While in the midst of this economic crisis, scant attention has been paid to a paradigm shift just taking hold of the economy. The changes that will arise will have a profound impact on all of our lives for years to come.
Over the past few decades, the American consumer has been the locomotive that drove not just the U. S. but the global economy. During these years, our growing trade deficit was evidence of the insatiable appetite we had for consumption of foreign made goods. It is apparent that the world economy is undergoing an epiphany. No longer does the U. S. have the financial capacity to be the dumping ground for consumer products manufactured all over the world. In order for the global economy to continue to grow, Chinese, Japanese and consumers everywhere will need to open up their coffers and increase consumer spending. Our day of reckoning has arrived -credit limits are tapped out. Furthermore, the massive shrinkage in American consumers' net worth is likely to have a long term psychological effect that will crimp future spending.
Consumption has now been replaced by savings. For many years, economists have been warning us about the impact of the low savings rate by Americans. Over the last decade, significant gains in net worth resulting from rapidly appreciating real estate and investments had the deleterious effect of reducing savings. Besides the obvious issue of under-funding for retirement, the other main problem with low savings is the dearth of private sector capital necessary to finance growth in the economy. As a result, the savings rate remained at 1% or lower of income during the economic boom.
With declining home prices and big losses in stock and bond portfolios, the savings rate has suddenly reversed and climbed to 6-7%. At last glance, more than $700 billion has been saved by Americans in less than a year. Now some economists are concerned that we are saving too much and that this hoarding of cash will not be easily directed into new investments until consumer confidence is restored. In the meantime, approximately $6 trillion of cash remains liquid in banks, money markets, etc. Eventually, a large portion of this liquidity will be re-directed into investments and could result in a huge stock market rally.
The financial services industry has already under-gone a seismic shift. Two of the major players on Wall Street, Bear Stearns and Lehman Brothers, have disappeared and the remaining investment banking firms have taken TARP money and are now regulated as banks. The risk taking that was predominant in these firms and was a cause of the economic crisis has been eliminated. The exorbitant income paid to investment bankers is past history, and the best and brightest minds coming out of college will probably migrate to more promising professions. Some foreign firms such as Nomura Securities and Deutsche Bank have taken advantage of the vacuum and increased their role in the capital markets. Going forward, it is unclear whether Wall Street will remain the financial capital of the world.
As the recession deepened, some industries remain mired in deep distress while other fledging sectors present tremendous opportunities for future growth. The problems of the auto industry are well documented. With the federal government on board as an equal if not majority partner, they are in a position to dictate terms such as the recent dismissal of Rick Wagoner as CEO of General Motors. While we can't predict if GM and, perhaps, Chrysler will declare bankruptcy or simply downsize, I do believe that they will ultimately survive. However, going forward, an emphasis on small, fuel efficient cars powered by alternative energy will most certainly represent an end product of the changes in this industry.
Alternative energy is the next great frontier. Much like productivity increases in labor that resulted from advances in technology in the 1990s and boosted the U.S. economy, new replenishable and pollution free sources of energy should be the next catalyst. Whether you share the views of T. Boone Pickens about the benefits of natural gas or wind power, this dialogue is very useful in advancing the cause of alternative energy. With an estimated cash outflow of $500 billion paid annually to OPEC for oil, clean, reusable sources of energy developed in the United States will free up capital that can be deployed into more efficient and productive uses. The solution is not one source but a combination of solar, wind, geo-thermal, batteries and even nuclear. Nobody can predict the mix or what companies will emerge as market leaders. Much like the technology boom, only a handful of companies will be the Microsofts or Ciscos of the energy revolution.
As the economic crisis continues, it has become clear that Washington has replaced New York as the nation's financial center. For soon to be college graduates such as my daughter, Washington appears to represent the best job market as government hires talent to dispense and monitor the massive disbursement of federal funds. The medical/biotech arena represents the other sector that is in hiring mode. For example, the recent decision by President Obama to remove barriers on stem cell research opens up an exciting field that shows great promise as a remedy for an assortment of medical conditions. With the rising tide of aging baby boomers requiring greater medical attention, the proliferation of new wonder drugs and genetic solutions clearly offers a path for economic expansion. With healthcare reform on the horizon, career opportunities should abound as new and, hopefully, upgraded administrative and medical procedures evolve.
While none of us can predict all the changes that will take place, there is little doubt that they will be dynamic. When asked recently about the severity of this recession, General Electric CEO Jeffrey Immelt stated that this is not a recession but a reset. Those who have foresight to accurately predict trends and opportunities will benefit greatly in their career and investments. While we are in a period of upheaval, I predict that out of the ashes will emerge a stronger more efficient economy focused on improving the quality of our lives and not a strategy of borrowing our way into prosperity.
Clifford L. Caplan, CFP®
In the News: Recently in the March 1, 2009, edition of The Boston Sunday Globe, I was quoted about the myths and reality of using the 60-day rule for IRA distributions to alleviate temporary cash flow problems. In the current edition of Wealth Management Business, a magazine that is subscribed to primarily by accountants and attorneys, I wrote an article titled “Wading in Turbulent Waters for Investment Opportunities.”