ *
Tue 21 Nov 95 . | .# | 5023.55 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Wed 22 Nov 95 . | .# | 5041.61 | . + *
Fri 24 Nov 95 . | . # | 5048.84 | . + *
Mon 27 Nov 95 . | . # | 5070.88 |~.~+~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue 28 Nov 95 . | . # | 5078.10 | . + *
Wed 29 Nov 95 . | . # | 5105.56 | . + *
Thu 30 Nov 95 . | . # | 5074.49 | . + *
=====================================================================
[, ] = 4% exponential change unconfirmed by 10% exponential (not a signal).
@ = market overbought or oversold. I or & (on baseline) = 10% exponential SELL.