10/12/2012 5:01 PM ET|
Cheer up! A case for economic hope
Expectations have been lowered. The savings rate is up. Mortgage rates are at record lows. The stock market still has room to run. The next decade may turn out better than expected.
The daily economic headlines are depressing. But what I find really troubling is how dark the mood gets when the discussion turns to the longer-term outlook. It's easy to see why. For example, the Congressional Budget Office projects the federal debt will reach 70% of gross domestic product by year's end, the highest percentage since shortly after World War II.
The widespread fear is that the combination of an aging population and pressures to embrace fiscal austerity will weigh heavily on the economy. Bill Gross - legendary bond investor and co-founder of the mutual fund giant Pimco, predicts the post-World War II era of lush average annual stock market returns is over.
Perhaps most disturbing is the gloom enveloping the prospects of recent colleges graduates. These are young adults who did the right thing by investing in their college education and graduating. Yet their wages in the aggregate have dropped 5.4% -- 1.6% for men and 8.5% for women -- between 2000 and 2011, according to the Economic Policy Institute. The combined unemployment-and-underemployment rate of young college graduates in 2010 and 2011 was 19.8% and 19.1%, respectively. Generation Debt is saddled with an unprecedented student loan burden even as far too many have struggled to find work.
But it doesn't take rose-colored glasses to see a more optimistic scenario, especially for young adults. Just look at the years after World War II.
Yes, caution is the generational watchword of the moment. Surveys show younger adults are wary of risks and disillusioned with the returns on homes and stocks. Yet the sobering memories of financial bets gone bad and the embrace of greater financial conservatism could eventually pay off big for those will to take a risk. Many American households are already laying the foundation for a stronger economy. "The generation coming out of the last decade, their expectations have been lowered," says James W. Paulsen, the chief investment strategist at Wells Capital Management. "It's a good time to start out."
Learning from dad's experience
In other words, the younger generation could end up pleasantly surprised, much like young adults in the 1950s were. At the end of the Second World War, the consensus among opinion-shaping elites was that the U.S. was a mature economy destined to slide back into depression. The press wondered at the economy's strength and "almost everyone expected a crash, or at least a retrenchment, journalists had difficulty reckoning with month after month of continued economic expansion," writes Andrew Yarrow in "The Big Postwar Story: Abundance and the Rise of Economic Journalism." With the benefit of historical hindsight, we know that the '50s economy grew at an inflation-adjusted average annual rate of 4.4%, despite three mild recessions.
The same story holds with investing. Memories of the devastating 1929 stock market crash lingered with a skeptical public as the Second World War ended. Professional investors fanned the flames of fear by constantly worrying that "another '29" lay ahead. Many Americans steered clear of stocks and sought refuge in safe fixed-income securities instead.
After all, investors had earned a real 2% average annual return on their equity investments during the 1930s, compared with a real return of 7.1% on government bonds and 2.7% on short-term Treasurys, according to Ibbotson Associates, a division of Morningstar.
Yet intrepid equity investors sported a real average annual return of 16.8% on stocks during the decade of the '50s, while bondholders lost 2.2%, Ibbotson says. Treasury bills were down 0.3%.
Optimists like my parents were rewarded. In 1949, they moved from an apartment in Queens, N.Y., with paper-thin walls to Levittown, Pa., America's most famous postwar suburb. My parents were thrilled with their new home. It came with radiant heat, a refrigerator and a washing machine, a real step up in lifestyle for a family of three that was soon to be four.
My grandfather was furious at his son for buying a home. In the 1920s, he had bought a house in Yonkers, N.Y., that he lost during the Great Depression (thanks to an interest-only mortgage). Everyone in his extended Irish-Catholic family was forced to move into a crowded two-bedroom rental not far away.
He never owned again. He believed my father was ruining his family's future by taking on a mortgage. But when I asked my mother why they bought after the experience of growing up in the Depression and World War II, she said they just believed times were going to get better. So did their neighbors. Without pushing the analogy too far, the sober '50s set the stage for the exuberant '60s, even though growth in the '60s came in at a fraction below the pace of the '50s.
A path out of debt
In the current environment, I think it's underappreciated how much progress households are making restoring their balance sheets. For instance, balances on credit cards in the second quarter of 2012 were 22.4% below their peak in the fourth quarter of 2008, according to the Federal Reserve Bank of New York.
Similarly, the financial obligations ratio -- principal and interest payments on debt, as well as other monthly expenses like leases and rental payments, as a percent of disposable personal income -- reached an all-time high of 18.95% in 2007. The latest reading from the Federal Reserve for in 2012 has the ratio at 16.06%, about the same level as 1984. Americans are saving again. The personal savings rate is now at 4.2%, well above the low of 1% reached in April 2005. Taken altogether, household financial behavior is changing for the better.
Yes, student loan debt keeps growing. Institutions of higher education rely too much on students and their families borrowing to pay for their education. Nevertheless, despite the proliferation of truly horrific student loan debt stories, for a majority of college borrowers student loan debt is good debt, an investment in future earnings and careers.
Let's assume that over the next decade a healthier job market emerges. That's a reasonable assumption, based on what most economists of all political persuasions believe. Odds are the next five years will be better than the previous five years, thanks to improving household finances, a stronger housing market and rising business investment.
The decline in housing prices has made existing homeowners miserable, but the price plunge and low interest rates are a boon for recent college graduates, newcomers to America and other first-time homebuyers. The payment for a median-priced home with a conventional mortgage represents 12% of median-family income, the lowest percentage since records were kept starting in 1971, according to Fiserv Case-Shiller.
Homes aren't cheap, but with the ratio of median single-family home price to median family income lower than any time since 1991, prices are more reasonable. The same holds for stocks. Stocks have soared some 110% since hitting a low in March 2009. Nevertheless, the current valuation level of the stock market isn't excessive, with a current trailing 12-month price-to-earnings multiple slightly above 14. "Compared to past post-war stock market recoveries, the current valuation level of the U.S. stock market is only about average," says Paulsen.
And then there's the iPhone
One last glint of optimism: Consider the iPhone5. On Sept. 17, Apple(AAPL) announced that pre-orders of its new smart phone topped 2 million in 24 hours, more than double its previous record of 1 million held by the previous iPhone. The iPhone embrace is emblematic of an economy where improvements in mobile technology, computer software and information networks are rapidly gaining momentum. It suggests that today's techno-pessimists are underestimating the dynamism of mobile technologies and Big Data.
There are many definitions of capitalism, yet despite all their variations, capitalism is at its core a system of continuous innovation. Combined with democracy, capitalism allows for what the late Herbert Stein characterized as "the triumph of a society that, while retaining certain fundamental features, had adapted almost continuously, in one direction or another, to emerging problems, perceptions and theories."
That process is going on right now in millions of households across the country. I don't want to minimize America's deep-rooted problems like fiscal policy, the political environment and widening income inequality, but my best guess is that risk-takers in a risk-averse environment will be amply rewarded.
More from Kiplinger's Personal Finance magazine:
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Nice history lesson, and I wax nostalgic occasionally too, but nanny state government and current and growing debt levels aren't gonna get us back there, Beaver Cleaver.
Top Things I learned from Watching Biden
1. The Intelligence Communities is not very intelligent and routinely lies to the president.
2. Remember all those times when Biden gaffed in the past? He actually meant what he said.
3. The idea of Iran obtaining and threatening the world with a nuclear strike is not a big deal.
4. The fact that we have the worst economy since Great Depression is just hilarious.
5. If someone starts referring to you as “my friend”, watch your back.
6. Obama / Biden’s tax plan will give 120,000 families an additional 500 billion in tax relief over the next 10 years. (that’s an average of $417,000 per year per family, Biden actually said this)
7. It’s okay to make up numbers as you go as long as it’s done with conviction and a goofy smile.
The US economy is the worst and most phony I've seen.
1.The stock markets, housing, banks, and autos are on complete government life support.
2.The government owes $16 trillion soon to be 25 trillion.
3. Interest on savings is zero and this is hurting consumption.
4. The average wage is stuck in 1992 but prices are in 2030.
5. Half the mortgages are "underwater".
6. Health insurance costs $15,000/yr plus.
7. 20% or more can't even find a decent job.
8. If you have a job your benefits and retirement are likely eroding or already gone...
Welcome to Obamaville where signs are painted to point in an upward direction as a distraction from everything that is GW Bush's fault.
As the former Soviet Union came closer and closer to complete collapse, so did the lies about how great Communism grow and grow in direct proportion to how close the country was to its end.
Like how all those reports about how grand life under Communism was (if you were a member of the wealthy elite), and how perfect the economy functioned (in the repeated failure of crops to meet any predicted forecasts other than failure brought on by grossly -- though centralized --mismanagement and historic drought), and how glorious the wars against the enemies of Communism were being won (like in Afghanistan), and how wonderfullly the people flourished (in bread lines), and how happy the Allies of Mother Russia were (fleeing accross the Iron Curtain as fast as they could).
With propaganda like this article, can the collapse of the United States of America be anything but just around the corner?
The sun may go out tomorrow. But I wouldn't bet on it. Even if I win I lose.
Same with the stock market..
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