This is a continuation of the 4 Fs: Fear of a False Factor is Favourable but with an expansion of the main points.

What is really going on?

The reason that today feels as scary as 2008 is that the memory of 2008 is still fresh. But this is nothing like 2008. In 2008, credit dried up and nobody could get cash. Today, many companies and investors are sitting on huge cash holdings. In 2008, we had real problems – a credit crisis, a real estate crash, an oil bubble, and a recession. In 2011, all we have is primarily political issues.

U.S. “debt crisis”

The U.S. can easily pay its bills if it wants to. It has huge powers to raise taxes. Simply adding a GST of 5-7% would already put the U.S. into annual surpluses. Their income taxes are the lowest since the 1950s (only 14.9% of GDP).1 Of US households, 51% pay no federal income tax. 1 Their gasoline taxes are extremely low. There is no national sales tax, their mortgage interest is tax deductible and it is the largest consumer economy in the world.

The US is a massively under-taxed country.

The news makes it sound like everyone has lost confidence in the US. However, there is clear evidence that they can pay their debts:

  1. The credit rating agencies, who analyze finances to death, still rate the US AAA or AA+. If they were unable to pay their debts, the rating would be far lower.
  2. US treasury bills are still the safest investment in the world. This is why huge investors globally have been piling into them lately. It’s very ironic and revealing that fears that the US cannot pay its debts on its bonds resulted in huge amounts of money being invested in US bonds.

The U.S. budget looks quite bad because it shows lower tax revenues during their recession combined with large tax cuts. Obama also spent a lot of money on a “stimulus package” the last couple of years. Like most government spending, it was 80% wasted. Projections of U.S. debt just project the existing inflated budget deficit and assume that nothing will be done.

The statistic used to try to claim the debt is too high is that the total debt to GDP ratio is over 90%.1 This is a strange comparison that accountants and lenders rarely use. It compares debt to income. It is like saying your mortgage is more than 90% of your salary. So what? The relevant figure is your debt payments to your income. This figure is not quoted because there is no story. U.S. debt payments are lower now than 3 years ago, because interest rates are so low. Interest on public debt in 2010 was $414 billion, down from $430 billion in 2007. 1 How can there be a “debt crisis” when interest payments on the debt have declined?

The US can easily pay its debts and the solutions are not complex. Solutions will certainly involve some tax increases. It is not clear yet what it will take to give them the political will necessary, but their politicians will eventually be forced to work together and create a solution.

Political Circus

The real issue is political. Politicians have made it an issue as they posture leading up to the 2012 election.

Obama and the Democrats spent (or wasted) tons of money to try to stimulate the economy and create jobs in 2009-10. The vote in November 2010 that gave the Republicans the majority in the Senate deadlocked the government and meant Obama needs the support of Republicans to pass any legislation. The Republicans, including their more radical Tea Party movement, are using the debt and deficit to push for spending cuts and make Obama look bad for having spent so much on the “stimulus”.

The “crisis” is not that the U.S. cannot pay its bills, but that the politicians are rigidly stuck in their positions and will not compromise. The government is dysfunctional.

There was never any real doubt that a deal would eventually be reached on the debt ceiling, since no politician wants to explain to seniors in their district why they did not get their pension cheque. Back in May, it was obvious to us that there would be a “miraculous”, last minute deal.

You can understand all the news about the US debt if you think of it as political posturing.

U.S. Credit Rating Downgrade

Even the downgrade of the U.S. credit rating from AAA to AA+ is political. Only 1 of 3 credit agencies downgraded them and the reason given was a lack of political willingness to compromise, not the actual ability to pay. The S&P said they had lost confidence in the ability of the US government to make decisions. The S&P debt rating agency even made a $2 trillion math error, but that did not matter, because the downgrade decision was based on the state of U.S. politics.

Canada went through this 20 years ago. We were running large deficits and had our credit rating cut. There were predictions of a debt spiral. Then we implemented the GST (replacing the dreadful manufacturers’ tax), made some spending cuts and were back in a surplus. It took a few years to regain our AAA credit rating. The US can do this as well.

This downgrade is not really relevant to investing anyway. The huge investors around the world are piling into US treasury bills (even though the interest rate is almost zero) because they know it is still the safest investment on the planet.

Debt in Europe

The problem in Europe is also primarily political. The Eurozone has provided one currency, but there are still 17 countries with their governments trying to hold onto their identity and power to make budget/fiscal decisions. These 17 governments are the problem. They need to give up more power, move toward a more complete political union and not allow themselves to spend more money than the taxes they bring in.

As usual, governments need a crisis before they act, which is why we have had a series of crises in Europe. We will likely continue to have a series of small crises in Europe until the governments are forced to act, but we believe that all will be resolved. The European Union will definitely support all its member countries through each crisis. Why?

There is a deep 60-year commitment to the European Union. American news questions whether the Euro will survive, but as usual, Americans are out of touch with the rest of the world. The extreme nationalism that resulted in the 2 world wars made it clear to Europeans that they need to work together.

Europe dominated the world in the 1800s, but US economy is almost as large as all of Europe combined now for one main reason – they have 50 countries vs. 1 for the US. Wealth is created by the free movement of workers, money and products. Until the European Union was created, all the country borders were a massive drag on growth. Even now, Europeans hesitate to leave their country and the Eurozone is only 17 of 50 countries in Europe.

Europe is slowly moving to financial and political unification, and the Eurozone continues to add countries. These “financial” crises are speeding up this process.

We expect more crises in Europe, but we expect all to be resolved.

Double-dip Recession

As usual, the media exaggerates a story. Our fund managers are all forecasting economies to only slow down a little. The US economy will grow a bit slower for the next few years – probably 2-2.5%, not the 3-4% we have been used to.

There is often talk of double-dip recessions, but they almost never actually happen. There is only one case of 2 back-to-back recessions in history (early 1980s). Another recession is usually predicted after a recession, but double-dip recessions are actually very rare.

This is again only partly relevant to investing. Despite what you hear, the stock market is not really correlated to the economy – either short term or long term. The stock market usually rises during recessions, just as it does during economic growth.

Companies are in great shape

The real news that is not getting proper coverage is that companies are in great shape:

  1. Profits at record highs: The consensus forecast for earnings in the S&P500 is $100.07 for 2011 and $113.43 for 2012 – both are all-time record highs.3
  2. Markets are cheap: The forward P/E ratio for the S&P 500 is 11.52 4, which is 28% below the historical average of 16%. This is the lowest since 1985. Low P/Es are usually associated with high interest rates. If you exclude periods of high interest rates, then this is the lowest since 1954.
  3. Balance sheets are strong: Company balance sheets are financially more solid than they have been in decades and many have mountains of cash. There is no “debt crisis” for companies either.


The US can easily pay its debts and will eventually find the political will. Europe will likely continue to have crises, but the Eurozone will stand behind all its members and the crises will all be resolved. We are not having a double-dip recession and our financial system is not falling apart.

The stock markets fear many things now, but we believe NONE of them will happen.

This is why stock markets are the cheapest they have been for decades. Unlike the end of 2008, company profits are at record highs. Company balance sheets are financially more solid than they have been in decades and many have mountains of cash.

For long term investors, this is what great buying opportunities look like – overly pessimistic markets combined with very strong company fundamentals. “Be fearful when others are greedy and greedy when others are fearful.” 2

The current price of stocks is based on what most investors think will happen. There is a buying opportunity when the market is too fearful of things we are confident will not happen.

The long term growth of the stock market will continue to reward those that have faith and patience.

Remember the 4 Fs: Fear of a False Factor is Favourable.

1 Wikipedia
2 Warren Buffett
3 Reuters
4 Wall Street Journal

“Disclaimer: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Opinions expressed are the personal opinion of Ed Rempel.”

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website  You can read his other articles here.


  1. Ed Rempel on September 19, 2011 at 1:17 am

    Hi SST,

    I get it. You think that multiple catastrophes will happen and life as we know it will end. We should all start stocking up on canned food.

    We can quote all kinds of stats, but I all I’m saying is that our fund managers are confident that none of these things will happen (list in post 99). They are in the thick of the action, plus some have great contacts among the decision-makers in government and business.

    We’ll see in the next few months or the next couple of years what happens. Let’s make a note to check back in a few months.


  2. Ed Rempel on September 19, 2011 at 1:21 am

    Hi SST,

    Actually, it’s like deja vu all over again – the causes of the current gold bubble are very similar to the causes of the 1st bubble in 1980.

    The Hunt brothers tried to corner the market on silver, not gold.

    Check Wikipedia. The main causes of the 1980 gold bubble were:

    1. Speculation of inflation.
    2. High oil prices.
    3. Russia invading Afghanistan.

    “History teaches that man does not learn from history.”


  3. Ed Rempel on September 19, 2011 at 1:50 am

    Hi again SST,

    Wow, you have really bought into the index/ETF marketing. “Mr. Market is ALWAYS correct”???

    This is worth mentioning, because few people seem to know about the death of the Efficient Market Hypothesis.

    This theory is that the market is efficient and takes into account all information, so the Mr. Market always prices all stocks and market investments at the correct price.

    IF you actually believe that, then you must also believe:

    – All stocks and commodities have the same future profit potential (adjusted for risk).
    – You should be indifferent to which investment you have, since all other stocks/indexes have the identical profit potential to your investments.
    – All people that beat the market did it purely on luck.
    – A monkey can invest as well as Warren Buffett.
    – Nortel was correctly valued at $124 and also correctly valued at $.69 2 years later.
    – Bubbles, manias, and overly pessimistic markets cannot ever happen. The tech bubble correctly valued all tech stocks.

    In your specific case, SST, if you believe that “Mr. Market is ALWAYS correct”, then you should have zero hesitation in switching your gold for RIM shares.

    While the EMH is still talked about a lot, it is widely agreed to be false in its full form. Anyone that believes the investments they own are better than investments they don’t obviously does not believe the EMH.

    There are degrees of the EMH, though:
    – “Strong EMH” is the full theory discussed above that is obviously false.
    – “Semi-strong EMH” is also generally believed to be false. It holds that people can beat the market with insider or first-hand knowledge, but fundamental research and technical analysis (charting) are useless.
    – “Weak EMH” version is probably true, though. It holds that a good stock-picker can beat the market with insider/first hand information or with good fundamental analysis, but technical analysis (charting) still does not work.

    The most thoroughly-researched book on this topic I have seen is “The Myth of the Rational Market” by Justin Fox. It is a “must read” if you want to understand this topic thoroughly.

    In the book he tells about a recent conference of university finance professors. They were asked to raise their hand if the taught the EMH. Nearly all raised their hand. Then they were asked if they believed the EMH – only one hand went up.

    I wrote 3 articles with more info on this topic: .


  4. SST on September 20, 2011 at 9:00 pm

    @Ed: First thing — I stand corrected — it was indeed silver the Hunt’s were after. No idea WHY I got that incorrect! Momentarily stupefied?

    The 1980 gold bubble was a one-month 75% spike. The current rise in gold has taken 10+ years — NOT one month. Take a look at a 10-yr. chart, see any spike at all? It has risen only 20% in the last two-and-a-half months. Hmmm, AAPL is also up over 20% during the same time — does that mean APPL is in a bubble, too? Oh, right, they have “earnings”. GM had earnings too. (Disclosure: I am long AAPL)

    Yes, gold is well above its trendline and could see a pull back to $1,400 (-25%), but a bubble? Hardly. Was gold in a bubble in 2008 when it dropped almost 30%? Nope. Take a look at the string of easy money-fueled bubbles since the 80’s: S&L, internet stocks, housing, credit (finally!)…and now ??? With the chickens coming home to roost, there isn’t any room or fuel left for any further bubbles, including gold. Guess time will show us.

    “Wow, you have really bought into the index/ETF marketing.”
    I’ve never bought an index or ETF, and most likely never will.
    Or do you mean marketing more in terms of trying to sell the long-term S&P 500 returns supported with data going back to 1872 — even though there was absolutely ZERO possible manner in which an average investor could have mirrored the movements of the S&P “500” prior to 1978?

    “I get it. You think that multiple catastrophes will happen and life as we know it will end. We should all start stocking up on canned food. We can quote all kinds of stats, but I all I’m saying is that our fund managers are confident that none of these things will happen (list in post 99).”

    I didn’t say fill your basement with canned goods, did I?
    What I did do was point out the very current position of your list (#99) which you and your team think will not and is not taking place. You can believe all you want that those events are non-events, the facts very much show otherwise — show me they are NOT happening right now! I’ll believe in facts long before an embedded fund manager’s confident opinion.

    As for your list, I’ll trend heavily, again, toward the facts (#100), unless you would like to point out exactly which major country is paying down their debt principal and not incurring any new debt? Or explain where the growth will come from in the USA — the world’s largest economy currently running (4-yrs. in) a GDP less than during the Great Depression with 20% unemployment? Or why you think there won’t be yet ANOTHER American Lost Decade with the S&P 500 eking out a brilliant -1.5% pre-inflation per annum loss as it did during the ’00s?

    Even the US Energy Information Administration admits: “Concerns about fiscal sustainability and financial turbulence suggest that economic recovery in the [developed] countries will not be accompanied by the higher growth rates associated with past recoveries,” But, hey, what do they know.

    As per “Mr. Market is always correct”…what I did NOT say was “Mr. Market always prices all stocks and market investments at the correct price” (and please, stop putting words in my mouth). What I did NOT say was that the market is efficient and/or rational — how can it be with all the government meddling and corporate fraud? What I DID say was that the market is always correct.

    Further explanation: let’s say the S&P is at 1200 — that is the level at which all current influences — real, irrational, — have determined the S&P to be at that moment. It doesn’t matter if your thoughts or opinions or confidences say the S&P should be at 1500. Mr. Market tells us, ultimately, what is going on right NOW — and that price is correct. You can only buy/sell the market at its current level (or higher/lower, if you so choose), regardless of any opinion you may have. Besides, any investment with a forward P/E greater (or less) than 1 is experiencing “incorrect” pricing.

    A good analogy would be to think of the market as a car crash. What the market shows is the result of the crash — that’s it. It doesn’t care which car was speeding or which driver was drunk or who ran the red light or if the road was icy; it doesn’t show how much will be paid out in insurance or the influx of business to the auto-body shop or car dealership; it doesn’t show which brand of recalled car or at what intersection or the price of gasoline — all it shows is the crash, NOT the cause and/or effect.

    Bottom line to all this back-and-forth (and as I’ve repeated many times) — there is a time and place for everything. Sometimes it’s best to put your money into stocks, or bonds, or precious metals, or real estate, or commodities, or even canned goods (hey, world food prices have risen 40% in the past year!). I understand that the paper markets are your business, and that you have to sell them to your clients in order to make your money. It is, however, personally naive and professionally irresponsible to think that the stock market is the ONLY venue in which to invest and make money.

    We can argue theories and course-of-action all day, but I prefer to rest on my bottom line profit — that bastion which can NOT be argued. As always, time will tell which investments yield the largest returns.

    As for switching my gold to RIMM stock…not gonna happen.
    I have, however taken some precious metal profits and invested in private companies — NOT public stocks.

    It would be great if we re-visited this in 365 days to discuss how the events of the day played out and what effect they had upon various economies and markets.

    May the biggest profit margin win.

  5. SST on September 21, 2011 at 8:36 pm

    As an addendum, and for any who cares, I scoured this snugly bit of market truth from a source of utmost integrity and respect*:

    $1 invested in commodities or stocks; 1970 – current (41 years)

    Commodities = $97.55; 11.82% per year
    Stocks = $40.90; 9.47% per year

    The ONLY time stocks outpaced commodities during the last 41 years was 1997-2000 — during the internet bubble! Oops!

    Don’t let anyone sell you on stocks, especially if it’s their job to do so, and even more if you haven’t done your OWN research! Wealth comes in many different forms…

    *(if anyone wishes further info and/or data, please let me know and I’ll forward/post it.)

  6. SST on September 22, 2011 at 11:35 am

    Good thing we have nothing to fear from an Operation Twist factor!


    Looks like this five-years-running recession will keep on keepin’ on.

  7. Ed Rempel on September 23, 2011 at 12:19 am

    Hi SST,

    I’m back from 2 investment conferences.

    Where did you get the commodities return figure? Is that commodity stocks or hedge funds? The only ones I can find show a low return with commodities only tripling over recent 25 years (about 3%/year). For example, .

    This would make sense, since commodities are a physical substance. Most physical substances are have long term returns not far different than inflation. They may have high and low periods, but the long term is usually not far from inflation.


  8. SST on September 23, 2011 at 10:23 pm

    @Ed: “Where did you get the commodities return figure? Is that commodity stocks or hedge funds?”

    The info is taken from an Ibbotson report.

    Neither stocks nor hedge funds — purely commodity indices vs. equity indices.
    I thought it fair since the ‘historical S&P 500 return’ mantra is a favorite among industry professionals.

    “Most physical substances [commodities] are have long term returns not far different than inflation. They may have high and low periods, but the long term is usually not far from inflation.”

    You better check your calculator batteries there, Ed.
    In the exact same report, annual inflation comes in at ~4.5%, commodities returned almost 12% per year — 166% more per year than inflation! Not sure what your definition of “not far from” is, but that’s a pretty wide gap in my opinion.

    All that said, however, it does not lend proclivity for gains in commodities. Although, with the world population growing and sucking up food, land, and energy at an ever increasing pace…I doubt a downward trend is in the books.

    (Disclosure: long land, food, energy, silver — yup, even after today!)

  9. SST on September 24, 2011 at 11:23 am

    @Ed: “Companies are in great shape — Markets are cheap: The forward P/E ratio for the S&P 500 is 11.52 4, which is 28% below the historical average of 16%. This is the lowest since 1985.”

    Now seems like an apropos time to address this statement.

    1) using a forward P/E gives distorted and wholly false numbers. How can you quote historical returns of one type and then turn around and quote future returns of another type? You have to use trailing for any kind of consistency or credibility.

    2) Trailing (12-month) P/E = 13.5.
    However, Schiller’s data computes a trailing 10-year P/E = 19.5.
    I’m not exactly sure of his methodology pertaining to replacements, but I’ll take his word that his data is solid.

    3) Funny you should mention 1985. For me to actually buy into the S&P, the P/E (Schiller style) would have to drop to 1980/83 average levels = 8.5. Why, you might ask? My reply:

    i) Depository Institutions Deregulation and Monetary Control Act (1980)
    ii) Garn–St. Germain Depository Institutions Act (1982)

    And you wonder why the S&P P/E hasn’t been this low since 1985?

    A return to a true pre-credit tsunami P/E of 8.5 still requires another 26% – 56% drop (your ‘forward’ through to Schiller trailing) in P/E. This would come with a 38% drop in the S&P, down to 700 (using 10-year trailing earnings, inflation adjusted).

    Others might say the market needs to, or will indeed, plummet 92% to 100, to wipe out all the last 30 years of false prosperity and match the nominal 1979-80 level. I would use inflation-adjusted earnings for 1970-79 — $37.82 * 8.5 (P/E) = 320 S&P, only a 70% crash.

    Of this, I’m not so sure, but it is quite plausible: the 1929-32 market declined ~90%. I will put money on the pain being far from finished.

  10. SST on October 11, 2011 at 4:13 am

    @Ed re:#36 — “Note the risk notices that should accompany any gold investment. It is not a safe investment – it is a very high risk, speculative investment.”

    An interesting statement from someone who will have nothing to do with gold, yet the graphics on his financial website are nothing but images of gold (and silver)!

    Gold dollar signs, gold watch, heavy gold weight, golden egg, golden ‘globe’, gold spike…

    Ed, just curious as to why you use gold to portray the image/sell the idea of wealth and security if you believe gold to be just the opposite?

  11. Ed Rempel on January 8, 2012 at 11:53 pm

    Hi SST,

    The P/E of the market is usually high when interest rates are low and low when interest rates are high.

    The reason for this is the “earnings yield”, which is the P/E upside down, or E/P. The earnings/price of the stock market gives you a rate of return based on existing profits.

    Today, the forward P/E is about 11.7%, which is an E/P of 8.5%. That is far higher than bonds at about 2%, which means that stocks are very cheap vs. bonds today.

    The reason that P/E was low in the 1980s is because interest rates were sky high. A P/E of about 10% in the 80s, would be an E/P also about 10%, which was actually lower than bond yields at the time.

    In short, a P/E of 11.7% means stocks are very cheap vs. bonds today, but did not mean that in the 1908s.

    Using the forward P/E for next year is entirely reasonable. We are trying to get use it as an idea of whether the stock market is going. In recent quarters, about 70% of companies have had positive earnings surprises above the analysts expectations (which is what the forward P/E is based on), so there is no reason to doubt the accuracy of the forward P/E.

    To show how cheap the stock market is today, the last time we had a P/E of 11.7% without having sky high interest rates was 1954.


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