Among the multitude of voices, commentaries and other so-called expert perspectives on economics, markets and money, there is one that I admire and respect for his vision and practical perspective. His name is Bill Gross and he is a renowned investment manager for the Pacific Investment Management Company (PIMCO).
In his November, 2009 Investment Outlook, Bill introduced his concept of a “New Normal” paradigm for the global economy and financial markets. He defines his “New Normal” paradigm as:
“A period of time in which economies grow very slowly as opposed to growing like weeds; where government plays a significant role in terms of deficits, regulation and control of the economy; where the consumer stops shopping until he drops and starts saving to the grave”.
More specifically, this new paradigm suggests that:
• The American-style capitalism that emphasized the making of paper instead of things is over and will cede global economic leadership to countries that actually make things. The United States must return to an economy that is geared towards making real products if it is to be a significant player on the global economic scene in the years to come.
• The invisible hand of free enterprise driven by the private sector will be increasingly replaced by the more visible fist of the government’s direction of economic activity in the United States.
• Global economic leadership in the 21st century likely belongs to Asia (particularly China) and Asia-connected economies (like Brazil and India).
• United States housing ownership levels will sink over time, and housing will not be a significant economic driver in the years to come.
• Unemployment in the United States is likely to remain high for many years to come. The “New Normal” level of unemployment will be much higher than it has been over the last few decades. Some jobs will never come back.
While there are no guarantees that Bill Gross’ vision will play out as he suggests, he makes a very strong case that is based on solid analysis and it should not be ignored. We should all acknowledge it; be on the lookout for indications of its validity; and be prepared to tactically adjust our financial and professional lives in response to it.
We should all get ready for the “New Normal”.
Saturday, January 16, 2010
Sunday, January 10, 2010
We Need Another Bubble!
I think we will all agree that the rollercoaster economic ride of the last decade has been very unsettling and financially destructive for many people in this country. Conventional wisdom suggests that we need to find a way to put our economy on a more stable upward trajectory that doesn't alternate regularly between boom and bust cycles.
But, is this really possible?
In other words, is it realistic to expect that, given the basic structure of our economy, we can ever get to a point where we have both significant and stable economic growth? I am increasingly becoming convinced that we cannot and we likely will not achieve this happy medium any time soon.
Unless we change the basic nature of our economy, significant and stable economic growth is not in our future. We can have significant growth, but it will not be stable. On the otherhand, we could settle for stable growth, but it will not be significant.
Here's my logic:
Since we have primarily a consumption-based economy (i.e., 70% of our GDP is based on personal consumption), we periodically need some new catalyst to keep the consumption engine firing on all cylinders. In other words, we continually need to give people a reason and the financial ability to consume more than just necessities in order for our economy to grow significantly.
In the 1990's, we did this with the tech bubble. As a result of hefty stock gains during that period, people felt wealthy and they ramped up their discretionary consumption as a result. The consumption cylinders were firing.
In the 2000's, we did it with the real estate bubble. Again, people felt wealthy as a result of the hefty gains in the values of their homes. Again, the consumption cylinders were firing.
Now, generally speaking, people feel poorer than they have felt in years. So, frivilous consumption has fallen and saving has increased. The consumption cylinders are sputtering.
Is this a good thing?
On a very basic human level, I think this change in financial attitudes is good. However, on a macroeconomic level, this means that our economic engine will not be firing on all consumption cylinders again for a long time. So, as long as we remain a consumption-based economy, this will not be a good thing.
I suspect that at some time in the not-so-distant future we will be longing for another bubble.
Stay tuned..................
But, is this really possible?
In other words, is it realistic to expect that, given the basic structure of our economy, we can ever get to a point where we have both significant and stable economic growth? I am increasingly becoming convinced that we cannot and we likely will not achieve this happy medium any time soon.
Unless we change the basic nature of our economy, significant and stable economic growth is not in our future. We can have significant growth, but it will not be stable. On the otherhand, we could settle for stable growth, but it will not be significant.
Here's my logic:
Since we have primarily a consumption-based economy (i.e., 70% of our GDP is based on personal consumption), we periodically need some new catalyst to keep the consumption engine firing on all cylinders. In other words, we continually need to give people a reason and the financial ability to consume more than just necessities in order for our economy to grow significantly.
In the 1990's, we did this with the tech bubble. As a result of hefty stock gains during that period, people felt wealthy and they ramped up their discretionary consumption as a result. The consumption cylinders were firing.
In the 2000's, we did it with the real estate bubble. Again, people felt wealthy as a result of the hefty gains in the values of their homes. Again, the consumption cylinders were firing.
Now, generally speaking, people feel poorer than they have felt in years. So, frivilous consumption has fallen and saving has increased. The consumption cylinders are sputtering.
Is this a good thing?
On a very basic human level, I think this change in financial attitudes is good. However, on a macroeconomic level, this means that our economic engine will not be firing on all consumption cylinders again for a long time. So, as long as we remain a consumption-based economy, this will not be a good thing.
I suspect that at some time in the not-so-distant future we will be longing for another bubble.
Stay tuned..................
YTD Performance By S&P 500 Industry Sectors - January 8, 2010
Based on the year-to-date performance by the S&P 500 Index's industry sectors, market participants still believe that the economy is in the early stages of an economic recovery:
The industry sectors that are supposed to lead in the early expansion phase of the macroeconomic cycle are financials, materials and industrials, and they are leading.
However, we should keep an eye on the consumer discretionary and technology industry sectors to see if they continue to relinquish their leadership from 2009. They too should be leading at the beginning to the midpoint of an economic expansion phase.
However, we should keep an eye on the consumer discretionary and technology industry sectors to see if they continue to relinquish their leadership from 2009. They too should be leading at the beginning to the midpoint of an economic expansion phase.
Stay tuned........................
My Fellow Californians: Things Could Get Real Ugly From Here.............
My fellow Californians, you may or may not have read about the latest state budget proposal from the "Governator", but I can assure you that you will likely feel the effects of his financial proposals in the months and years to come.
Regardless of how the inevitable budget battle plays out, things are likely to get real ugly here in the Golden State over the next few years.
Click here for a quick overview of the major proposals in the "Governator's" 2010-2011 California State Budget.
Now, I will be the first to agree that government spending on any level in this country is to some degree wasteful and inefficient. Moreover, our country needs to look critically at how we spend taxpayer dollars at both the federal and state levels because we simply cannot continue on the path that we are on with deficits at all levels of government.
However, unless we believe that all government spending on programs to provide a financial safety net for deserving citizens is wasteful, then cuts in many of these programs will be catastrophic for many of these recipients directly and harmful in some way to all of us indirectly.
Here are some potential social impacts related to the proposed cuts:
- Cut the CalWorks program, the state's primary welfare-to-work program. So, do we expect that these recipients will just quietly go away or find some other financial support vehicle, given the current state of the economy? I wouldn't bet on it.
- Cut the prison budget by shifting nonviolent prisoners to county jails. I hope they choose the right prisoners to shift to these less secure facilities. I guess it must be better to have overcrowded county jails rather than overcrowded prisons.
- Raising more revenue by catching more speeders and red light violators. I don't know about you, but I started noticing a more visible presence by CHP about six months ago. Now, I understand why. The state has decided that it will help close its revenue gap by pulling over more drivers for speeding and whatever else they can make stick. Cities are getting in on the act as well by being more aggressive with parking fines.
- Reducing the juvenile prison population and closing the facilities that house them. With serious juvenile crime on the rise coupled with above-average unemployment amongst juveniles, I suspect we will be needing more juvenile prison facilities, not less.
Lastly, the "Governator's" budget is built on a very questionable premise that the federal government is going to give California some $6.9 billion that the "Governator" says the state is "owed". If this money doesn't materialize, the budget cuts will get more draconian.
See what others have to say about the state of California's finances and its proposed budget for 2010-2011:
"Invitation to Disaster"
"California: Is Default Inevitable?"
"California Budget To Raise Millions From Red Light Cameras"
"What Happens When California Defaults?"
Stay tuned........................
Regardless of how the inevitable budget battle plays out, things are likely to get real ugly here in the Golden State over the next few years.
Click here for a quick overview of the major proposals in the "Governator's" 2010-2011 California State Budget.
Now, I will be the first to agree that government spending on any level in this country is to some degree wasteful and inefficient. Moreover, our country needs to look critically at how we spend taxpayer dollars at both the federal and state levels because we simply cannot continue on the path that we are on with deficits at all levels of government.
However, unless we believe that all government spending on programs to provide a financial safety net for deserving citizens is wasteful, then cuts in many of these programs will be catastrophic for many of these recipients directly and harmful in some way to all of us indirectly.
Here are some potential social impacts related to the proposed cuts:
- Cut the CalWorks program, the state's primary welfare-to-work program. So, do we expect that these recipients will just quietly go away or find some other financial support vehicle, given the current state of the economy? I wouldn't bet on it.
- Cut the prison budget by shifting nonviolent prisoners to county jails. I hope they choose the right prisoners to shift to these less secure facilities. I guess it must be better to have overcrowded county jails rather than overcrowded prisons.
- Raising more revenue by catching more speeders and red light violators. I don't know about you, but I started noticing a more visible presence by CHP about six months ago. Now, I understand why. The state has decided that it will help close its revenue gap by pulling over more drivers for speeding and whatever else they can make stick. Cities are getting in on the act as well by being more aggressive with parking fines.
- Reducing the juvenile prison population and closing the facilities that house them. With serious juvenile crime on the rise coupled with above-average unemployment amongst juveniles, I suspect we will be needing more juvenile prison facilities, not less.
Lastly, the "Governator's" budget is built on a very questionable premise that the federal government is going to give California some $6.9 billion that the "Governator" says the state is "owed". If this money doesn't materialize, the budget cuts will get more draconian.
See what others have to say about the state of California's finances and its proposed budget for 2010-2011:
"Invitation to Disaster"
"California: Is Default Inevitable?"
"California Budget To Raise Millions From Red Light Cameras"
"What Happens When California Defaults?"
Stay tuned........................
Saturday, January 2, 2010
Which ETFs (Exchange Traded Funds) Will Lead In 2010?
In 2010, all eyes will be on the Federal Reserve Board and the various economic indicators charting the health of the U.S. economy. There will be winners and there will be losers.
Will the Fed achieve a delicate balancing act with its monetary policy?
Will the economy maintain its positive momentum after the Fed and the government start curtailing their various stimulus programs?
Will the ETF leaders from 2009 continue their run in 2010?
Will the ETF laggards from 2009 play catchup in 2010?
Will the Fed achieve a delicate balancing act with its monetary policy?
Will the economy maintain its positive momentum after the Fed and the government start curtailing their various stimulus programs?
Will the ETF leaders from 2009 continue their run in 2010?
Will the ETF laggards from 2009 play catchup in 2010?
We will be paying very close attention to the global economic and financial dynamics to determine the answers to these questions as soon as they become apparent. Stay tuned..........
Could You Have Seen The Great Recession of 2007 Coming?-----YES!
In my conversations with people about the recent economic and financial turmoil that we have experienced over the last couple of years, I get the impression that most people think that these kinds of distressful events just happen with no warning. That is simply not the case.
While noone has a completely accurate crystal ball that tells them when the economy is going to enter a boom or bust cycle, there are clearly observable relationships that exist in our economy that can telegraph the increasing likelihood of an impending boom or bust cycle. Such was the case with our most recent economic upheaval, dubbed the The Great Recession of 2007:
While noone has a completely accurate crystal ball that tells them when the economy is going to enter a boom or bust cycle, there are clearly observable relationships that exist in our economy that can telegraph the increasing likelihood of an impending boom or bust cycle. Such was the case with our most recent economic upheaval, dubbed the The Great Recession of 2007:
With a little better understanding of economic relationships, you can enhance your chances of taking advantage of financial opportunities and avoiding financial risks. You can be sure that the U.S. economy will experience other booms and busts in the future. Will you see them coming next time?
Wednesday, December 30, 2009
Macroeconomic Cycle Investing Update - Early Expansion Stage?
If you believe that the stock market is indeed an efficient forecasting mechanism for the state of the economy, then you would be inclined to believe that the U.S. economy is in the early stages of economic expansion.
This conclusion is based on the fact that the three top performing S&P 500 industry sectors, as of December 30, 2009, are industry sectors that usually lead the market at the beginning of an expansion in the economy.
Does the stock market have it right?
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