A commenter to a post I wrote this past week asked if there were anything I am "Doomerish" about. As it happens, yes there are several such things. I guess that makes me a "closet Doomer."
By nature, I am pessimistic. I am always expecting Pandora's box to be opened and for all kinds of horrors to come flying out. But I am also a math nerd, and that means I view Pandora's box like a safe with a combination. Doom can't come flying out until all of the tumblers have fallen into place. Until the proper combination has been found, and the safe unlocked, doom is at bay. In fact, my first post ever at Daily Kos, in October 2005, was entitled "Not Doomed Yet".
Let me explain in detail the source of my longer-term pessimism, by referencing two posts I wrote in 2007 and 2008. By 2007,
One chart we have shared recently with our clients during our portfolio reviews with them is the chart of the S&P 500 Index overlayed with equity mutual fund flows. The strength of the market's advance since 2009 would seem to suggest investors have jumped head first into stocks. Additionally, a number of recent market reports have opined on the elevated sentiment levels (here and here). High bullish sentiment has tended to be one technical indicator suggesting a market top may be near. However, as the below chart shows, flows into equity funds have just recently turned positive.
Maybe more importantly, flows out of fixed income investments have only been occurring for the last five months as noted in the first chart below. In the second chart below, cumulative flows are shown beginning in 2009. The cumulative flow chart shows investors
Roger Nusbaum submitted a thought-provoking article on Thursday (5 Dec) slamming the WSJ suggestion to invest emergency cash, defined as the:
"three-six months worth of expenses that financial experts say people should set aside for some sort of unexpected hardship."
Initially I also rallied against this seemingly reckless advice, but upon further thinking, I actually think the WSJ is spot-on - with a few caveats. The investor who fits the profile below (age 25-55 with decent assets and strong credit balances) will likely be much better off in the long-term by keeping extremely minimal assets in direct cash and instead relying on home-equity credit (HELOC) and/or credit cards for short-term cash needs.
I will illustrate this approach both theoretically and mathematically below. I know this might be controversial, but I look forward to the expected commentary.
Caveats to my WSJ Endorsement
Key assumptions on the demographics: