Monday, September 26, 2011

Notes From a Noted Economist

1 - It seems that late September/early October (along with late January/early February) is conference season. In addition to the Financial Planning Association (FPA) National Convention less than two weeks ago, last Wednesday and Thursday saw the annual Symposium of FPA's Charlotte chapter. Both Juliet and I attended, and as always, it was superb. We heard from several top-notch speakers, each of whom had important and timely information to share.

2 - If you scroll down a bit, you can read a synopsis of the presentation by Ken Goldstein, one of the speakers from the Charlotte symposium. If you have a minute, read his comments. The summary comes directly from my notes, and I think you'll find his comments to be interesting and insightful.

3 - As if we had not gotten smart enough last week, Juliet is boarding a plane this morning bound for Washington, DC, where she will participate in a two-day Operations Workshop with TD Ameritrade. In Washington, she will meet up and spend time with Bonnie Armstrong, our special projects guru. Juliet will be back in the office on Thursday; in the meantime, Libbie and I will hold the fort.

4 - On Friday, we mailed out Portfolio Resetting DVDs to clients who were unable to attend the workshops in person. Please let us know if you have any trouble viewing the video or have questions regarding the content.

Of course, last week saw the stock market lose everything it had gained the previous week -- and more. This see-saw may continue for a while yet. We continue to steer the best course we know how.

Have a wonderful week!


Ken Goldstein Holds Forth

At the Financial Planning Association of Charlotte's annual two-day symposium last week, Ken Goldstein (above), an economist with The Conference Board, gave an excellent presentation entitled "Stuck in the Slow Lane." Here are some of the highlights from the notes I took during the talk:
  • "Some folks are wasting time talking about a fiscal crisis, but this country doesn't have a fiscal crisis. We have a jobs crisis." And the single biggest problem causing the jobs crisis, according to Goldstein, is the fact that there is no demand for goods and services. Businesses aren't going to hire more until consumers spend more.  Consumers aren't going to spend more until businesses hire more, so it becomes a vicious cycle.
  • "Right now, with an economy that faces a lack of demand, we're talking about reducing the deficit. We're talking about the wrong thing."
  • "What we are seeing is not simply a cyclical crisis, it is a fundamental structural shift in the global economy. The world you lived in prior to 2006 is not coming back. The economy will come back, but the world has changed. The rules--some of them--have changed."

By way of example, Goldstein described three changes that have occurred in the U.S economy:   

1 - Increasing savings by US consumers. This means that dollars which used to be spent in the economy are now sitting unspent in the bank. This includes people who have started aggressively paying down debt, as a reduction in debt is equivalent to an increase in savings.

2 - The rules of finance have changed. It is much harder to obtain a loan. As a share of the overall economy, lending is shrinking.

3 - Housing has undergone a fundamental shift. In Goldstein's words, "Real estate just got a long term haircut." This is because the population is barely growing, so we don't need as many houses. Why is this important? Here's why: You have heard that 2 out of every 3 jobs come from small businesses. Well, more half of those jobs are related to real estate. When real estate slowed to a crawl, many of those jobs dried up.

And it doesn't look like the situation is about to change anytime soon. The economic advantages of being a homeowner instead of a renter have changed. Also, in Goldstein's words, "No longer can you get a mortgage with no money down, nor should you. So the sub-prime market is gone, and it's not coming back."
(A couple of real estate sidelights from the talk: [1] The average consumer cares more about the housing market than the financial market. [2] In Canada, homeowners can't deduct mortgage interest the way we can here, yet their housing market is stronger than ours.)

Other bullet points to consider:
  • "The average raise this year, for those who get one, might be 1% - 2%."
  • "For everything you buy, 18.5% of that cost goes to pay for somebody's health care."
  • "The Fed is about to announce Operation Twist. Don't pay any attention to it. It won't hurt and it won't help."
  • "If we go into a second recession, it will be short and shallow, but we won't come out of it with a bang."
  • "There is no pricing power, nor will there be for the foreseeable future." (It is virtually impossible for businesses to increase prices on their goods and services, because consumers can't afford higher prices. That translates to low inflation.)"
  • "No matter who gets elected next November, the economy is not going to grow at a rate greater than 2% to 2.5%, with an inflation rate of about the same, because there is no ability to raise prices."
  • "Emerging economies are growing at 2 - 3 time the rate of developed economies. At this rate, the global share of the economy will go from 60/40 in favor of developed economies to the reverse within ten years or so."
  • "Global businesses are trying to convince emerging market consumers to trust their brands. Those companies that succeed in that quest will still be in business when the good times return."
  • "If Europe goes to heck, all their banks are really going to take a hit. Then our banks are going to take a big hit; that's called contagion."
  • "The problem with the Eurozone is that since the beginning of the euro, one size fits all. That doesn't work."  
  • "So," Goldstein concluded, "the economic environment is lousy." The question then becomes: What is the economy going to look like 10 years from now?

The good news is that there's a brighter future ahead. It's going to come from taking all the money that companies and investors have been hoarding and investing it into the "next great thing." Goldstein didn't know exactly what that next great thing will be, but he believes that it could be in an area such as renewable or other domestic energies.

Finally, the most interesting moment during the Q & A period came when an advisor asked: To what extent should the government be involved in the economy? Goldstein's answer: "We need a cop on the corner. How big a cop is open to debate, but we need that cop."

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