Where to Put Your Money

What do we make of all this data and news coming at us?  How do we make investment decisions based on all of this?  Where do I put my life savings/investments as it all moves so fast?  These are questions we get all the time as investment advisors.

Let me give you some recent headlines concerning the world and the U.S. economy.

  • The Eurozone is essentially back in a recession, had it not been for Germany, technically it would be.
  • The US is hovering at a 2% growth rate.
  • China has slowed more than forecast and the talk now is one of stimulus.
  • Atlantic City’s April gaming revenues decreased 15%
  • Producer Price Index was -0.02 for April
  • Consumer Price Index was +0.0 for April
  • ADP Employment Change was up only 119K vs. estimates of 170K
  • Factory Orders were less than forecast
  • Announced Job Cuts were 11% higher over last year
  • Average hourly earnings were below last year’s
  • Consumer Credit jumped to $21B more than 2X estimates

If you factor all this in, what do you get?  You get an economy that only grew at a meager 2.2% in Q1 and this was apparently fueled by the consumer borrowing money and using credit cards.  The U.S. economy is powered by the consumer—you, me, grannie and all visitors from out of the country.  As you can see from just this small sampling of the data on our economy, there is little demand for goods and workers.  Everyone either owns what they need, has no discretionary money to spend, or both.  I say it is both.  The equity that we built in our homes was either borrowed against and spent, or it has evaporated.  Same can be said of 401K and IRA plans: many have borrowed from them and others are not back to even from the 2008 crisis, but they are four years closer to retirement.

Back to the question of where to put your money in this economy.  When you invest you have a choice between equities, fixed income or cash.  There are many variations to these.  With stocks you can invest in equities of companies trading on an exchange, private equity or venture capital, to name a few options.  In fixed income you have investment grade, high yield bonds/loans, government debt, municipal bonds, or real estate mortgages to name a few.

When investing in stocks or private equity, you need for there to be a catalyst to make the stock go higher.  In fixed income you only need a steady state business or entity to make sure they are able to make their interest payments to you until they can either pay off your debt or refinance it.  Fixed income, barring any defaults, has a built in rate of return that you can take to the bank.  If you want to add in a default rate and recovery rate based on historical levels, you can still have a pretty good estimate of what your return will be going forward.  The challenge in fixed income is whether or not you can analyze the entity you are loaning money to.  Corporations that file audited financials with the government are pretty easy, but municipalities, our government or even the financials, like J.P. Morgan Chase, good luck.

With that said, high yield over the past 30 years has performed relatively equal or better than all the choices I have given you with varying degrees of risk as compared to them.  As per the equity comparison, the risk or volatility in high yields bonds over 30 years has been about half of that of equities with similar returns.*  Do you want to hope there is a catalyst coming to drive equities higher or do you want to loan good companies money, collect your coupons and know when you are getting paid back your money?

Get used to this economic environment as it is here to stay for a while.

*  See our whitepaper, The New Case for High Yield, for specific numbers.  Blau, Jonathan, Daniel Sweeney, and Karen Friedlander. “2012 Leveraged Finance Outlook and 2011 Annual Review.” Credit Suisse Global Leveraged Finance.  January 26, 2012, p.116.
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