I Am Mad As Hell and I Am Not Going to Take it Anymore!
“I am Mad as Hell and I Am Not Going to Take it Anymore”! By Morris R. Segall, CFA, CIC The above mantra from the movie “Network” is but one symptom of the increasing social, emotional, physical and political cost of the worldwide recession which is now entering its second year. For those of you that have been following our commentaries over the past three years you know that we have written extensively on the financial and economic trends and developments that have led to the current severe worldwide recession and our views of the reactions of the U.S. and foreign governments to this recession. However, the length and severity of this recession are causing in our opinion additional high, and we believe, long lasting social, physical and political costs that will represent significant changes in worldwide economic growth and social and political attitudes, particularly in the U.S., going forward.
As we have been stating for some time, this recession was initially caused by the bursting of the housing bubble here in the U.S. which then spread to the financial system and finally to the business, non-residential real estate and state and local government sectors. The U.S. recession has spread worldwide as our economy contracted and credit losses expanded to overseas banking and export dependent economies. Indeed the negative impacts of recessions overseas are more severe on foreign economies than here in the U.S. As a result, we are seeing the following trends and developments.
1. Social unrest in Russia, Eastern and Western Europe as rising unemployment and cutbacks in domestic government spending programs and consumer incomes. Of particular note are the street demonstrations and strikes in Western Europe where we have not seen this type of reaction to economic distress since the Great Depression of the 1930’s. It speaks volumes about the level of angst and anger among foreign workers and consumers.
2. This social unrest is creating political change. Governments in Latvia and Iceland have already collapsed and there is increasing pressure on the governments in Ireland, France and Great Britain to stop the bleeding in those economies. Even in Russia, discontent among the populace is being aimed at the current government which had been quite popular last year.
3. Worker protests abroad are leading to increased calls for expulsion of immigrant workers and protectionist measurers to protect domestic jobs and companies. Globalization has now become very unpopular in the advanced industrialized countries of Western Europe as they face the same erosion of their industrial base as we have suffered over the past decade. There have been attacks on immigrant workers in Western Europe and Russia as frustrated and angry citizens fight for the shrinking job markets in their countries. In short, we see a movement to the political right as nationalist feelings replace the internationalist perspectives previously held overseas. This does not augur well for the future of the European Union and free trade policies.
4. The rise in protectionism is also occurring here in the U.S. as shown by the recent rescission of long haul trucking privileges to Mexican companies that were hauling freight into the U.S. from Mexico. That freight must now be transported from the border by U.S. firms. Mexico responded by putting tariffs on a list of U.S. imports. This backlash against free trade agreements is putting pressure on government leaders who still champion globalization as desirable for U.S. economic growth. Policymakers in Washington and Fortune 500 companies that manufacture and trade overseas are finding themselves at odds with workers and consumers who are losing their jobs to lower cost foreign labor. With unemployment in this country effectively at 9% and going higher, American workers are “mad as hell and aren’t going to take it anymore”. Labor unions helped elect Barack Obama. They expect “payback”. Importantly, Democrats in Congress and the President himself have pledged to re-evaluate America’s free trade agreements and policy. We expect some “pullback” from the liberal free trade policies of the last decade.
5. Public anger is also being aroused by the scandals related to the “bailouts” of many of this nation’s large, international conglomerates, particularly financial firms, and the recently disclosed large bonuses paid by both financial and non-financial firms that have received billions in taxpayer assistance. The “bailouts” and the executive bonuses have stoked the fires of smoldering public resentment at the widening gap between the increasingly rich executive class and the struggling middle class in this country. See the slide below showing the disparity in real per capital income growth in the economic expansion of the 2002-2007 period and that of the economic expansion of the 1982-87 periods under President Reagan.
6. Now also look at the slide below showing the trend in retail inflation over the 2005-2008 periods and the most recent six month reporting period of February, 2009.
While the collapse in commodity prices in the last six months has been a primary cause in inflation turning negative in the last six months, note the annual inflation increases in 2006 and 2007 and the continued increases in many non discretionary consumer expense categories such as utility charges, education and tuition and healthcare costs. Add to this data the fact that American workers have now experienced the second major declining stock market cycle of this decade with major market indices declining by 50% from peak to trough in 2001-02 and 2007-2009. Importantly, the current stock market debacle has been caused by excesses and mismanagement of risk by many of the nation’s financial institutions that have needed taxpayer assistance to stay afloat. It is little wonder, the American middle class is angry and they are reflecting their anger politically.
It began with the Congressional elections of 2006 when an angry American electorate gave a sitting Republican President and his party the worst political drubbing since the elections of 1964. This at a time when the American economy was humming and creating approximately 2 million new jobs annually in 2005 and 2006. It continued with the recent Presidential election of 2008 where the unlikely candidacy of a first term Senator from Illinois first surprisingly won the Democratic nomination, upsetting the presumed party favorite, and then led the Democratic Party to its most overwhelming victory since Lyndon Johnson defeated Barry Goldwater and the Republican Party in 1964. The 2006 and 2008 election results were a loud dissatisfaction on the part of the American electorate with the economic, social and political status quo. Their statement was clear, “They were mad as hell and not going to take it anymore”. We have long noted this building anger among American voters and counseled candidates running for office in 2006 and 2008 that the American electorate was angry and wanted dramatic change.
We also felt that change was being translated in two very distinct demands. First, the inequities of the economic system that allowed excess and corruption by corporate CEO’s and politicians were unacceptable. Second, the middle class wanted the Federal government to do more to help them with the draining expenses of energy, healthcare, education and retirement necessities. To their credit, the Democratic Party and Barack Obama, grasped voter dissatisfaction and embraced a populist agenda to answer that dissatisfaction. American voters responded with a landslide victory for President Obama and the Democrats that now control both houses of Congress as well as the White House. But the intensifying recession since the end of the third quarter of last year has created more pain and suffering among American workers and consumers. President Obama’s stimulus programs highlighted by huge taxpayer financed “bailouts” of major financial institutions are wearing thin on the American public. Already angry American voters are now livid with the revelations of continued bonuses to failed executives and the failure of newly elected Democratic congressmen and senators and newly appointed officials within the Obama Administration to stop “politics as usual”. The embarrassing revelations and resulting voter backlash is forcing the President to adopt a defensive posture of trying to convince voters and congressional opponents of his program both within and outside of his party to support him. This is not the position the President wanted to be in within the first 100 days of his administration. The current recession belongs to the Democrats now and voters want to see tangible improvement for them from the Congress and this Administration. Continued corporate excesses at the expense of taxpayers and middle class workers are only adding to the anger of the American public.
7. In addition, to anger, the American public is emotionally stressed and physically debilitated. After experiencing the heady and seemingly inexorable rise in consumer net worth and incomes from the expanding economy, rising stock markets and most importantly, the outlandish increase in real estate values over the 2003-2006 periods, the American consumer has seen his world literally come crashing down since the second half of 2007. It is estimated that the declines in housing values and the stock markets together over the last 5 quarters is more than $15 trillion or an entire year’s GDP. As a result, the American consumer that exuded great confidence and risk tolerance has become stricken with fear.
In the article, “The Fed’s Conundrum”, April 5, 2007, we commented on what we felt was an increase in the fear factor for consumers which was going to suppress consumer spending and their appetite for risk going forward. We based this on the increase in inflation prevalent at the time and the accelerating decline in the housing cycle underway leading to increased mortgage foreclosures. In addition, as government statistics would later prove, job creation was peaking that spring. Fear is something the American public doesn’t exhibit very much. The post war period has been one of economic growth and a rising standard of living for Americans. To be sure, the American economy has experienced periodic and sometimes severe recessions but they have been surpassed by longer and stronger growth periods. That is until this decade. The current recession is the second major economic downturn since the year 2000 and this recession is by far the most damaging and most pervasive in financial and social terms since the Great Depression of the 1930’s. The loss of homes, jobs, net worth, financial security and retirement security has caused the American consumer to doubt his ability to survive and to doubt the American capitalist economic model. In the current economic environment, Americans are full of worry. In a March 4, 2009 article in Advertising Age, it was noted that prescriptions for sleeping pills and anti-depressants had escalated 7% and 15%, respectively, in 2008 despite a cutback in marketing for such drugs by pharmaceutical companies. Based on the worsening economic climate in the first half of 2009, we would expect such numbers to increase. In the same Advertising Age article a poll by the National Sleep Foundation released on March 2, 2009, found over 30% of respondents said they are “losing sleep over the economy and their own financial situation”. The National Sleep Foundation Poll found an increase in sleeplessness and anxiety is leading to an increase in depression and a decrease in efficiency and productivity on the job. We also believe there is an increase in suicides and calls to suicide hot lines as a result of the current upheaval in the lives of Americans in this recession. National data is incomplete and not current into the first quarter of this year but regional and local data particularly in cities hard hit by the recession indicate a dramatic increase in suicides, suicide attempts and calls to suicide hot lines. This emotional stress is taking its toll on the overall physical health of the country.We believe doctor visits for emotional or stress related physical illnesses have increased as well as absenteeism from work. The result is a significant increase in medical care costs for doctor visits and prescriptions as well as a decrease in overall worker productivity. In such an environment, people are more nervous and short tempered which often lead to increased aggressive behavior. In addition, consumer outlooks for the future are negative.
We believe these current trends and developments have longer term significance and implications for the U.S. and overseas countries, politically, socially and economically. From an intermediate term economic outlook perspective, we believe the current recession will “bottom out” in the second or third quarters of this year. We believe the worst of the recession is now being experienced in the first quarter. We do not expect an economic recovery to be measurable until the fourth quarter of this year, at the earliest, and possibly the first half of next year. Assuming a recovery from the current recession gets underway next year and builds through 2011, 2012 and 2013, we expect such a recovery to be cyclical and quite robust given the pent-up demand that is accruing from consumers and businesses over the past 5 quarters. The economic recovery will be led by the U.S and extend overseas late in 2010 and more pronounced in 2011, 2012 and 2013.
However, longer term, we see the following resulting implications from this recession.
1. Americans will be more circumspect in assuming risk going forward. They will not embrace the unbridled use of credit as they have in the past. First, the availability and cost of credit in the future will restrict credit to consumers. Second, many consumers will eschew the use of credit to maintain lifestyle given the difficulty they have faced in meeting debt obligations.
2. Americans will be more conservative in their investment programs after the cyclical rebound expected over the next 2-3 years in worldwide equity markets. For one thing, Americans will be older and less inclined to take risk with their remaining and/or rebuilt capital, particularly in retirement plans. Second, Americans’ faith in the equity markets has been shaken by two market declines of 50% in the past 9 years plus the scandals also attendant with these declines. We believe Americans will retreat to a more basic and conservative investment profile that emphasizes intrinsic and transparent value and predictable future prospects. In addition, we expect a more highly regulated environment for financial firms and capital markets which should result in less leveraged and speculative investment products and strategies.
3. Americans will have to work longer before retiring as a result of the huge losses in savings, net worth and retirement accounts. However, many of the current generation of middle aged and senior workers will be suffering deteriorated health as a result of the current emotional and physical stress they are currently experiencing. These workers will have aged faster than otherwise due to the emotional and physical stresses of this recession. This will result in many workers having to retire earlier than planned which will add to the cost of Medicare, Medicaid, Social Security and private pension costs. These increased costs will be in addition to the enormous increase in Federal entitlement program costs from the retirement of the “Baby Boomer” generation of workers who begin to turn 65 in 2011 and will reach age 70 in 2016.
4. As a result of the wealth and job destruction in this recession and the impending retirement of so many workers, the demand for increased government services to handle a burgeoning aging and retirement population will put enormous strain on the U.S. Federal budget. This will be in addition to the huge strain on Federal finances that is now being incurred from the massive “bailout” programs that are being initiated to stabilize the banking system and end the current recession. It is likely the annual Federal budget deficits will range from $500 billion to $1 trillion or more over the next 5 years. Clearly this will put upward pressure on interest rates and price inflation in the U.S. and downward pressure on the U.S. Dollar in foreign currency markets. Indeed, we and other economists have raised the threats of these developments presently and they are already of concern to foreign governments and investors that own U.S. Treasury bonds.
5. Unemployment in the U.S. will be historically high even with a cyclical economic recovery projected over the 2010-2013 period. There simply will be no job opportunities for many of the former Wall St. and banking managers, executives and traders and automobile and related managers and executives, particularly over the age of 50.
6. The increasing population of aging and retired workers will not have the financial resources anticipated for this population segment at the beginning of this decade when the stock market bubble at that time had created so many retirement plan millionaires. As a result, the projected retirement population will live more frugally than earlier projected and will not be the economic stimulus many had planned on. Indeed, for the reasons stated previously, they will be more of a drain on the U.S. economy than a help. In addition, they will not provide the spending for increased foreign imports or overseas travel as previously predicted.
7. We expect international trade agreements to be less liberal here and abroad as the infatuation with globalization becomes a casualty of the massive unemployment in the current recession.
Conclusions:
We expect the U.S. recession to end later this year and gradually begin recovery next year and accelerate through 2011, 2012 and 2013. The U.S. recovery will stimulate the export dependent economies overseas and they will recover accordingly. After a strong cyclical recovery, the U.S. will settle into a stagflationary economic cycle characterized by a secular high level of unemployment, lower worker productivity, a resumption of higher energy, food and commodity inflation and slower consumer income growth and spending. U.S. government finances will be deteriorated by high deficits, increased entitlement spending, increased interest rates and a depreciated currency. Future long term economic growth will again be paced by emerging markets overseas in Eastern Europe, Asia and Latin America. Americans will shift politically to the left as they become more dependent on government spending for basic needs and income. Populations in mature industrialized economies will shift politically to the right as they become more nationalistic to protect jobs, companies and existing social welfare programs. They will also be less inclined to pursue free trade in the future. Free trade will still be important to emerging industrialized economies as they continue to pursue export oriented economic growth and employment. This will increase tensions between the mature economies such as Western Europe, Japan and the U.S. and the emerging economies of Asia, Latin America and Eastern Europe. From a capital markets standpoint, we remain defensive in the short term as we look for evidence of an economic bottoming. However, we would prepare to emphasize common stocks, particularly large cap and NASDAQ U.S. stocks to participate in a bottoming in the recession and subsequent economic recoveries here and abroad. We would also increase our positions in gold and other commodities as the world economies reflate and commodity prices increase. Concomitantly, we would avoid bonds as they will see a shift in cash to stocks and an increase in interest rates in an economic recovery. Please contact us for specific recommendations on your investment program.
As we have been stating for some time, this recession was initially caused by the bursting of the housing bubble here in the U.S. which then spread to the financial system and finally to the business, non-residential real estate and state and local government sectors. The U.S. recession has spread worldwide as our economy contracted and credit losses expanded to overseas banking and export dependent economies. Indeed the negative impacts of recessions overseas are more severe on foreign economies than here in the U.S. As a result, we are seeing the following trends and developments.
1. Social unrest in Russia, Eastern and Western Europe as rising unemployment and cutbacks in domestic government spending programs and consumer incomes. Of particular note are the street demonstrations and strikes in Western Europe where we have not seen this type of reaction to economic distress since the Great Depression of the 1930’s. It speaks volumes about the level of angst and anger among foreign workers and consumers.
2. This social unrest is creating political change. Governments in Latvia and Iceland have already collapsed and there is increasing pressure on the governments in Ireland, France and Great Britain to stop the bleeding in those economies. Even in Russia, discontent among the populace is being aimed at the current government which had been quite popular last year.
3. Worker protests abroad are leading to increased calls for expulsion of immigrant workers and protectionist measurers to protect domestic jobs and companies. Globalization has now become very unpopular in the advanced industrialized countries of Western Europe as they face the same erosion of their industrial base as we have suffered over the past decade. There have been attacks on immigrant workers in Western Europe and Russia as frustrated and angry citizens fight for the shrinking job markets in their countries. In short, we see a movement to the political right as nationalist feelings replace the internationalist perspectives previously held overseas. This does not augur well for the future of the European Union and free trade policies.
4. The rise in protectionism is also occurring here in the U.S. as shown by the recent rescission of long haul trucking privileges to Mexican companies that were hauling freight into the U.S. from Mexico. That freight must now be transported from the border by U.S. firms. Mexico responded by putting tariffs on a list of U.S. imports. This backlash against free trade agreements is putting pressure on government leaders who still champion globalization as desirable for U.S. economic growth. Policymakers in Washington and Fortune 500 companies that manufacture and trade overseas are finding themselves at odds with workers and consumers who are losing their jobs to lower cost foreign labor. With unemployment in this country effectively at 9% and going higher, American workers are “mad as hell and aren’t going to take it anymore”. Labor unions helped elect Barack Obama. They expect “payback”. Importantly, Democrats in Congress and the President himself have pledged to re-evaluate America’s free trade agreements and policy. We expect some “pullback” from the liberal free trade policies of the last decade.
5. Public anger is also being aroused by the scandals related to the “bailouts” of many of this nation’s large, international conglomerates, particularly financial firms, and the recently disclosed large bonuses paid by both financial and non-financial firms that have received billions in taxpayer assistance. The “bailouts” and the executive bonuses have stoked the fires of smoldering public resentment at the widening gap between the increasingly rich executive class and the struggling middle class in this country. See the slide below showing the disparity in real per capital income growth in the economic expansion of the 2002-2007 period and that of the economic expansion of the 1982-87 periods under President Reagan.
6. Now also look at the slide below showing the trend in retail inflation over the 2005-2008 periods and the most recent six month reporting period of February, 2009.
While the collapse in commodity prices in the last six months has been a primary cause in inflation turning negative in the last six months, note the annual inflation increases in 2006 and 2007 and the continued increases in many non discretionary consumer expense categories such as utility charges, education and tuition and healthcare costs. Add to this data the fact that American workers have now experienced the second major declining stock market cycle of this decade with major market indices declining by 50% from peak to trough in 2001-02 and 2007-2009. Importantly, the current stock market debacle has been caused by excesses and mismanagement of risk by many of the nation’s financial institutions that have needed taxpayer assistance to stay afloat. It is little wonder, the American middle class is angry and they are reflecting their anger politically.
It began with the Congressional elections of 2006 when an angry American electorate gave a sitting Republican President and his party the worst political drubbing since the elections of 1964. This at a time when the American economy was humming and creating approximately 2 million new jobs annually in 2005 and 2006. It continued with the recent Presidential election of 2008 where the unlikely candidacy of a first term Senator from Illinois first surprisingly won the Democratic nomination, upsetting the presumed party favorite, and then led the Democratic Party to its most overwhelming victory since Lyndon Johnson defeated Barry Goldwater and the Republican Party in 1964. The 2006 and 2008 election results were a loud dissatisfaction on the part of the American electorate with the economic, social and political status quo. Their statement was clear, “They were mad as hell and not going to take it anymore”. We have long noted this building anger among American voters and counseled candidates running for office in 2006 and 2008 that the American electorate was angry and wanted dramatic change.
We also felt that change was being translated in two very distinct demands. First, the inequities of the economic system that allowed excess and corruption by corporate CEO’s and politicians were unacceptable. Second, the middle class wanted the Federal government to do more to help them with the draining expenses of energy, healthcare, education and retirement necessities. To their credit, the Democratic Party and Barack Obama, grasped voter dissatisfaction and embraced a populist agenda to answer that dissatisfaction. American voters responded with a landslide victory for President Obama and the Democrats that now control both houses of Congress as well as the White House. But the intensifying recession since the end of the third quarter of last year has created more pain and suffering among American workers and consumers. President Obama’s stimulus programs highlighted by huge taxpayer financed “bailouts” of major financial institutions are wearing thin on the American public. Already angry American voters are now livid with the revelations of continued bonuses to failed executives and the failure of newly elected Democratic congressmen and senators and newly appointed officials within the Obama Administration to stop “politics as usual”. The embarrassing revelations and resulting voter backlash is forcing the President to adopt a defensive posture of trying to convince voters and congressional opponents of his program both within and outside of his party to support him. This is not the position the President wanted to be in within the first 100 days of his administration. The current recession belongs to the Democrats now and voters want to see tangible improvement for them from the Congress and this Administration. Continued corporate excesses at the expense of taxpayers and middle class workers are only adding to the anger of the American public.
7. In addition, to anger, the American public is emotionally stressed and physically debilitated. After experiencing the heady and seemingly inexorable rise in consumer net worth and incomes from the expanding economy, rising stock markets and most importantly, the outlandish increase in real estate values over the 2003-2006 periods, the American consumer has seen his world literally come crashing down since the second half of 2007. It is estimated that the declines in housing values and the stock markets together over the last 5 quarters is more than $15 trillion or an entire year’s GDP. As a result, the American consumer that exuded great confidence and risk tolerance has become stricken with fear.
In the article, “The Fed’s Conundrum”, April 5, 2007, we commented on what we felt was an increase in the fear factor for consumers which was going to suppress consumer spending and their appetite for risk going forward. We based this on the increase in inflation prevalent at the time and the accelerating decline in the housing cycle underway leading to increased mortgage foreclosures. In addition, as government statistics would later prove, job creation was peaking that spring. Fear is something the American public doesn’t exhibit very much. The post war period has been one of economic growth and a rising standard of living for Americans. To be sure, the American economy has experienced periodic and sometimes severe recessions but they have been surpassed by longer and stronger growth periods. That is until this decade. The current recession is the second major economic downturn since the year 2000 and this recession is by far the most damaging and most pervasive in financial and social terms since the Great Depression of the 1930’s. The loss of homes, jobs, net worth, financial security and retirement security has caused the American consumer to doubt his ability to survive and to doubt the American capitalist economic model. In the current economic environment, Americans are full of worry. In a March 4, 2009 article in Advertising Age, it was noted that prescriptions for sleeping pills and anti-depressants had escalated 7% and 15%, respectively, in 2008 despite a cutback in marketing for such drugs by pharmaceutical companies. Based on the worsening economic climate in the first half of 2009, we would expect such numbers to increase. In the same Advertising Age article a poll by the National Sleep Foundation released on March 2, 2009, found over 30% of respondents said they are “losing sleep over the economy and their own financial situation”. The National Sleep Foundation Poll found an increase in sleeplessness and anxiety is leading to an increase in depression and a decrease in efficiency and productivity on the job. We also believe there is an increase in suicides and calls to suicide hot lines as a result of the current upheaval in the lives of Americans in this recession. National data is incomplete and not current into the first quarter of this year but regional and local data particularly in cities hard hit by the recession indicate a dramatic increase in suicides, suicide attempts and calls to suicide hot lines. This emotional stress is taking its toll on the overall physical health of the country.We believe doctor visits for emotional or stress related physical illnesses have increased as well as absenteeism from work. The result is a significant increase in medical care costs for doctor visits and prescriptions as well as a decrease in overall worker productivity. In such an environment, people are more nervous and short tempered which often lead to increased aggressive behavior. In addition, consumer outlooks for the future are negative.
We believe these current trends and developments have longer term significance and implications for the U.S. and overseas countries, politically, socially and economically. From an intermediate term economic outlook perspective, we believe the current recession will “bottom out” in the second or third quarters of this year. We believe the worst of the recession is now being experienced in the first quarter. We do not expect an economic recovery to be measurable until the fourth quarter of this year, at the earliest, and possibly the first half of next year. Assuming a recovery from the current recession gets underway next year and builds through 2011, 2012 and 2013, we expect such a recovery to be cyclical and quite robust given the pent-up demand that is accruing from consumers and businesses over the past 5 quarters. The economic recovery will be led by the U.S and extend overseas late in 2010 and more pronounced in 2011, 2012 and 2013.
However, longer term, we see the following resulting implications from this recession.
1. Americans will be more circumspect in assuming risk going forward. They will not embrace the unbridled use of credit as they have in the past. First, the availability and cost of credit in the future will restrict credit to consumers. Second, many consumers will eschew the use of credit to maintain lifestyle given the difficulty they have faced in meeting debt obligations.
2. Americans will be more conservative in their investment programs after the cyclical rebound expected over the next 2-3 years in worldwide equity markets. For one thing, Americans will be older and less inclined to take risk with their remaining and/or rebuilt capital, particularly in retirement plans. Second, Americans’ faith in the equity markets has been shaken by two market declines of 50% in the past 9 years plus the scandals also attendant with these declines. We believe Americans will retreat to a more basic and conservative investment profile that emphasizes intrinsic and transparent value and predictable future prospects. In addition, we expect a more highly regulated environment for financial firms and capital markets which should result in less leveraged and speculative investment products and strategies.
3. Americans will have to work longer before retiring as a result of the huge losses in savings, net worth and retirement accounts. However, many of the current generation of middle aged and senior workers will be suffering deteriorated health as a result of the current emotional and physical stress they are currently experiencing. These workers will have aged faster than otherwise due to the emotional and physical stresses of this recession. This will result in many workers having to retire earlier than planned which will add to the cost of Medicare, Medicaid, Social Security and private pension costs. These increased costs will be in addition to the enormous increase in Federal entitlement program costs from the retirement of the “Baby Boomer” generation of workers who begin to turn 65 in 2011 and will reach age 70 in 2016.
4. As a result of the wealth and job destruction in this recession and the impending retirement of so many workers, the demand for increased government services to handle a burgeoning aging and retirement population will put enormous strain on the U.S. Federal budget. This will be in addition to the huge strain on Federal finances that is now being incurred from the massive “bailout” programs that are being initiated to stabilize the banking system and end the current recession. It is likely the annual Federal budget deficits will range from $500 billion to $1 trillion or more over the next 5 years. Clearly this will put upward pressure on interest rates and price inflation in the U.S. and downward pressure on the U.S. Dollar in foreign currency markets. Indeed, we and other economists have raised the threats of these developments presently and they are already of concern to foreign governments and investors that own U.S. Treasury bonds.
5. Unemployment in the U.S. will be historically high even with a cyclical economic recovery projected over the 2010-2013 period. There simply will be no job opportunities for many of the former Wall St. and banking managers, executives and traders and automobile and related managers and executives, particularly over the age of 50.
6. The increasing population of aging and retired workers will not have the financial resources anticipated for this population segment at the beginning of this decade when the stock market bubble at that time had created so many retirement plan millionaires. As a result, the projected retirement population will live more frugally than earlier projected and will not be the economic stimulus many had planned on. Indeed, for the reasons stated previously, they will be more of a drain on the U.S. economy than a help. In addition, they will not provide the spending for increased foreign imports or overseas travel as previously predicted.
7. We expect international trade agreements to be less liberal here and abroad as the infatuation with globalization becomes a casualty of the massive unemployment in the current recession.
Conclusions:
We expect the U.S. recession to end later this year and gradually begin recovery next year and accelerate through 2011, 2012 and 2013. The U.S. recovery will stimulate the export dependent economies overseas and they will recover accordingly. After a strong cyclical recovery, the U.S. will settle into a stagflationary economic cycle characterized by a secular high level of unemployment, lower worker productivity, a resumption of higher energy, food and commodity inflation and slower consumer income growth and spending. U.S. government finances will be deteriorated by high deficits, increased entitlement spending, increased interest rates and a depreciated currency. Future long term economic growth will again be paced by emerging markets overseas in Eastern Europe, Asia and Latin America. Americans will shift politically to the left as they become more dependent on government spending for basic needs and income. Populations in mature industrialized economies will shift politically to the right as they become more nationalistic to protect jobs, companies and existing social welfare programs. They will also be less inclined to pursue free trade in the future. Free trade will still be important to emerging industrialized economies as they continue to pursue export oriented economic growth and employment. This will increase tensions between the mature economies such as Western Europe, Japan and the U.S. and the emerging economies of Asia, Latin America and Eastern Europe. From a capital markets standpoint, we remain defensive in the short term as we look for evidence of an economic bottoming. However, we would prepare to emphasize common stocks, particularly large cap and NASDAQ U.S. stocks to participate in a bottoming in the recession and subsequent economic recoveries here and abroad. We would also increase our positions in gold and other commodities as the world economies reflate and commodity prices increase. Concomitantly, we would avoid bonds as they will see a shift in cash to stocks and an increase in interest rates in an economic recovery. Please contact us for specific recommendations on your investment program.
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