Dear Daily Crux reader,
If there's one concern shared by most of our readers, it's this:
Where is the economy headed next?
Folks want to know if we're in a real recovery… or if another serious recession is just around the corner.
To help answer these questions – and put your mind at ease – we sat down with our friend, Dr. David Eifrig, editor of the Retirement Millionaire advisory.
Longtime readers know "Doc" is one of the smartest, most respected analysts we know… So when we learned he's actually bullish on the economy and stocks today, we knew we had to sit down with him and learn more.
Read on to see why Doc isn't worried…
Good investing,
Justin Brill
Managing Editor, The Daily Crux
www.thedailycrux.com ––––––––––––––––––––––––––––––––––––––––––
about the economy now
The Daily Crux: Doc, it's no secret that many folks are worried about stocks and the economy these days… So when we recently heard you're optimistic about the economy – and bullish on stocks – we knew we had to sit down with you and get your thoughts. Can you explain?
Dr. David Eifrig: Sure… First let me say that I understand the worries. There are some serious concerns out there, especially for retirees and those near retirement age. Banks pay no interest on your savings, and there's not a day that goes by where we don't hear about the Federal Reserve's inflationary policies or the government's out-of-control spending.
These issues could cause serious problems at some point in the future… but the good news is, all the signs I follow point to solid, steady economic for the foreseeable future, and suggest that now is a great time to own stocks.
Crux: What measures do you follow?
Eifrig: The most important factor I watch is inflation. Higher inflation often leads to higher long-term interest rates. Higher inflation could also pressure the Federal Reserve to raise short-term interest rates earlier than they've pledged. Higher interest rates can cause stocks and bonds to sell off, as they become relatively less attractive.
Retirement Millionaire readers know my favorite measure of potential inflation is a data series from the Federal Reserve known as the "M1 money multiplier." M1 is essentially just a measure of the actual flow of money through the economy. The important point to remember is if this measure is over 1.0, it means the economy is expanding… banks are lending and money is flowing. If it's below 1.0, it means money is not circulating.
M1 has been slowly increasing over the past two years, but it's still well below 1.0. So inflation does not appear to be a worry right now… And I feel even more confident about this when I look at some other measures.
One is energy prices. Energy plays a huge role in the economy. When energy prices go up, the increased costs can cause economic growth to slow. But again, we see no reason to worry. Oil inventories are near record highs, prices have been falling, and gasoline prices are no higher than they were this time last year.
On top of that… natural gas prices have plummeted, which is spurring industries like utilities and trucking to convert from to coal, oil, and diesel to natural gas. As this trend continues and picks up speed, we'll see dramatic savings on energy costs for companies, and even lower demand – and lower prices – for oil and gasoline.
Again, we see no signs of inflation here.
Another indicator of potential inflation I like to watch is what's known as production capacity. This is simply the percentage of total U.S. manufacturing capacity that's currently being used to make things. When this measure becomes high – meaning companies cannot easily increase production further – you'll often see companies begin to increase prices.
This measure has been slowly rising over the past few years, but is still at a comfortable level below 80%, meaning we could have years of continued steady growth and low inflation.
The last inflation-related measure I follow is "wholesale inventories" – which tells us whether companies are selling goods quickly or if they're piling up in storage warehouses. When inventories are high, it's unlikely that prices will increase… and the latest data show inventories are actually higher now than they were before the recession in 2007.
Again, these data suggest no worries about inflation right now.
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Crux: Your measures show inflation is unlikely… but what about the opposite? Is it possible these measures aren't signaling just low inflation, but could actually give way to another economic contraction and deflation?
Eifrig: It's possible – but highly unlikely – for a couple reasons. Like I mentioned earlier, while all these measures are showing low potential inflation, almost all of them have been showing slow, steady growth – not contraction – over the past few years.
And a few other economic measures I follow agree.
First is employment – or more specifically, employment in the private sector known as the "non-farm payroll" number. This measure is still well below its pre-recessionary levels, but it's important to note that it's shown slow and steady growth over the past two years. If the economy was contracting or at risk of deflation, we'd expect this number to begin falling again like it did in 2008 and 2009.
The second measure I follow is construction spending, or how much money people are spending to build homes and businesses. This measure finally bottomed early last year and has also been slowly rising ever since. Again, we'd expect this number to be falling again if the economy was contracting, but that isn't the case.
Finally, I follow the government's consumer price index, or CPI, which tracks the price of a basket of goods and services, including housing and transportation.
Now, some folks argue that the CPI underestimates inflation over the long term, but it suits our purposes here just fine. For example, in 2007 and early 2008, the CPI rose from a low 2% to above 5% due to soaring energy and food prices. It then fell below 0% – indicating falling prices and deflationary pressures – in late 2008 and 2009.
If either were the case today, we'd expect to see it here… but the CPI has remained between 1.5% and 3.5% over the past couple years.
So we see a similar picture in all three measures… slow, steady economic growth with little-to-no risk of inflation. And this is a near-perfect environment to own stocks and bonds.
Crux: We know asset allocation is more important than investment selection, but do you have any advice on the types of stocks and bonds you'd like to own?
Eifrig: Sure… My best advice is to own shareholder-friendly businesses that will be standing no matter what happens to the economy. Companies that have stable top line revenues and cash flows and pay dividends and buy back shares when they're low. These are exactly the kinds of stocks you'll find in our Retirement Millionaireportfolio.
Crux: Great advice… You've also long-recommended owning gold and silver as "chaos hedges." With your current outlook on the economy, does this advice still stand?
Eifrig: Yes, it does. While I expect the U.S. economy will continue its steady growth, there are still some uncertainties surrounding Europe, so it makes sense to continue to hold a moderate portion of your portfolio in gold and silver.
But once Europe blows over – either with the first signs of a precipitous collapse or signs that the economies there are improving – we'll be looking to reduce our holding of the chaos hedges from our current allocation.
Crux: Any parting thoughts?
Eifrig: I'd also like to remind folks to keep doing the simple things you can do to maintain your health… After all, without your health, nothing else is important. Taking a few simple steps – like walking every day, learning to meditate, and other ideas we share each month in Retirement Millionaire – can go a long way toward reducing your financial stress and keeping you healthy.
Crux: Thanks for talking with us, Doc.
Eifrig: You're welcome. It's always my pleasure.Editor's Note: Have you seen Doc's controversial new report? If you're like most readers, it will shock you… And it might even offend you… But it could also make a huge difference in how you plan for retirement. Click here for the details. Dear Daily Crux reader,
If there's one concern shared by most of our readers, it's this:
Where is the economy headed next?
Folks want to know if we're in a real recovery… or if another serious recession is just around the corner.
To help answer these questions – and put your mind at ease – we sat down with our friend, Dr. David Eifrig, editor of the Retirement Millionaire advisory.
Longtime readers know "Doc" is one of the smartest, most respected analysts we know… So when we learned he's actually bullish on the economy and stocks today, we knew we had to sit down with him and learn more.
Read on to see why Doc isn't worried…
Good investing,
Justin Brill
Managing Editor, The Daily Crux
www.thedailycrux.com ––––––––––––––––––––––––––––––––––––––––––
about the economy now
The Daily Crux: Doc, it's no secret that many folks are worried about stocks and the economy these days… So when we recently heard you're optimistic about the economy – and bullish on stocks – we knew we had to sit down with you and get your thoughts. Can you explain?
Dr. David Eifrig: Sure… First let me say that I understand the worries. There are some serious concerns out there, especially for retirees and those near retirement age. Banks pay no interest on your savings, and there's not a day that goes by where we don't hear about the Federal Reserve's inflationary policies or the government's out-of-control spending.
These issues could cause serious problems at some point in the future… but the good news is, all the signs I follow point to solid, steady economic for the foreseeable future, and suggest that now is a great time to own stocks.
Crux: What measures do you follow?
Eifrig: The most important factor I watch is inflation. Higher inflation often leads to higher long-term interest rates. Higher inflation could also pressure the Federal Reserve to raise short-term interest rates earlier than they've pledged. Higher interest rates can cause stocks and bonds to sell off, as they become relatively less attractive.
Retirement Millionaire readers know my favorite measure of potential inflation is a data series from the Federal Reserve known as the "M1 money multiplier." M1 is essentially just a measure of the actual flow of money through the economy. The important point to remember is if this measure is over 1.0, it means the economy is expanding… banks are lending and money is flowing. If it's below 1.0, it means money is not circulating.
M1 has been slowly increasing over the past two years, but it's still well below 1.0. So inflation does not appear to be a worry right now… And I feel even more confident about this when I look at some other measures.
One is energy prices. Energy plays a huge role in the economy. When energy prices go up, the increased costs can cause economic growth to slow. But again, we see no reason to worry. Oil inventories are near record highs, prices have been falling, and gasoline prices are no higher than they were this time last year.
On top of that… natural gas prices have plummeted, which is spurring industries like utilities and trucking to convert from to coal, oil, and diesel to natural gas. As this trend continues and picks up speed, we'll see dramatic savings on energy costs for companies, and even lower demand – and lower prices – for oil and gasoline.
Again, we see no signs of inflation here.
Another indicator of potential inflation I like to watch is what's known as production capacity. This is simply the percentage of total U.S. manufacturing capacity that's currently being used to make things. When this measure becomes high – meaning companies cannot easily increase production further – you'll often see companies begin to increase prices.
This measure has been slowly rising over the past few years, but is still at a comfortable level below 80%, meaning we could have years of continued steady growth and low inflation.
The last inflation-related measure I follow is "wholesale inventories" – which tells us whether companies are selling goods quickly or if they're piling up in storage warehouses. When inventories are high, it's unlikely that prices will increase… and the latest data show inventories are actually higher now than they were before the recession in 2007.
Again, these data suggest no worries about inflation right now.
----------Advertisement---------
How S&A reader Robert L. made $183,000
Every year, our firm shows readers how to take advantage of dozens of trading strategies. But of all these ideas, one strategy has proven superior at consistently showing our readers how to make tens of thousands of dollars in profits… like Kip R., who made $60,000… Valerie S., who made $20,300… and Robert L., who made $183,000.
The irony is, these readers were using a strategy that doesn’t require you to buy a single stock, bond, or option upfront to make this money. How is this possible?
Click here for details.
---------------------------------
Crux: Your measures show inflation is unlikely… but what about the opposite? Is it possible these measures aren't signaling just low inflation, but could actually give way to another economic contraction and deflation?
Eifrig: It's possible – but highly unlikely – for a couple reasons. Like I mentioned earlier, while all these measures are showing low potential inflation, almost all of them have been showing slow, steady growth – not contraction – over the past few years.
And a few other economic measures I follow agree.
First is employment – or more specifically, employment in the private sector known as the "non-farm payroll" number. This measure is still well below its pre-recessionary levels, but it's important to note that it's shown slow and steady growth over the past two years. If the economy was contracting or at risk of deflation, we'd expect this number to begin falling again like it did in 2008 and 2009.
The second measure I follow is construction spending, or how much money people are spending to build homes and businesses. This measure finally bottomed early last year and has also been slowly rising ever since. Again, we'd expect this number to be falling again if the economy was contracting, but that isn't the case.
Finally, I follow the government's consumer price index, or CPI, which tracks the price of a basket of goods and services, including housing and transportation.
Now, some folks argue that the CPI underestimates inflation over the long term, but it suits our purposes here just fine. For example, in 2007 and early 2008, the CPI rose from a low 2% to above 5% due to soaring energy and food prices. It then fell below 0% – indicating falling prices and deflationary pressures – in late 2008 and 2009.
If either were the case today, we'd expect to see it here… but the CPI has remained between 1.5% and 3.5% over the past couple years.
So we see a similar picture in all three measures… slow, steady economic growth with little-to-no risk of inflation. And this is a near-perfect environment to own stocks and bonds.
Crux: We know asset allocation is more important than investment selection, but do you have any advice on the types of stocks and bonds you'd like to own?
Eifrig: Sure… My best advice is to own shareholder-friendly businesses that will be standing no matter what happens to the economy. Companies that have stable top line revenues and cash flows and pay dividends and buy back shares when they're low. These are exactly the kinds of stocks you'll find in our Retirement Millionaireportfolio.
Crux: Great advice… You've also long-recommended owning gold and silver as "chaos hedges." With your current outlook on the economy, does this advice still stand?
Eifrig: Yes, it does. While I expect the U.S. economy will continue its steady growth, there are still some uncertainties surrounding Europe, so it makes sense to continue to hold a moderate portion of your portfolio in gold and silver.
But once Europe blows over – either with the first signs of a precipitous collapse or signs that the economies there are improving – we'll be looking to reduce our holding of the chaos hedges from our current allocation.
Crux: Any parting thoughts?
Eifrig: I'd also like to remind folks to keep doing the simple things you can do to maintain your health… After all, without your health, nothing else is important. Taking a few simple steps – like walking every day, learning to meditate, and other ideas we share each month in Retirement Millionaire – can go a long way toward reducing your financial stress and keeping you healthy.
Crux: Thanks for talking with us, Doc.
Eifrig: You're welcome. It's always my pleasure.Editor's Note: Have you seen Doc's controversial new report? If you're like most readers, it will shock you… And it might even offend you… But it could also make a huge difference in how you plan for retirement. Click here for the details.
Sunday, 3 June 2012
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