Financial Winners and Losers

The Thinker by Rodin

For most of us the current recession, already the longest lasting recession since the Great Depression, is an unpleasant reality. 345,000 jobs were lost in May, which raised the official national unemployment rate to 9.4%, the highest in over a quarter century. While the trend is improving, this is still very bad. The Labor Department estimates 14.5 million Americans are unemployed. If you include the underemployed and those who gave up looking the unemployment rate is 16.4%. Many of us can look at our investments and find they are worth half of what they were before the recession started. Stock market indices reflect this trend. Meanwhile, real estate prices keep plummeting. Surplus homes abound, as financially distressed people walk away from their mortgages. All these statistics document that the economic pain is pervasive and widespread.

Yet despite all this pain, there are winners out there, many of whom are profiting from our pain and losses. Fahreed Zakaria, a Newsweek columnist, recently documented some of them. China’s Shanghai Index is up 45%. Brazil’s stock market is up 38%. Indonesia’s market is up 32%. Retail sales are 15% higher in China this year than they were a year ago. In India, car sales are up 4.2% compared with a year ago. All these countries are expected to grow this year while most of the rest of the world’s economies will contract. Learning why these countries are bucking trends is interesting. What it amounts to is that they are not overburdened by debt. Consequently, they have plenty of money to spend and invest. For cash rich countries like China, right now the world is a bargain. That is why they are buying foreign energy companies and purchasing mineral rights. The effect is to rapidly extend their influence across the world, simply because they own more of it.

Americans are belatedly discovering that not all forms of wealth are equal. The value of stocks and homes in particular are directly tied to the current state of the economy. When the economy tanks, they lose proportionate value. When the economy tanks severely, your house can have negative worth, flipping from an asset to a liability. Stocks too have little value if you need to sell them in a recession. Many Americans today feel compelled to sell their stocks, usually acquired through a 401-K plan, simply to survive. They do so in part because whatever meager savings they had acquired have been spent trying to hold on to their lifestyle. On the other hand, savings are more tangible as well as reliable. Perhaps that is why Americans are belatedly getting the religion: an old-fashioned savings account is good, not bad. Savings rates, which were at 0% before the recession are now at 5.7%. However, savings accounts do not offer a complete panacea either. The reason we bought stocks and houses in the first place is that inflation often ran ahead of on the marginal interest we might have earned on any savings.

Like the Chinese, Americans who find themselves cash rich in this recession now have an opportunity to shop for bargains. Our nation is now one big red light sale. With a few exceptions like health care, there are bargains everywhere, but particularly in housing, stocks and commodities. The smart Americans who kept their jobs and have sizeable stashes of cash should be scooping these bargains up.

Like most Americans, I do not have huge sums of readily available cash to invest. What amounts I do have I am tempted to invest in good undervalued stocks. Take General Electric. GE is perhaps the best-managed company on the planet, having sat on the Dow Jones Industrial Index since 1906. Its stock price actually slipped below $6 a share briefly in March, largely due to its financial subsidiary. It is currently trading at around $13 a share, but over the last decade, its price has been $30 to $40 a share. Shrewder investors than me may see red flags in owning GE stock, but I suspect it is a bargain. Likely, many other well-established companies out there can be purchased at a substantial discount too, only because the current economy substantially discounts their long-term worth. Their worth is discounted in part because people have to sell stocks to turn into cash to pay immediate expenses.

What lessons can we learn from this miserable experience so we do not repeat it? One may be a lesson I learned in 1988: unemployment sucks. I have remained fully employed since then because I have remained a civil servant. Private industry is certainly important, and in the short term often pays better than the public sector, but it is also inherently chancy. Having a steady paycheck during turbulent times is a great blessing. In my case, it is also a blessing to know there is little likelihood that I will be fired if the economy tanks further. As a civil servant, I will never be a millionaire. On the other hand, I should have steady employment. Moreover, when I retire I will have a pension to draw from, as well as social security and investment income from my 401-K. While I am unlikely to retire to a lavish estate in the Hamptons, neither am I likely to eat dog food in retirement. I am likely to have what now seems to be vanishing: a real retirement that should include occasional trips to exotic locations as well as good medical benefits, which are increasingly important as I age. I was not thinking about these things nearly thirty years ago when I first joined the civil service, but in the current economy, my decision looks smart. If you feel like a piñata from the last couple of years, perhaps it is time to consider some place other than private industry as a career, whether it is government service, a religious institution, a non-governmental agency or a nonprofit. There is no requirement that you have to spend your life in rough career waters.

Speaking of careers, if you have looked behind the unemployment numbers, the value of advanced education should now be clear. While people with bachelor or better degrees were affected by the recession, as usual they did better than those with just high school education. Where were the most jobs lost? Simply drive through the rust belt. Manufacturing took the biggest hit, and manufacturing jobs tend to require fewer skills. Also disproportionately affected were service related jobs that depend on the economy. When people have less money, they travel less, so we have lots of unemployed pilots, flight attendants and baggage handlers. When people have less money, they are not buying houses, which is why many realtors are working part time at best. With less money in circulation, there is less need for bankers, stockbrokers and securities dealers. The lesson: advanced education reduces risk of unemployment as well as usually pays better. Advanced education is needed not just because it pays better but because our world is more complicated. It needs increasingly more people with the advanced skills to manage and understand it.

I hope that some of us are learning to be thrifty. As someone raised from children of the depression, thrift came naturally to me. Apparently, it did not to many of my generation, because so many are overleveraged. The recession should teach us that many of the things we thought were necessities are luxuries. A family does not necessarily need two cars. My family survived on one car until I was out of the house. You don’t have to shop at Harris Teeter when a Shoppers Food Warehouse will do. You don’t need to buy shoes at Neiman Marcus; you can get a decent pair at Payless. If you are smart, you will funnel the difference into savings.

And speaking of savings, if you are rich enough to put in money for retirement but not rich enough to have at least six months of expenses in a savings account, perhaps you should at least be channeling some of that investment money into a savings account instead. In actuality, six months of living expenses is considered on the low side. You would be wiser just match your employer’s contribution into a 401-K (or perhaps put just 3% if they offer no match at all) and funnel the extra into high yield savings accounts. Unless your job is very secure, have the goal to accumulate at least 75% of your yearly expenses into a savings account.

By saving money instead of borrowing it, you make yourself more financially secure and you help turn the United States into a creditor nation again. Until 1978, we were the world’s largest creditor nation. Now we are the world’s largest debtor nation. The United States still has the world’s largest economy. These dynamics can be turned around, if we take time to learn from this recession. If we do it right, the next time a global recession rolls around we will be prospering like China and Indonesia instead.

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