A couple of years ago, I went through an exceedingly challenging period in my personal life, where the path I'd been on for several decades proved flawed, and I had to figure out how to pick up the pieces and move on. The status quo had become unacceptable, even though the way forward was unclear. Just then, a friend reminded me that "Sometimes the only way out is through"... no matter how frightening, frustrating, and confusing that path is.
It strikes me that most developed economies are in that very same spot right now. The path we've been on--debt accumulation, deficit spending, entitlement and instant gratification mentality, and living way beyond our means--is faulty, but which way forward? Indeed, the pendulum has swung so far into uncharted territory that there are no equivalent periods in history to give us a hint at how to dig ourselves out of the mess we've created.
The extremely heightened volatility in the markets in 2011 was at least partly caused by an underlying acknowledgment of this conundrum. While investments should be made based on a host of fundamental factors, investors have been preoccupied for many quarters about the seeming intractability of global issues. The frustrating thing is our fate in the near term seems much more tied to political outcomes than corporate, economic, or fundamental ones.
But all is not lost. Like so many processes in life and in nature, this period of frustration is needed to set the stage for the next act. I'm sure the transition from agricultural societies to industrial ones wasn't angst-free either. I'm entirely convinced that if each one of us does some small part, we can successfully navigate through these times to a brighter future, too. How? For what they're worth, here are a few of my own personal suggestions. I'd love to hear yours.
Amidst all the handwringing about lackluster employment growth, poor consumer spending, and highly leveraged countries is the seldom-reported news that U.S. GDP is back at record (a.k.a. pre-financial meltdown) levels. With unemployment as high as it is, this means corporate America is cranking out solid profits with very productive workers. Markets are still down from their highs, meaning the valuations of many of these profitable companies are more reasonable. In the U.S., overall payout ratios are low, even while cash sitting on balance sheets and flowing through income statements is strong. Companies that pay dividends also tend to raise them periodically--which allows your income stream to stay at least partially ahead of inflation. Focusing on high-quality, dividend-paying entities that do business around the globe seems like a pretty nice place to park any excess funds while the globe sorts itself out.
I strongly suspect the increased volatility we've seen in the markets this past year is at least partly caused by our frustration with the political climate. Stock indexes vacillated wildly in 2011, particularly during the latter half of the year. They were swinging not because fundamentals were changing that markedly, but because investors were forced to grapple with the implications of unknowable outcomes in a host of geopolitical arenas--and, I suspect, as investors expressed their frustrations with politicians. Recall, we had the debt ceiling debate (2 or 3 times, in fact); the run-up to the downgrade of U.S. government debt; and continued worries over debt reduction and austerity deals that were on, off, and on again in Greece and elsewhere.
To me, the failure of the bipartisan committee Congress hand picked to address U.S. debt issues epitomized the ludicrousness of it all. After weeks debating the issues the committee emerged with no agreement, telling the world last November that though they'd failed to reach an agreement, "...we end this process united in our belief that the nation's fiscal crisis must be addressed..."
"Really? You don't say!" is my response. "That's why we picked you--to get it addressed!" Thank heavens 2012 is an election year and we can do something about it if we choose. I'm fully convinced that if the committee had emerged from their deliberations saying something like, "We're cutting $3 trillion. It's going to be rough, and nobody likes this deal because we all had to give on some issues. Taxes are going up, services are going down, younger people can't retire until they're 75, but, by golly, we'll have the budget balanced by 2020," then the markets would have rallied and businesses would have started investing.
I recently helped one of my daughters move from Minnesota to San Antonio. It's a pretty easy drive from Minneapolis: 23 hours up and down the same slice of I- 35. In the process, it dawned on me how much vision, fortitude, and national support it took to build our Interstate Highway System. Why can't we get one or two or three of those types of projects going now?
That is precisely the type of conversation I want my politicians and business leaders to have in the next 10, 20, 30 years. Let's pick a couple of industries we want to "own" and build the incentives and the infrastructure to make it happen. Let's figure out how the biotech corridor in Massachusetts was created, or the vibrant Research Triangle Park in North Carolina, or the technological expertise in and around Silicon Valley.
Southern California used to own the entertainment industry, and the Pacific Northwest owned aerospace. What happened? Let's lure back some of the workers, technology, and ancillary expertise we ceded overseas in the outsourcing mania of the 1980s, 1990s, and beyond. Does it mean we may have to pay a little higher price for some goods? Perhaps, at least initially, but strategically and economically (and morally) it's the right thing to do.
Where's the vision and leadership to accomplish something this grand? There are so many things we could tackle (the smart grid, renewable energy, cloud computing security, etc.) to strengthen industries that would facilitate high-paying, highly skilled jobs and all sorts of ancillary businesses to support them. The best athletes, musicians, speakers, and entertainers visualize perfect performances and positive outcomes. Why can't we collectively identify and start working toward something positive?
Yes, things seem overwhelmingly negative and exceedingly frustrating right now. That's obvious from the headlines, the market volatility, and the people "occupying" public places everywhere. But with a modicum of vision, courage, and heart we could muddle through this fog into a brighter tomorrow.
Carol M. Schleif, CFA, is a partner and investment principal of Lowry Hill, a Wells Fargo business. Lowry Hill is a private asset management firm that provides proprietary investment management and financial services to families, individuals, and foundations with wealth greater than $10 million. The firm manages approximately $4.7 billion in assets for nearly 300 families and 56 foundations from offices in Minneapolis, Naples, Fla., and Scottsdale, Ariz. Schleif (formerly Clark) welcomes questions and comments at firstname.lastname@example.org.
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