Fintech executive, writer, math geek, and investment systems developer. Founder and CEO of Altruist and Founder of FormulaFolios.

Recession Probability Update - August 2011

Greetings, Each month we measure the strength of the US Economy via our Recession Probability Analytics (RPA).  RPA ranks the economy on a scale of 1 to 100 with 1 being the best and 100 being the worst possible economic conditions.

We feel this takes the guesswork out of how strong or weak the markets are as well as give investors a gauge on how "safe" investing conditions are.  While not perfect, RPA has proven very useful in helping investors avoid major stock market declines by providing a warning when the measurement is higher than 50.

This months RPA:  38.74 Last months RPA:  34.27

The RPA has risen now in two consecutive months and is getting close to going above 40 for the first time in over a year.  The economy is clearly not strong today relative to historical averages, but is not super weak either.  I would call it fragile.

In the next week we'll learn what our governments resolution is to hitting our "debt ceiling" of $14.294 trillion.  What's funny, is that as of my writing this the Unites States debt is actually $14.540 trillion and climbing more than $100,000 every 6 seconds.  Check out to watch it grow - it's pretty amazing.

For those that wonder where this places us in history and what the ramifications might be, check out this cool graphic I found at Wikepedia:

These graphics also show public debt (this is the money we owe as US citizens personally tally up to).  Considering our GDP (gross domestic product - the total of all business done in the US) is only $14.66 trillion - we're in big trouble.

For those who still don't get it, if you add up the National Debt, Social Security liabilities, Medicare liabilities, Prescription Drug liabilities, Government mortgage guarantees, and all other non-funded (meaning we don't actually have the money we've promised to cover these promises) we have a total of $114 trillion in unfunded obligations.  In a nutshell, the debt ceiling is a minor concern relative to the massive problems we'll have paying all the people and promises we've made as a nation.

One last bit of information to help drive this concern into all my readers:  on a per tax payer basis our government has promised $1,027,008 in funding for debt payments and social services.  We're hosed!

So while watching the health of our economy is important via tools like RPA - there's a lot more investors should be doing to protect themselves from inevitable issues caused by our massive debts and obligations.  Here's my quick and dirty hit list:

  1. Have reasonable expectations.  A lot of investors think it's a big deal if the market goes up 10% and they make 5%.  That's short term thinking that will eventually cost a lot of people a lot of money in losses.  Getting reasonable returns while protecting yourself from inflation that comes from excessive government spending and money printing is far more important long term - and that should be the way all investors think.
  2. Don't hold long term bonds and fixed income investments.  Many brokers and sales people are luring conservative investors into investments that have a higher "yield" than what they get currently from their short term, safe investments.  No matter what the sales people tell you - if something is paying more it is always either less safe, or longer term, or both.  Eventually the Federal Reserve will have to raise rates to fight off inflation and rates will have to start rising.  When rates go up long term fixed income investments will lose value.  So be patient and eventually short term investments will start paying more.  Remember the saying "pigs get fed and hogs get slaughtered."  It basically means that you shouldn't let low rates get you down and get greedy chasing a couple extra percent in the short term.
  3. Be globally diversified.  Investors will need to apply this mantra to both their growth investments as well as their income investments.  They'll also need to be sure to hold non-equity and fixed income investments like commodities (gold, silver, other metals, agricultural commodities, energy commodities, etc).  This is because the US imports almost 2/3 of what we consume.  If the US runs into major debt problems and starts trying to print (even more) money to pay debts and domestic promises, we'll eventually have to pay a lot more for metals, produce, energy, etc.  So having some in your portfolio is a nice hedge against traditional market risks.
  4. Don't panic.  When bad news happens know that markets will probably drop.  When markets drop they often over-shoot what they should realistically should.  If you followed the first 3 steps you should be okay long term - even if there is some short term pains.  Also remember that the media will most definitely sensationalize everything and cause even more excess panic than what is realistic.

At my firm we're doing these steps and more.  I hope all my readers have proactive advisors thinking along the same lines.  It's not exciting plugging along with modest returns while some investors are roaring - but it's not what you have today that really matters - it's what you have the rest of your life, and that is how your money should be managed.

This has been a much longer than normal post - but one that is timely and important.  I sincerely hope it helps you understand what's happening in the world of finance and ultimately in making better decisions with the resources you have.

If you have any questions about this measurement feel welcome to contact your advisor here at Retirement Wealth Advisors.  Thank you for following our updates and have a great weekend.

With Regards,

Jason Wenk

US Debt Crisis - Some Perspective

US Debt Crisis - Some Perspective

Recession Probability Update - July 2011