Embrace Tomorrow's Status Quo Today
In A Bleak Economy, What Else Can Go Right?
For over a year, the headlines have been rife with dire warnings that seem to indicate the demise of the world as we know it.
For example, we learned that in June we experienced the worst percentage decline in the broad market averages since the Great Depression. We also discovered that home prices are declining faster than at any time in recorded history, and that debt levels (personal and governmental) have never been so high--nor have gas prices, even factoring in inflation. Gold is going through the roof and the dollar is falling through the floor. Corn, copper, steel, soybeans, etc. are shattering more records than Michael Phelps. And woe is us: flu season is right around the corner. Could this be the year of the "Great Pandemic"? It's no wonder that consumer confidence has dropped to multi-decade lows, and that stock markets around the world are misbehaving. But what could actually go right as a result of this upheaval?
Such persistently sour headlines understandably wear on our psyche. At the margin, the malaise prompts us to avoid or postpone making big decisions, and the "crisis of confidence" can quickly spiral into a self-fulfilling prophesy. We delay buying a new home because "we surely can't sell the old one." We delay investing in a vacation property because "prices surely will go lower." We avoid adding another franchise or branch because "we surely won't get financing," even if our best business planning tells us now is the time to build market share.
From a business and personal perspective, the past couple of decades have, in contrast, provided a perfect storm of ideal conditions for business and consumption. We became used to ultra-cheap gas, inexpensive imports, and low commodity prices. Credit became broadly available to more people and businesses, at lower prices and on easier terms. Huge cuts in the capital gains, dividend, and ordinary income tax rates drove the liquefaction of billions--if not trillions--of dollars of previously illiquid family assets. Financial innovation increased the velocity of trading while more accommodative tax and pension laws (such as those that created the 401(k) in the early 1980s) added to demand for greater liquid asset creation. Risk was parsed out into more hands, creating the illusion of an almost risk-free environment. Arguably, even the Federal Reserve propagated the illusion of "too big to fail" by intervening in the affairs of Bear Stearns, Fannie Mae, and Freddie Mac.
But that was then, and this is now. We suspect the next 20 years are highly unlikely to be anywhere near as accommodating. Gas isn't going back to a buck (or even two) a gallon, and real interest rates can't go much lower. (They're already below zero.) Thanks to increased global demand, commodities prices may remain elevated. Tax rates are almost certain to increase, no matter who moves into the White House or gains control of the House and Senate. Credit is more expensive and harder to get, in addition to a now greater appreciation for risk in the system.
Unfortunately, we Americans don't adapt easily to change. Moreover, we tend to further react when the change is large and/or sudden. But change is a necessary and productive part of keeping a capital-market system functioning well. While it's easy to get caught up in hand-wringing over the reality that things are likely to be different, it's more productive to focus on what might prove to be positive outcomes of a new status quo. Where might new opportunities lie, and how do you batten your business and/or your financial wherewithal to survive, adapt, and thrive? More specifically, what if:
- High oil prices meant producers wanted to manufacture their goods closer to their end markets? Could we see a manufacturing/distribution-led renaissance of the middle class?
- Banks didn't fail, but started lending the old-fashioned way: to creditworthy customers who could both afford a down payment (so they had some skin in the game) and the monthly payments?
- More consumers learned to save for a reasonable down payment for any major purchase, rather than putting everything on credit and then walking away when they got tired of it or couldn't afford the payments?
- The global "pie" of free and open markets enlarged, so everyone could participate in capitalism, rather than the U.S. being the primary consumer of the rest of the world's goods?
- The U.S. wasn't the only global "superpower" but one of several very powerful, free market-based economies? After all, we arguably attained this position only after WWII--a relatively short period of time from a global historical context. As recently as the early 1900s, J.P. Morgan personally had to bail out the country from a major financial panic since we had no federal bank. Indeed, we were still considered an emerging economy at that time, and financial centers in the rest of the world were busy underwriting our corporate evolution. We then proceeded into a major economic depression that only a World War and the subsequent Baby Boom pulled us out of.
- The cheap dollar brought more foreign investment in hard assets within the U.S. borders? Could this hasten the end of the real estate crunch?
- Our intellectual expertise, coupled with the cheap dollar and more accommodative goodwill amortization laws outside the U.S., spawned an increase in global services business M&A activity?
Granted, I'm brainstorming longer-term "stuff" here. Yet the long term typically seems to get here before we know it--and usually well before it's recognized by mainstream media. In fact, a key trend already seems to be ingraining itself into the fabric of a new U.S. reality: closer evaluation of the "frictional" costs of doing business (e.g., credit, transportation, or input costs). These costs, which had previously not been heavily factored into many decisions, will now play a key role. Considerations such as where to make products relative to where they are consumed, where to live relative to where one works, and how far away to travel for entertainment and leisure will likely matter much more in the future than they have in the past.
Undoubtedly, it's a challenge to fathom the many positive outcomes potentially emerging from within today's newsmaking events. And amplified reporting across media outlets certainly doesn't make it any easier. But as futurist Alvin Toffler said, "Change is the process by which the future invades our lives." And isn't it much more fun to be looking a little further down the road focusing on what could go right rather than be stuck here wallowing in what isn't the same?
Carol M. Clark, CFA, is a partner and investment principal of Lowry Hill, 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 $6 billion in assets for nearly 300 families and more than 60 foundations from offices in Chicago, Minneapolis, Naples, and Scottsdale. She welcomes questions and comments at firstname.lastname@example.org.
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