Pragmatism, Not Pessimism

by: SA For FAs

iMFdirect suggests that economic forces like fiscal policy matter more than tariffs when it comes to bilateral trade balances.

Brenda Jubin recounts the colorful history of T. Rowe Price and his storied investment firm.

Thought For The Day: When the trends aren’t favorable, it behooves one to respond as constructively as possible.

Why Consensus On The Dollar Has Been Wrong

"Typically, when the growth rate of a country starts to decelerate, their currency depreciates. This is not the case with the U.S. dollar, primarily due to the dynamics of being the world reserve currency." (Eric Basmajian)

T. Rowe Price And Persistence

"In the early years of the firm, especially during the war, the market did not reward growth stocks…Eventually Price's growth strategy paid off handsomely. From its inauspicious beginning in 1934 to the end of 1972, when Price retired, assuming the reinvestment of all dividends, his model portfolio of growth stocks rose more than 2,600 percent in value. The Dow was up 600 percent over the same time frame." (Brenda Jubin)

Tariffs Not As Critical As One Might Think

"The evolution of bilateral balances over the past two decades has been, to a significant extent, driven by…fiscal policy, demographics, and weak domestic demand…In contrast, changes in bilateral tariffs played a smaller role..." (iMFdirect)

Thought For The Day

Journalists, market commentators and, really, everybody need feedback - positive, negative or neutral - to see how they're seen, make corrections if necessary or just to better understand why they did what they did, or think what they think.

For that reason, I'm quite a fan of your feedback, comments and criticism. In particular, I was struck by a comment to yesterday's podcast, in which I noted that each of one of the key pillars of retirement security is now fairly shaky. Not being disposed to negativism, I concluded on what I thought was constructive advice as to what retirement savers could do to improve their odds in a difficult situation. To that wellsc responded:

"What a gloomy way to start the day, Gil. I'm reminded of the old saying 'too soon old, too late smart'. I'm already retired but worry about Social Security stability for myself and my children. (I plan to draw it at age 70 in less than four years.) I think the gig economy is masking a serious problem with the overall economy. Unstable employment in a workforce creates a cascading effect of negative outcomes impacting the economy and society, imho."

Clearly, my effort to be constructive was drowned out by the doses of doom that preceded it. I appreciated the opportunity wellsc afforded me to reflect on this, and I think that a basic reason for my retirement pessimism can be seen in the above-quoted, non-retirement article by iMFdirect. That article on trade balance issues suggests that dramatic moves regarding tariffs are ultimately less influential than broader forces in the economy such as fiscal policy and demographics.

And indeed it is those sorts of structural forces that are at play in Western economies today. Take fiscal policy, for example. "Advanced" (the quotes are meant to be ironic) economies today are fiscal wrecks, bingeing off debt-financed spending, living for today and kicking problems down the road for some unlucky future generation to deal with when the game of musical chairs is called.

The demographic forces at play are even more formidable: The U.S. is way "ahead" of other Western societies, but is nevertheless behind replacing its current population, with a fertility rate of just 1.8. The solvency of any national pension system such as Social Security essentially depends on some large group of covered workers funding the retirements of a smaller group of beneficiaries. Social Security's workers to beneficiaries ratio has declined significantly over the years. Leaving out the skew of its earliest years (in 1940 there were 159.4 workers to beneficiaries), that ratio was a robust 5.1 in 1960, 4 in 1965, and a decent 3.4 as recently as 2001. It was 2.8 in 2013 and is projected to fall between 2.3 and 2 in just 15 years. Think about that for a moment: How much tax is going to have to come out of two people's paychecks to support somebody else's lengthy retirement?

And thus, these broader "forces," as iMFdirect calls it, or social trends as I prefer to call them, are powerful influences. It is trendy to not have children, or many of them, because they "cost" a lot of money, retard someone's career advancement or simply limit the leisure and freedom people seek. Ironically, the leisure and freedom they wish for in their later years will be constrained by the dearth of younger people holding up the fort today.

So with apologies for today's dose of gloom, wellsc's remark caused me to refine my thinking on this issue. When the trends really aren't favorable, it behooves one to nevertheless respond as constructively as possible. I stand by the recommendations I made in yesterday's podcast and take comfort in the fact that despite the broader social trends, one's individual choices can nevertheless ameliorate our personal predicaments.


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