Always keep an eye on the Fundamentals

USA500, Monthly

There have been some interesting comments that caught my eye recently. Two fellows I hold with great respect each voiced their continued concerns regarding the global growth picture and the US equity markets in particular.
In an interview with MarketWatch last month, “Rich Dad Poor Dad” author Robert Kiyosaki reiterated his fourteen year old prediction that 2016 would bring about “the worst market crash in history”.

2002 was the year that Kiyosaki came to prominence with the first of his series of his best selling personal-finance books.  In the original book he suggested 2016 would be the key year because it is now that the first wave of post war US baby boomers begin to hit 70 ½. In the USA this means that they must (by law) start to take distributions from their traditional individual savings accounts 401(k)’s.  In the USA these 401(k) savings accounts have a very high proportion of shares and government bonds. There are estimated to be over 76 million US citizens part of the Baby Boom generation.

When we add a selling pressure from the first of the baby boomers together with zero income from savings and little capital gains from stock markets at record highs we have the recipe for at least a slowdown in the equity markets. As we saw last year stock market bull runs do not last forever and 2015 saw a clear rounding top in the seven year bull market.

History also shows that there are a number of factors that suggest  the equity markets will be at best, flat this year.

• The 2015 Christmas rally did not occur
• 2016 saw the worst first 10 trading days on record
• January & February were both strong down months
• The US Election follows a “two term” President

The other commentator that caught my eye was Bill Gross (a very successful fixed income (Government Bonds principally) investor who tweeted his thoughts on the other major elephant in the room. He called them “Investor delusions” that will one day be exposed to fresh air: 1) China is growing at 6 per cent per year and that 2) Demographics don’t matter because they move too slowly.

Today China reported its slowest GDP economic growth since 2009 but still in line with expectations at 6.7 percent. Many other data points such as electricity energy consumption and transportation load factors within the country suggest this figure will be difficult to maintain throughout the year. The rise and fall of the Shanghai stock exchange cannot be ruled out again this year. Demographics really do matter as high income countries from Japan to Germany struggle with policies to cope with ever aging populations. As Kiyosaki said fourteen years ago in 2002 “Demography is destiny”.