POLL: Market Correction – Are You Buying, Selling, or Holding?

With the current market correction and extreme market volatility, i’m curious as to what the readers are doing with their money.   The market has a way of bringing out the true risk profiles of investors.  If this correction is making you queasy, then it is likely that your equity exposure may be a bit too high and it may be time to rethink the percentage of bonds within your portfolio.

As I have a relatively long time frame until retirement and signifcant percentage held in cash, I see the current correction as an opportunity to add to new and existing positions. Thus far, I have added to the indexed RESP portfolio, and added to an existing position within my leveraged smith manoeuvre portfolio. I hope to buy more as valuations become more attractive.

If you have a moment, please participate in the poll below (click here if you cannot see the poll):
 

Are you buying, selling, or holding in this market correction?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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SST
10 years ago

@ Ed: “A proper comparison would be GDP to debt PAYMENTS.”

GDP: $13.2 trillion
Debt Payments (interest only): $413 billion

Total Debt: $14.5 trillion
Total Tax Receipts: $2.1 trillion

There is your “proper” comparison.

It’d be like me making $50,000 a year, running up my credit cards to $345,000 and paying $10,000 a year to service just the interest.

Sure, I might have no problem with the interest payments, the problem is that the principle debt still exists…and still rising.

The US can raise taxes all it wants but this will sink them.

Debt service is 20% of net income — taxes — which is 16% of gross.
If they DOUBLE the taxes, they could apply $413 billion to principle reduction. That would only take approx. 25-30 years (?) with all things held static (I’m sure I’ll be corrected on this figure, and would be interested in knowing just what the time frame would be).

But they wouldn’t be static, not by a long shot.
What would happen if taxes were doubled?
Two things right off the bat: 1) people would stop spending, and 2) people would stop working — both would effectively drop the GDP and the tax base substantially. Oops.

I’ll steer clear of the US for quite some time…until things get REALLY cheap!

DMS
10 years ago

@SST You’re welcome! Many so called investment experts follow the sound bites in the news and the advice of the general investment community. That’s why most of these sheeple underperform and rarely outperform each other.
Mediocre fund managers/financial planners have to rely on commissions and trailer fees to pay their mortgage. They get their cut regardless of how the markets perform. There’s a reason they’re not multi millionaires. They’re about as skilled intellectually as used car salesmen.

SST
10 years ago

@DMS: I’ll let your post argue for me, as mine would have been closer to a rant. Thank-you.

Above all, the math speaks louder than anyone. And it doesn’t lie.

DMS
10 years ago

Ed,
If you think treasuries are the safest investment on the planet, I’ve got some swamp land in Florida I’ll sell you!!

You are right in saying the U.S. could reduce their debt within 10 years IF they raise taxes and significantly cut spending based on reported official debt of $14 Trillion. What you overlook though are their unfunded liabilities such as medicare and social security. These put the real debt at closer to $80 Trillion conservatively!! Bit harder to pay down.

Add to this an aging population, lack of a major manufacturing base and an education system on the decline, layer upon layer of political red tape and the prospects of real growth look pretty grim.

Some other observations for the US economy in 2015 simply assuming current conditions persist:

Federal spending will be $3.3 trillion per year, and with federal revenue of $2.3 trillion (this number will be reduced as it also assumes $731 billion in payroll tax, a number which will likely be indefinitely reduced) the result is a budget deficit of $983.7 billion.
Annual Medicare/Medicaid expenses will be just over $1 trillion
US population: 326.8 million
US workforce 131.3 million (and declining)
Officially unemployed: 19.4 million
Actual unemployed: 22.3 million
State/Federal employees: 17.9 million
People on SSN and other retirees: 72.6 million
And the most critical data:

Food stamp recipients: 89.7 million
Foreclosures: 2 million
Social Security Liability: $19 trillion
Medicare Liability: $99 trillion
Total US Unfunded Liabilities: $144 trillion
Gross Debt to GDP: 143%
Should one of the bolded predictions hit, the travails of Greek and Irish bondholders will be nothing compared to what those unlucky enough to be in possession of US debt in 2015 will have to go through.

Canada certainly did fight back and clean up it’s financial house to restore our AAA rating. But that was a far different world than the present day one we’re living in. The Eighties brought about a commodities boom, along with the majority of the population working and far from retirement(Baby boomers)
We were positioned well and had the political will to benefit.

You raise a great point stating “if the U.S. have the political will” to do the right, yet unpopular things like raising taxes.
So far, we’ve seen the incompetence coming out of Washington and more of a desire to play politics than do the right thing.

There’s no question as you said that the U.S. will always repay their debts. They have a printing press after all! Heir Havenstein had one too and chose to use it. We saw what happened there! But the money creditors receive in payment will be significantly debased and worth far less than they were initially.

Mr. Bernanke has shown us that he’s equally as clueless and has been wrong every step of the way throughout his career. He told us that the subprime crisis would be contained. He also told us that there was no housing bubble overall, that certain areas were “frothy”.
QE2 had no real effect other than a short term boost that quickly fizzled and about another Trillion dollars added to the national debt (including reinvested) QE3 is coming soon. I’d even bet money on it.

The difference once again between England’s past debts and the U.S. Debt situation is apples and oranges. China is the industrial superpower of the world and is poised to become more of a domestic rather than export based economy. The U.S. Would need years and Trillions of dollars of capital to rebuild its manufacturing base and retrain enough skilled workers to fill the jobs.

Gold is money. Fiat currencies are nothing more than a theory. Every fiat currency in the history of the world has eventually failed. Gold, though ancient and somewhat useless other than as a store of wealth has and continues to be the instrument of wealth preservation.

My advice in closing is that people steer well clear of U.S. Stocks, bonds and dollars. Asia and Europe, despite their own problems,have far better prospects.
While gold has risen very sharply, I’d suggest buying more on any big dips. The average investor still doesn’t own physical gold for the most part and it’s still far from being in a long term bubble.

Ed Rempel
10 years ago

Hi SST,

Nearly all professional investors know the US can easily pay it’s debts if it wants to. Why do you think everyone was flocking to US treasuries this week? They are still the safest investment on the planet.

Several of our fund managers have said that just putting in a GST at 5-7% would already put the US into a surplus – even taking into account that the GST would slow the economy a bit. They also have low gasoline tax, low cigarette taxes, many states have no income tax, etc.

The entire debt ceiling and S&P downgrade are political issues – not financial issues. The issue has to do with their willingness to raise taxes or do what they need, not their ability.

Canada was in a similar position 20 years ago. We had large deficits and the S&P downgraded us to AA. Then we replaced the manufacturers’ tax with the GST on a much broader tax base, cut some costs and moved back into annual surpluses. It took us less than 10 years to get our AAA rating back.

The US could do the same much quicker, if they have the political willingness to do it.

I’m not sure why so much news claims a debt to GDP ratio of 80% is so bad. England had a ratio of 150% from 1800-1950 with no financial problems.

It is even a weird ratio that us accountants would not really use. It compares a liability to income. It is like having a mortgage that is 80% of your salary – not really a problem and a comparison banks would not make.

A proper comparison would be GDP to debt PAYMENTS. Of course, that would not make news, since the debt PAYMENTS for the US have been LOWER for the last 3 years because interest rates are so low.

If you look at this entirely as a political issue, it becomes clearer what it happening.

Precious metals might continue to go up, but they are 100% speculative and do not trade on fundamentals. There is no fundamental that would stop gold from going to $10,000 or to stop if from dropping to $200 and staying there for 100 years. They are highly risky at these prices.

Ed

SST
10 years ago

@ Mario: “The US can create as many US dollars as it wants. It can, if it wanted, repay all it’s debt tomorrow morning, with about 10 minutes of work.”

Yup, it sure can. That’s a fact.
Then what happens? Oh, that’s right — the US$ becomes utterly WORTHLESS (well, the last 5 cents of remaining worth vanishes). Then what? You think an AA+ downgrade caused havoc?

Thing is, what you just admittedly described was indeed “economic THEORY” — not reality. Why argue over a debt ceiling? Why not just make it $100 trillion? Or erase it all together? Why bother collecting taxes when you can just print, print, print!?! People would have much more money to spend “stimulating” the economy and creating growth and jobs. That’s a theory too, right?

But, cest la vie! No matter what any of us argue to believe, we can all sit back and watch the fireworks!

Hope your precious metal holdings are well stocked. :)

Mario
10 years ago

“Ummm….you do know it is mathematically impossible for the US to pay off its debt”

1) You are completely wrong and you know nothing about basic economic theory. The US can create as many US dollars as it wants. It can, if it wanted, repay all it’s debt tomorrow morning, with about 10 minutes of work.

2) Yes, repaying all debt in one shot would obviously create inflation if they just created dollars to repay the outstanding debt.

3) The US would never do this, and in fact has absolutely no reason to ever do it, as the debts that it has should not ever be repaid. The US knows this and the creditors know this as well. The creditors, like China, would never want the US to repay the debt. It would make no sense. What would China do with trillions of electronic credits? They would rather have them in bonds, equally worthless, but at least they pay some interest.

4) The huge US debt is not an important issue. In it’s most simple form, the US issues electronic credits (US dollars) to other countries (China) and in return, China ships over boatloads of valuable finished goods. The people in China are busy and have jobs and a mortgage and all that other “stuff”, while the people in the US get to buy junk for a low price, simply by creating electronic credits on a computer and wire transferring them to China (like 2 seconds of work….)

This is fundamentally how the system works. It is an economic law, indisputable. You can argue about other things, like what happens if the system is abused, or if people do not act rationally, but not about the mechanics of the modern monetary system.

SST
10 years ago

@ Joe S. — “The US can pay its debts by raising its taxes…higher income taxes, national sales tax plus spending freeze would make debt a thing of the past within 10 years.”

Ummm….you do know it is mathematically impossible for the US to pay off its debt, and infinitely more impossible to do so within ten years, no matter what they do, right?

They raise taxes, they sink.
They cut spending, they sink.

They are sunk.
Unfortunately, Canada is hanging on to a drowner.

Joe S.
10 years ago

The US can pay its debts by raising its taxes, which are amongst the lowest amongst developed countries. You have to differentiate between ability to pay, and willingness to pay. They are politically not willing, but if a strong mandate ever came around, it could be done (higher income taxes, national sales tax plus spending freeze would make debt a thing of the past within 10 years).

StevestonDad
10 years ago

Ed,
Explain how the U.S. can easily repay its debts? By printing money? Where’s the growth going to come from?