911 Financial Planning with Gary Williams, CFP
Sep 27 2012
On 9/11/12, I met with Gary Williams, CFP, to talk about a few financial planning issues related to the road ahead. We covered a lot of ground including a little personal reflection about our own 911 experiences. We talked about trust, investment risk and the importance of determining your “tolerance” for risk before you set up your investment plan. We also talked about the benefits of having a clear financial plan for the uncertain times ahead. Here’s some of what Gary said in our interview: As we look at the trajectory of the U.S. economic recovery, once again this year we see a light at the end of the tunnel and wonder if it is an oncoming train. Although improvements in 2010 and 2011 did indeed end up derailing, it looks, at this point, as if 2012 may bring the start of sustainable growth. The end result remains vulnerable to outside influences, though, so the real question is, How will we know? The bright spots: employment and housing When it comes to sustainable growth, economists focus on a number of key indicators, including: Employment. Employment generates wage income, which is the base of consumption. Consumption accounts for more than two-thirds of our economy, so without growing employment, we can’t grow anything else with any lasting momentum. The 2012 employment picture has been encouraging, despite some recent weakness. Although unemployment currently stands at 8.3 percent, the economy continues to add jobs, albeit at a sometimes anemic rate. These increases in employment have been accompanied by growth in incomes, which has helped to support an increase in consumer spending. While there has also been some drawdown in the savings rate, it is not yet at a problematic level. This may suggest that continued income growth will allow continued spending growth, while saving continues. Housing. Housing is a foundational component of any recovery, and we’re starting to see rising prices in some markets, as well as an uptick in housing starts. Combine that with current record-high affordability levels, record-low mortgage rates, and rising rents, and you’ve got a recipe for a continued recovery. Durable goods demand. Improvement in this area is due, in part, to deferred demand. You may not need a new car every year, but you will eventually, and it seems that many Americans are digging into their pockets to fund big-ticket purchases again. Are the above improvements sustainable? They could be. The current level of employment growth seems to be sustainable around a trend line that would promote continued recovery. Continued growth in spending would follow as a result. The housing recovery and growth in durable goods demand should also be able to continue their forward trajectory. Factor in a gradual recovery in local and state government spending and slow growth in business investment—both of which are occurring—and the recovery appears to be on track. What Makes Trains Wreck The obstacles: political vs. economic Major obstacles to the ongoing economic recovery would likely be external events: A war in the Middle East A European economic collapse A significant political event in the U.S. Of the three, the most probable seems to be the last (although ongoing debt concerns in Europe have certainly added to market volatility). Notably, however, all three examples are political, not economic, events. That political events now trump economic ones is a reflection of the new world order. In some sense, though, this is just a reversion to the origins of the economics discipline, when it was known aspolitical economy. Events in the real world are once again dominating those in the financial world. International Issues and US Economics We can also examine this situation by considering the effects of nationalism and geography on recent economic developments. The Middle East and the oil price, the European financial crisis and the Greek and French elections, turmoil in Russia and its effect on natural gas prices across Europe . . . all show that the return of the real is not limited to the U.S. To begin to understand where we as a country now are economically, we must take a wider perspective than we have done during the past few decades. There are two dimensions we need to look at in this analysis: 1. Whether a country is a consumer or a producer of key items, such as capital, raw materials, and manufactured goods 2. Key dependencies of a country, such as capital, energy, market access, or other factors The first dimension looks at how a country operates, the second at its vulnerabilities. Compare Germany with Greece. Both are European countries, but the similarities end there. Germany produces capital; Greece consumes it. Germany manufactures goods; Greece imports them. Both consume raw materials, but Germany uses them more efficiently. Overall, Germany depends on market access and raw materials, while Greece depends on access to capital, imports, raw materials, and other factors. Unsurprisingly, Greece has been more economically vulnerable. Running this analysis on the U.S., we find that, overall—and with one big exception—we are in a strong position. The big exception, of course, is capital. The U.S. has been running large deficits for some time, depending on foreign capital for continued operation. In other areas, including manufacturing, demographics, geography, and even energy, the U.S. remains relatively strong. Because our capital dependency stands out in a generally healthy picture, it has, unsurprisingly, become a focus of national concern and policy debate under the name of the deficit. Looking Out for an Oncoming Train The U.S. capital dependency means that this year’s presidential election will determine the government that will have to make long-term decisions about how to deal with the country’s budget problems. To understand the basis of the decisions they will make, we must first understand the underlying facts: The so-called fiscal cliff. The expiration of the Bush tax cuts and the sequestration of government spending will both hit at the end of 2012. Worse, the debt ceiling debate will fire up again, quite possibly before the election. Any one of these would have significant political and economic effects, but if they all come at the same time—with a presidential election mixed in—we could be facing some extreme uncertainty and the possible derailment of the economic improvements we’ve seen thus far. Spending and taxes. We currently spend about 50 percent more than we raise in taxes; taxes cover about two-thirds of spending and borrowing accounts for about one-third. Approximately 37 percent of the spending is discretionary (defense and other government programs), about 57 percent is mandatory (Social Security, Medicare and Medicaid, etc.), and about 7 percent is net interest on accrued debt. o Should we just raise taxes? The numbers above mean that if we raised taxes without cutting spending, taxes would have to go up by about 50 percent. Everyone in the country would be paying half again as much as they do now. o What about cutting spending alone? We would either have to substantially eliminate the discretionary spending—all of defense and everything else we typically associate with the federal government—or, for example, cut discretionary spending by half and Social Security and Medicare by about one-third. The details can vary, but this is broadly what it would take. Neither “solution” would sit well with U.S. citizens; just look at what happened in Greece. The Light at the End of a Long Tunnel Despite how uncertain our economic picture may be, especially when you consider the political obstacles that could derail the recovery, there are positive developments at work. Keeping your personal financial plan up to date is one of the best ways to stay on track, regardless of what the future brings.