Quarterly Letter BACK The economy continues to expand. Growth in Gross Domestic Product (GDP) for the past twelve months is 3%. This is "normal" growth, roughly equaling the long-term trends in population and productivity. But it is not the "catch-up" growth we’ve come to expect after a recession, which is why the unemployment rate has not yet begun to decline. As we said for the past year, we believe we’re recovering from a "normal cyclical recession." We haven’t made the governmental policy mistakes that would give us a depression or revived inflation. Nor do we see much risk of a "double-dip" back into recession. In many respects, the economy is acting much like it did after the 1990 recession which recovery was also somewhat "half-speed." Stock prices continue to be volatile while seeking fair values. Fair value for most stocks is increasing as the economy expands, profits recover, and inflation continues to subside. We’re concentrating on owning those companies whose stocks are currently priced below fair value. We’re finding enough of these companies that we want to be fully invested and believe it’s a good opportunity to add to our stockholdings. We do expect market and individual stock prices to remain quite volatile. Most investors don’t know value, they only know price, and they’re fixated on the prices of a few years ago. Those prices, particularly for the stocks caught up in the hope and hype of 1999-2000, were, and are, irrelevant. We expect it to take some time to squeeze out the remaining hope reflected in many of these prices. For the most part, we intend to avoid this psychological "game," while concentrating on owning good companies at good prices. — Ron Muhlenkamp Consumer Spending BACK On the facing page is a copy of a table that I’ve been carrying in my briefcase for several years. Taken directly from the U.S. Bureau of Economic Analysis, the most recent edition lists Personal Consumption Expenditures (PCE) in the U.S. for the past fifty years. It then breaks down overall spending as a percentage of the total for broad categories of spending. We’ve added three lines near the top of the table.
The table says a number of things to me. The first thing is the huge growth in the U.S. economy. Personal spending went from less than $200 billion to over $6,600 billion ($6.60 trillion) in fifty years. That’s a multiple of 33 times. When we adjust for inflation of 7 times, we’re left with a growth in spending in real dollars of 5 times. When we adjust for population, personal consumption expenditure per capita multiplied 2.7 times. Net, we are 2.7 times as prosperous as our grandparents. But there have also been some interesting shifts in the makeup of that spending. Since the rest of the table lists categories of spending as a percent of the total, we can peruse the shifts in spending simply by following a row of numbers across the page. Let me start with Nondurable Goods, specifically food. The percentage of consumer disposable income spent on food has been cut in half (from 28% to 14%) in the past fifty years. This is despite the fact that half the money we currently spend on food is outside the home and, therefore, includes preparation. To me, the interesting thing about food is that, try as we might, we can’t consume much more of it per person than our grandparents did. So if we treat food as stable in its consumption, we are now twice as prosperous (relative to the amount spent on food) as our grandparents were. This confirms the above conclusion — we are more prosperous than those consumers of the 1950s. The next line, clothing and shoes, also confirms this. Although we each have much more clothing than our grandparents had (for a rough measure, check the closet space in a new house versus an old one), the amount we spend on clothing as a percentage of our income has also been cut in half. Durable Goods — motor vehicles, parts, furniture and household equipment — have declined (as a percentage) despite our having more of each per capita than our grandparents did. In Services, housing has been stable (in percentage terms) since 1960. However, today, new houses average 2,000 square feet. In 1960, they averaged about 1,000 square feet. So our houses are twice the size, even though our families are smaller. Similarly, housing operation and transportation have remained stable (as a percentage). Four items in the family budget have grown dramatically over the last fifty years — all Service items. First is medical care, which has grown from 4% to 15%. The fact that medical care has grown doesn’t surprise anybody, but the degree of growth often does. Second is recreation, which helps explain why Las Vegas is the fastest growing city in the country. Third is personal business, which is primarily personal financial business — think in terms of brokers and mutual funds growing on a base of banks and insurance companies. While I suspect that the year 2000 might have had an increment due to the Wall Street fad of the time, it’s been a steady up-trend for fifty years. The fourth item, which the government doesn’t include in expenditures but which we’ve added at the bottom of the table, is Government Receipts from Social Insurance (including Social Security and Medicare) — which is up three times since 1950. Those are the messages I get from the table.
As investors, we have a bias toward those areas where the long-term
trends are up. But we’re aware that it’s also possible to make good
money in the areas that are shrinking on a percentage basis. Think
food stocks in the 1980s, or Wal-Mart since 1972. Consumer Debt BACK We’re also hearing that the consumer is borrowed to the hilt, and therefore can’t sustain the current level of spending. We often see charts (like the one to the right) showing growth in consumer debt to income. But such a chart comparing debt (a balance sheet item) to income (an income statement item) ignores any changes in interest rates. When we compare debt to assets, we find that
the ratios are on the gradually rising trendline which we’ve seen
since WWII. Frankly this is what we’d expect to see as home ownership
and credit card usage become increasingly widespread. When the payments
on this debt are compared to disposable income, you get the chart
below. Because interest rates are now lower, the higher
current debt levels are less Folks, the consumer is not tapped out. — Ron Muhlenkamp Announcements BACK Muhlenkamp & Company, Inc. wishes our readers a peaceful and Happy New Year. 2002 Distributions 2002 IRA Contributions 2003 IRA Contributions Mailing List Clean Up Appearances BACK Back to Basics: How to Make Money in the Current
Investment Climate The Florida Money Show Visit www.muhlenkamp.com or call (800) 860-3863 extension 4 for more information Published January 2003.
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burdensome
to the consumer. The chart says the household debt service burden
has ranged between 12% and 14% for twenty years. Some believe that
interest rates can only go up from here, (we don’t), but most mortgages
are fixed-rate, meaning the debt burden for most homeowners won’t
increase involuntarily even if mortgage rates do increase. | Privacy Policy | Copyrights | Disclosures | Search | |