Coming Back From “The Great Recession” – Empty Walls and Lonely Nail Heads

By Riese Jones - August 20, 2012 | Tickers: AEP, XOM, JNJ, PG | 0 Comments

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     Yes…you are probably wondering what “The Great Recession” and the rest of the title means. It was an epiphany I had tonight. Drinking a beer…home alone in desolation after a long week at work. Like many of you, I work longer now these days – 10 hour days, six days a week for less money than I made before the “Financial Crisis”. I have barely managed to hold onto my house through all the turmoil of the past four years. Like many of you out there reading this right now – the last four years have been filled with personal stories of hardship, heroism, despondency, utter despair, and if you are lucky, holding friends close and dear for propping you up emotionally, psychologically, and maybe even financially during these very difficult times.

     In truth, our government officials and bureaucrats have failed us – us the “Average American” – where are the “Average Americans” in politics? It seems as though the only public officials we see and hear about in the press are multimillionaires who have no earthly idea of what life is like for the “Average American”. Speaking of average – I heard a statistic the other day – 15.1% of Americans are living at the poverty level or below as of last year which is expected to reach 15.7% when it is reported in November of this year – the highest rate since 1965. Who would have thought in such a rich nation we would be battling the extremes of the “haves” and the “have nots”? Like many of you – I once had a “secure job”, I once had extra money each month. After losing a child before birth, losing my job, getting divorced (while unemployed), and trying to carry my household alone on just one lesser salary – I have been emotionally, mentally, and financially devastated by “The Great Recession” - similar to those of you reading this today.

     I guess the real question is “What now”? What is next for you, me, and all of us? The US Government (the people who are multimillionaires who are making decisions for the “Average American”) has spent over $15 trillion dollars – of OUR MONEY!!! Over $15 trillion spent which has had no real positive affect on the “average American”. Our jobs outlook is no better than it was before we spent this money. The executives who got us into this mess received their “golden parachutes” and here we are dealing with the aftermath of the greed they used to make themselves wealthy at our expense. So what for you and me now…what does the future bring?

     As for me – I am now starting to build my life all over again. It feels like a long time since I have truly “lived”. I am still wondering if I can hold onto my house – I can’t really afford it anymore on my reduced, one person household income in spite of my recent refinance in an “historically low” interest rate environment. My car, that I leased while married and while I was earning more money, is also completely unaffordable – thank goodness the lease is up in February so I may actually be able to fulfill my lease obligations and not completely destroy my credit. I have spent every dime of my savings and also tapped into my retirement assets over the years just to pay for my liabilities and preserve my credit. What is astonishing to me is I am one of the lucky ones. I actually have kept my house (so far  - the jury is still out on my ability to do so in the future and I do not think I can make another years’ property tax payments after 2012). I have decent credit. On the outside, by all appearances (except for my neighbors who have seen the decline in lawn care, less watering of my lawn, the brown/dead spots, and the longer time between manicures) – all appears okay. But if you peel the onion, take a look at the devastating impact – financially, emotionally, and mentally – “The Great Recession” has taken a staggering toll – to me…and I can only imagine the impact to those who are in even worse shape than me. I didn’t lose everything like so many out there – I lost two thirds of my net worth. Any way you slice it my fellow Americans – most of us are a decade or more behind where we were when “The Great Recession” started.

     As I mentioned, the US Government spent over $15 trillion of our money wastefully – as government is never as effective at spending capital as the private sector my friends. It would have been better to have given every man, woman, and child the $39,000+ we now all owe rather than spend our money to “create more jobs” or avert a “Great Depression II”. What we have now bought ourselves is double digit inflation. I know you are thinking…”but we are at historically low interest rates” and “there is no sign of inflation”. I will tell you that history rhymes a lot but has a way of repeating itself. You cannot print over $15 trillion dollars and not have a depreciation of the US dollar (inflation since imported goods and commodities will take more US dollars to buy). The world has created a middle class in many countries that never had one before – many emerging markets in Latin America, South America, China, and India are becoming consumers and they will be using up more natural resources – increasing the price of these natural resources to you and me.

     While we are sitting at 15.0% unemployment, (I realize this is different than the number the US Government currently reports but if you look up U6 unemployment – this is a more accurate figure and a statistic the government keeps – our “actual” unemployment is currently at 15.0%) and without the banks lending money as readily as they were before 2008 (banks “create” money by adding leverage to the economy – creating a multiple of dollars for each dollar they hold in deposits by lending out multiples of the money they hold) – we will not have inflation. At some point, we will both get people back to work and the banks will start lending money more readily again. When this happens – WATCH OUT! The Federal Reserve is ALWAYS looking in the rear view mirror – looking at data to determine when the economy has mended and then, and only then, will they begin to raise interest rates. By the time the Federal Reserve acts and we start raising interest rates again they will be playing “catch up”. The genie will already be out of the bottle and we will be trying to contain the epic rise in inflation – similar to the Fed’s actions in mid-1970’s and 1980’s all over again -  when they raised rates many times to the extremes of double digits.

     Anyone reading this – I hope you are not holding long term bonds. I realize you are “not happy” with the interest rates and yield your bank accounts are paying right now – what will happen though when interest rates rise, and it will be a couple years from now, and it will happen overnight – your bonds will feel and behave like you were invested in stocks in 2008 during the “Financial Crisis”. Your bonds will decrease dramatically in value instantaneously – you will lose A LOT of money AGAIN!!! GET OUT of your long term or intermediate bonds before this happens. Any bond fund you hold or individual bonds – heed my warning – you have maybe a couple years or less, if lucky, to trim your positions. The Fed has said they are leaving rates the same until late 2014 – the minute they change their tone or the market “perceives” interest rates are increasing – your bonds will crash like stocks in the 2008 financial crisis. Bonds are not a “safe haven”. Start getting out NOW! Stay with low duration (a measure of volatility of bonds) bonds if you have any in your portfolio. DO NOT KEEP ANY LONG TERM OR INTERMEDIATE BONDS ABOVE 2 OR 3 IN DURATION!!! YOU WILL GET SLAUGHTERED!!! A healthy exposure to larger companies – dividend yielding stocks and commodities (natural resources) should serve you better in our upcoming “Inflation Crunch”. DO NOT GET HIT AGAIN by holding mid or high duration bond portfolios. Keep an asset allocation model and overweight in large dividend producing stocks and commodities in order to circumvent the coming “Inflation Crunch”. You have two years at best – maybe a bit less in order to divest of your mid and high duration bonds and reposition yourself. You have been warned.

     So where do you invest once you have divested of your intermediate and long term bonds? Look for industries that have historically done well in an inflationary environment. There are several industries that have the ability to raise prices quickly and pass these costs directly to consumers - namely energy, utilities, and pharmaceutical companies. Regardless of the prices these companies charge - we all need to fill our cars with gasoline, turn on our lights, and take our medication.

     In order to make up for the loss of yield and income from the bonds you are selling, I recommend companies in these industries that are currently paying a dividend yield greater than 3%.

     In the energy sector companies like Eni SpA 4.6% dividend yield, Total S.A. 4.8% dividend yield, ConocoPhillips 4.6% dividend yield, British Petroleum, BP p.l.c  4.5% dividend yield, and Chevron Corporation 3.2% dividend yield. Although Exxon Mobil Corporation (NYSE: XOM) is a perenial stalwart in this sector, with a current dividend yield of 2.6% and the continued internal political strife among their geophysicists depending on if you came from the Mobil side or Exxon side of the organization, which is still relevant inside the organization many years post merger making internal  politics the driver of the decision making process sometimes above and beyond good business sense - I would expect the other companies to outperform Exxon Mobil Corporation over the long term.

     In the pharmaceutical sector I would stick with the big players who are also paying greater than a 3% dividend yield. Companies like GlaxoSmithKline plc., 4.5% dividend yield, Pfizer Inc., 3.7% dividend yield, Eli Lilly & Co 4.6% dividend yield, Sanofi  4.1% dividend yield, Bristol-Myers Squibb 4.3% dividend yield. I would favor these pharmaceutical stocks over those that look a bit pricey on valuation with higher P/E ratios such as Merck & Co., Inc., Abbott Laboratories, Johnson & Johnson (NYSE: JNJ), and Procter & Gamble (NYSE: PG). You would also figure with Johnson & Johnson and Procter and Gamble, maybe Warren Buffett knows something you and I don't know - why else would he sell significant portions of his positions in these companies (I am sure the valuation and high P/E ratios also played into Warren Buffett's decision)? It is best to stick with the stocks in this sector with the lower P/E ratios.

     In the utilities sector, Duke Energy Corporation dividend yield 4.5%, Southern Company dividend yield 4.2%, and American Electric Power Company (NYSE: AEP) dividend yield 4.3%, are a good choice. American Electric Power Company just raised their rates for electricity on residential customers in Ohio- as a great example of these industries and their ability to increase their prices quickly in order to keep up with inflation in the future.

     So what does all this have to do with “Empty Walls and Lonely Nail Heads”? Two years after my divorce – I finally put some paintings up on those empty walls and covered those lonely nail heads. For many of you – it is going to take a lot longer to start piecing your lives back together. I began tonight – added some color – some signs of life. I realized I have been in a “Great Depression II” – financially, emotionally, and mentally - of my own the last few years. I hope like many of you – tonight was the first night in my long journey out of the abyss. I wish you well my fellow Americans. The first step is always the hardest. Prepare yourself before the next fall – get out of your mid and high duration bond portfolios and reposition yourself for the future. Good luck to all – I feel your pain. The good news is you have time to prepare for the “Inflation Crunch” – the time to reposition and act is NOW – hang some paintings and add some color to your portfolio before it is too late. Quality energy, pharmaceutical, and utility stocks paying good dividends are a great place to hang your assets as you prepare for the coming "Inflation Crunch". You have been warned. You do not need to have any “Empty Walls or Lonely Nail Heads” in your future if you act today to prepare yourself for the next asset class to be slaughtered. Please prepare and get out of those mid and high duration bond portfolios. Best of luck to you my fellow Americans.

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