A Look Back to Look Forward

"You can't help but with 20/20 hindsight go back and say, 'Look had we done something different, we probably wouldn't be facing what we are facing today." - Norman Schwarzkopf

In hindsight it may even seem inevitable that a socialist society will starve when it runs out of capitalists." - Larry Niven

The problem with looking back is that your mind is warped with a different sense of what happened at the time.  While historians can try to relive famous battles or dissect military maneuvers pointing out the flaws and speculating at the revised outcome, they are not dealing with the stress and the inputs of the situation as it happened so it is impossible to say that the choice made would have been different.  Furthermore speculating at the changed outcome is also rather pointless as changing history results in a completely different world from that which we live in today.  For every action there is a reaction and speculating at what that reaction would be to something that did not happen is relatively pointless.  With that said it is always good to look back on the year to try to relive some of the decision points in an effort to learn from them in an effort to limit the errors going forward.

The stock market had a banner year and will end up around 30%.  While I did not participate in this rally I feel comfortable with my results for the simple reason that pretty much everything that I worked on is panning out as expected.  What I did not expect was a massive rally on the back of weak economic fundamentals but in hindsight the Federal Reserve's easy money policy set the stage for the rally.  Based on this it certainly looks like more to come in 2014.  Janet Yellen, the incoming Federal Chair, will continue to print money and the market should continue to fly however once again I do not intend to participate for the simple reason that the market is running too far too fast and without the support of economic fundamentals the result is going to be as disastrous or maybe worse than 2000 and 2007.  Now whether this crash happens in 2014 is any one's guess but I would not be surprised to see the market continue to rally at least through the first half of the year.

One potential problem for the market is the yield on the 10 year note.  This is a barometer for interest rates in the United States and with the yield approaching 3% this could start to have a negative impact on growth.  Already the housing market is feeling the pain of higher rates and if rates creep much higher money is going to start to return to bonds at the expense of the stock market.  Just looking at large company retirement funding obligations, once the rate reaches around 3.5% a lot of corporate treasurers will be plowing billions into the bond market, locking in the yields and protecting their companies from another round of underfunding.  There will be other buyers along with the Federal Reserve but this is a number worth following closely.

Housing had another excellent year but as hard as it is to believe with rates as low as 4% on a mortgage it appears that the easy money has been made in this market and that without a healthy uptick in the employment numbers this market will probably not see much in the way of return in 2014.  Obviously there will always be pockets of the country that will produce a good rate of return but as rates tick higher the impact on this market will be large.  This will affect unemployment as a weak housing market will place more people back on the unemployment line once again.

On the unemployment front 2013 was a struggle.  Sure the unemployment number did fall but the results of the continued stimulus were not at all successful.  Unemployment has remained stubbornly above 7% and it looks like it will take a herculean effort to get it below 6.5% which is the Federal Reserve's target.  Until we get to that number the Federal Reserve expects to keep stimulating but the problem is once again the interest rate increases.  If these start to spiral higher at some point they will have to turn their attention to driving the yield down as otherwise all their efforts to stimulate will be for nothing.  For these reasons I do not see unemployment falling below 6.5% in 2014.

Precious metals were the worst performer of 2013.  Those of us that invested into gold and other precious metals we felt the pain of another bear market.  Stock prices fell around 40% and the commodity price fell over 20%.  It was carnage in this market which makes it even more interesting given that the fundamental reason for holding gold is firmly in place.  So you had a year where stocks rocketed on weak fundamentals while gold was decimated on strong fundamentals.  Furthermore you had more a market that brought more money losing companies to market than in any year barring 2000 and you can see why I am still not interested in participating in the stock market in 2014 other than a small trade here and there.

Not that I am not participating at all as the majority of my assets are tied up in privately held businesses that are starting to perform admirably.  It is clear to me having been involved in numerous start up companies over the past few years that the playing field has been tilted firmly in the direction of large business.  Small businesses continue to struggle and until this playing field is leveled the outlook for economic growth and lower unemployment in the United States is bleak.  The problem is that it took over 50 years for congress to get us to this point and there are no laws on the horizon to change this.  In fact things are getting even more arduous with the Health Care Reform and higher tax rates destroying the middle class and forcing many small businesses to shut down.  Without this engine of growth the United States will continue to see slow or negative growth for the foreseeable future.

I wish all of you  a wonderful holiday season and all the very best for 2014.  I look forward to an excellent year and I hope that you all manage to listen to my radio show on ESPN 1700AM radio or download the podcasts at www.theportfoliodoctors.com.