Dividends and interest ARE real. Unrealized Capital Gains MIGHT BE real.
April 20, 2009
– Comments (15)
"We're rich"
"We're in GREAT shape for the future, dear."
"I'm on track to retire in five years."
All of these statements were probably uttered thousands of times during the major bull run that stocks had during the past decade. Guess where most of these people are today? Right back where they started a decade ago...if they're lucky. A massive amount of imaginary "wealth" has been destroyed over the past year. I put the word imaginary in the previous sentence because that's all those gains were...phantom money. They weren't real. Dividends ARE REAL. Interest IS REAL. Unrealized Capital Gains MIGHT BE real.
A bird in hand is worth two in the bush. Capital gains come and capital gains go. There certainly should be a place in one's portfolio to take advantage of the potential for stocks to rise in the long term, especially if you believe that massive inflation will rear its ugly head again some day. However, I perfer to make the bulk of my investments in instruments that pay me. I'll gladly take my money from the companies that I own today and let other people pray that the U.S. economy will grow enough or irrational exuberance will reappear and they will be awarded with larger multiples or higher earnings from the non-dividend paying, high P/E common stock that they own.
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Now that I got that philosophical thought down on virtual paper, let's return to cold hard facts. Ever wonder what economic growth would have looked like over the past several years had the overextended U.S. consumer not been able to use their giant ATM, er um home equity, to borrow and spend? Here's a fantastic chart from John Mauldin's latest newsletter that shows it:
Without the massive mortgage equity withdrawals that happened, U.S. economic growth during '01 and '02 was negative and growth during the subsequent four year economic recovery would have been less than 1% per year. This slower growth was during the height of securitization and during a time when there was practically no risk aversion. I wonder how long it will take the economy to recover now, when mortgage equity withdrawals have fallen off of a cliff. They were only $9.5 billion during the second quarter of 2008 versus $223 billion during the first quarter of 2006.
Add to this tighter credit, higher risk aversion, an increased savings rate, baby boomers passing their peak spending years and economic growth is probably going to be slow for a while. Absent inflation, which is a very strong possibility, growth is what drives stock prices higher. I'll take my money today in the form of large dividend and interest payments and let others try to squeeze their capital gains blood out of a turnip.
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I came across another fantastic chart today that shows what has happened to home prices and where they are likely headed:
The graphic was posted by Henry Blodget over on Clusterstock. Using home price data provided by Robert Shiller, Blodget estimates that home prices have another 10% to 20% to fall until they reach "fair value." However he adds that prices are unlikely to plummet until they hit fair value and then stop on a dime. It's entirely possible that they'll overshoot by 10% to the down side. He believes that "although the rate of decline is likely to ease over the coming months and years...prices will likely keep falling through at least 2011."
Here's another chart that leads to a similar conclusion:
Deej
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