6 Month Check up on Some 2012 Money Magazine Predictions

I was thumbing through a back issue of Money magazine that I had lying around my house.   The Money issue interested me because it was the December 2011 year end issue with the cover declaration 'Make Money in 2012'.  Its about 6 months later so I thought it would be fun to check in on some of their advice and predictions and see how well they've fared.

On page 72 of the issue there is an article about investments that has some predictions from 'Dr. Dooms' for the 2012 outlook.   The for pundits are all long standing bears who "are still bracing for Armageddon."   Here is the advice given by each:


Nouriel Roubini : "Favor U.S. stocks over European equities."


Peter Schiff : "Avoid dollar-denominated assets.  Buy gold and silver."


Marc Faber: "Keep a quarter in cash, a quarter in gold, a quarter in real estate, and a quarter in stocks."


Henry Kaufman: "Buy stocks in firms with strong balance sheets".


Silly thing is that they can't all be right because for the most part they contradict one another.   For example Roubini and Schiff seem to be directly at odds.   Who do trust?  I think its anyones guess.

Lets look at them individually and see how well that advice has panned out...


Roubini:  All he's saying is that he thinks the U.S. market will perform better than European.   We can check that by comparing board U.S. based market index versus a European index.

For Europe we can use VEURX.   It was trading at $22.93 at the open of the year and is now at $21.64.   Its down 1.3%    In the US we can use the VTI ETF.   VTI opened at $65.41 and is at $67.65 today so its up 3.4%.

Schiff :  The advice here is to just buy shiny metal.    Kitco has data on historical gold and silver prices.   Gold opened at $1598 per ounce and is currently at $1592.   Thats a loss of 0.3%.     Silver opened at $28.78 and is now at $28.39.     Thats a loss of 1.3%. 

Faber :  This is a much more specific and diversified strategy.   Doesn't seem like a bad investment mix in general except it may be a bit conservative with 25% in cash and 25% in gold.   We can assume the cash investment is flat.   The gold is down 0.3%.    For the real estate I'll use the VNQ REIT ETF.  VNQ started at $59.05 and is at $62.45 today which is a gain of 5.7%.    Faber wasn't specific about what stocks to invest in so I'll just assume the broad US market which is up 3.4%    Combined the recommended asset mix would be up 2.2%

Kaufman :  Buying stocks with strong balance sheets could be a little vague but I would interpret it to mean stocks that are in a 'value' segment.  I guess you could also assume he means large cap stocks but large cap companies aren't all necessarily carrying strong balance sheets.  Working with the assumption that he means value stocks I'll pick the VIVAX fund to represent value performance.   VIVAX opened the year at $20.79 and is now at $20.79 so it is flat so far.


My verdicts are :

Roubini :  CORRECT - his prediction that U.S. markets would be better than Europe is right so far and the U.S. index has gained 4.7%  more than the Europe.

Schiff : WRONG - gold and silver has lost value so far and underperformed stocks or cash.

Faber : MIXED - His investment strategy underperformed the broad US market but not drastically.  Having 25% in cash makes for a more conservative investment. 

Kaufman:  USELESS  - Maybe thats a little harsh or blunt on my part but honestly I think his recommendation is too vague to be of much use.  He's basically just saying that you should pick good stocks.   OK.   Is that ever bad advice?   Should we buy stocks with weak balance sheets?

This is a pretty mixed bag isn't it?   Seems to me you could have just randomly picked a investment strategy out of a hat and done just as well.    Of course the year isn't over yet. 


I don't mean to pick on these four guys, they just happened to be the four people highlighted in the article.   They of course aren't the only pundits that are wrong in hindsight.   Various guru's have a poor track record.  Jim Cramer can't  beat a monkey at picking stocks.     Meredith Whitney wrongly predicted that the government bond market would be hit with significant defaults.  Of course I'm no better my  own attempts at predicting the future have a pretty poor track record as well.

I personally don't think we should trust the talking head financial experts very far to predict the future of the economy.  It seems more often than not their guesses are no better than flipping a coin.
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Wage Increases Since 1980 versus Inflation

According to the Society for Human Resources Management the average wage increase is expected to be 2.9% in 2012.    On the other hand inflation from April 2011 to April 2012 is up about 2.3% and it was up about 3.2% for the year 2011.

Getting wage data for private industry and the CPI data from the BLS.   We can compare how wages have trended over the past few decades and how wages compare to the inflation rate CPI.

First lets look at how wages versus CPI have trended.

Click chart for full size image.

For the most part the increase in wages has been a little higher than the CPI rate.   Thats a good trend for workers in general.   It means our income has out paced the cost of goods.

Lets look at the difference between wages and inflation.    Here I just plot the annual % wage increase minus the CPI increase.  So any figure >0% means the wages went up faster than inflation for that year.

The positive values are shown in green and the negative amounts in red.   A couple times the wage increase and CPI were equal so the difference was 0% and I show those in black.  Most of the time wages outpaced inflation and the green data points outnumber the red by 22 to 7.

Of course this is just the nation wide average data.   Some industries and professions have fared better than others.   An individual persons wages are not likely to have moved in step with national averages.

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Follow Your Passion ( to something useful which has value and demand and ...)

An often cited formula is :

Passion = Success

The idea is a simplistic concept that if you follow your passion that you'll end up with success.   I'm sure the people pushing this idea really don't intend it to be misinterpreted such that 18 year old kids assume they can go get a bachelors degree in 13th century Norwegian literature at some obscure private school and then somehow become gainfully employed and pay off their $80,000 in student loan debt.   But without some ground rules and basic common sense application of the 'follow your passion' mantra, individuals may misapply the idea and assume that they need nothing other than passion for the success to follow.

Lets at least make sure someone else cares about your passion.  I used to joke that I didn't think that my passion for playing video games on my couch would make me rich.    Clearly your passion has to be associated to something someone else would want to pay for.   This is where the usefulness requirement comes in. 

Chris Guillebeau recently wrote on Get Rich Slowly that :

Passion + Usefulness = Value

Better.  Thats an important step in the right direction.    It should make it clear that I will not get rich any time soon by following my passion for video gaming on my couch.     Its definitely very important that people realize that simple passion doesn't equate to monetary success.   Your passion has to be combined with something of use.   Again, this should really just be common sense.   But unfortunately I don't think the point is emphasized enough when some people preach the 'follow your passion' mantra.   Readers may mistakenly assume that passion alone is good enough.  

Just because something is valuable doesn't mean it will lead to a good job or success.   Is passion and usefulness sufficient to create success?   No.   There are numerous factors in success.   You won't find success if you're creating something of no value, but just creating something of value won't always lead to success.

There is so much more to success than simply providing value.   Maybe the formula should look more like this? :


(Passion + Value + Novelty + Demand + Risk + Capital + Time + Luck + Timing ) / ( Competition + Costs) = Success

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