As a frequent early riser, I have seen my share of sunrises. Most days, as the sun appears from the east in Panama City Beach and lights up Rosemary, 30A, Grand Boulevard, Sandestin and Miramar Beach, I am immersed in online newspapers from around the world, absorbing macroeconomic events and reading the world’s pre-eminent economists.
When I rise at an especially early hour, I occasionally see what is known as a “false dawn.” The sky appears to light briefly, as if sunrise is imminent, then darkness returns for some time before daybreak. Unfortunately, in our opinion, what we are seeing currently in our economy and markets is also a false dawn.
What comprises this early if misleading light regarding the economy? Improvement in the housing sector, for one. Bob Pisani of CNBC reports that the “S&P/Case-Schiller National Home Price Index for October was up 4.3 percent, above the 4 percent increase expected. With lean inventory, higher prices and high levels of affordability, housing has been one of the bright spots for the U.S. economy in 2012 and will continue to be so in 2013.”
Consumer confidence was also climbing in the final stages of last year. Unemployment numbers, however you wish to interpret them, were slightly improved over even the first half of 2012.
So why the false dawn metaphor? First, and unfortunately, we don’t buy the rhetoric on the national housing recovery, as we think it is almost entirely government driven. We subscribe to the thinking that with interest rates as low as they are, most folks who are going to buy have bought already. So we don’t see a huge number of buyers returning to the market, a market, which in some geographic pockets, still has significant numbers to work through. Additionally, at least one-third of all current housing sales are investor purchases.
More important is the lack of growth in jobs that can support a middle class lifestyle. A large segment of our populace is now or soon will be working minimum wage jobs and drawing less than $8 an hour. That’s about $1,280 monthly before taxes for a 40-hour week. It is simply impossible to purchase a home, pay for utilities and food and fund a child’s education at that income level.
So future home sales and consumer spending will suffer. Consumer spending, about 70 percent of GDP, can drive our domestic economic growth, but we see contraction rather than expansion in this area, despite increasing consumer confidence levels.
As Harvard Economics Professor Ken Rogoff says, “The footprints of crisis are evident in indicators ranging from unemployment to housing prices to debt accumulation ... With cash-strapped governments deferring urgently needed public infrastructure projects, medium-long term growth also will suffer … other secular trends, such as aging populations in most advanced countries, are taking a toll on growth prospects as well. Even absent the crisis, countries would have had to make politically painful adjustments to pension and health care programs. Taken together, these factors make it easy to imagine trend GDP growth being one percentage point below normal for another decade, possibly even longer.”
We see a continued secular bear market, with cyclical bull markets, and an extended low-returns environment. This will make tactical asset management even more vital, since buying an index will be even less of a guarantee of a decent return. Inflation is not currently rampant, but eventually, it may be, according to Martin Pring, author of “Investing In The Second Lost Decade.” Pring writes, “Some items like college education and medical expenses never seem to go down, regardless of how weak the economy is.”
It is possible that the Fed may lower interest rates even further to spur housing purchases and stimulate growth. But eventually interest rates will rise, and inflation with them.
Levels of governmental as well as personal debt also represent a headwind to growth. Pring writes, “At some point, when debt buildup becomes excessive, it is a drag on growth. In their book "This Time is Different,"
authors Rogoff and Carmen Reinhart estimate that this moment arrives for any country when public debt reaches 90 percent of GDP”… causing “median growth rates (to) fall by one percent and average growth falls considerably more.”
Margaret R. McDowell, a chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, a “fee-only” registered investment advisory firm located near Sandestin. Arbor Wealth (850-608-6121~www.arborwealth.net) specializes in portfolio management for clients with $250,000 or more of investable assets.