Over the last couple of weeks I’ve seen financiers and economists give a lot of misguided advice about what people need to do to help the nation and themselves overcome the terrorist attacks on America.
I’m a very patriotic person myself, I don’t just wave flags on Independence Day, I actually read and understand the U.S. Declaration of Independence, along with other wit and wisdom from America’s founders. One bit of wisdom from the founders that has come into disfavor is Benjamin Franklin’s old maxim, “A penny saved is a penny earned.” But it’s pertinent advice today.
Modern economists quake at the very thought that people might take Franklin’s advice. The New York Times’ economics “guru” Paul Krugman devotes approximately one third of his columns to attacking the sinister notion of saving. Keynes devoted most of his life to asserting that savings is the enemy of prosperity, and unfettered spending is the path to economic salvation. Predictably, economists are saying that the foremost war effort on the economic front is to convince consumers to spend more, and by necessity, to save less.
As early as last year, when the U.S. economy began its inexorable crawl towards recession, economists and market strategists crowed that despite the fact that technology and business spending was turning negative, continuing high consumer spending would shield the economy from damage. Finally the “consumer” is starting to wise up, and either just got laid off, or sees that his company is slowing down, cutting back, or is going bust, and may need to retrench. A consumer must first be a producer, and a “consumer” can’t forever spend more than he earns. So naturally, the “consumer” is starting to wonder about whether it’s a good idea to carry $20,000 credit card balances, and might start paying down debt or put some savings aside for a rainy day.
“Don’t Stop Spending!” say our government and economic policy advisors. People on TV tell me that it’s my patriotic duty to keep on spending, regardless of my economic concerns. I’m told that I should go to more Broadway shows – for example, “Urinetown: The Musical,” a socialist critique of “capitalist greed” and barriers to free urination, is New York Times’ “NYToday Pick.” People stuck at home are advised to patriotically sign up for expanded cable rather than basic cable, including “Spice” and the “Playboy Channel,” presumably boosting GDP by a further $600 per household per year. Robert Rubin wrote in the NY Times that the government’s “stimulative” tax rebates should be provided only to people “who have the highest propensity to spend.” Cheering news for crack addicts and other spendthrifts from the former Treasury Secretary, but what is a more cautious person to do?
The wise marketing people on Wall Street who have so steadily guided our country’s financial markets over the past couple of years have not missed a step, and are generally urging us that it’s our patriotic duty to buy more U.S. stocks. And not just Pets.Com this time! Buying more stocks would also help patriotically slow down the big slide in commissions and investment banking fees Wall Street has seen over the past year. How otherwise can Henry Blodgett afford a GDP-enhancing summer house in the Hamptons? Even though the U.S. recession hasn’t officially begun yet, and we have no idea how deep or long it will be, Peter Lynch is already telling us that there will be a “recovery” when it’s over, and to invest for the long term. Hold the pap, Petey, try this line with people in Japan, where those who bought the stock market in 1984 are still underwater on their investments, and where they’re still waiting for a 1991 economic downturn to end. A well-known commentator on Smartmoney last week implied that investors who bought stocks on margin deserved a special tribute of thanks from the country. Unless you were hoping to buy the stocks cheaper, or hoping your financial institutions would carefully manage their risks.
Now analysts who are tempted to downgrade stocks to a “sell” are even more unlikely to do so, since such an action is likely to be called “un-American.” Fox News’ Bill O’Reilly invited a professional short-seller on his show to lecture him on the “damage” he was doing to America and its economy. These stock market cheerleaders seem to think that high valuations are somehow “better” for the economy than low valuations. They suggest that if people will just accept a dollar and a half of dividends from a hundred-dollar investment (current S&P500 yield) then that is superior to investors demanding, say, three dollars. I say the best valuations are ones that accurately reflect the short and long term business and economic conditions of the country. When prospects are poor and uncertain, it would be crazy to expect high stock valuations.
Here’s my patriotic message. Listen to old Ben Franklin’s advice about saving money. Evaluate your household balance sheet. Prepare yourself for financial risks. Reduce debt if possible, and build cash reserves if you don’t have any. Be very aware that the U.S. unemployment rate is rising, a trend likely to continue for a while. Don’t go see “Urinetown: The Musical.” Don’t call Miss Cleo for “tarot readings.” Non-emergency savings should, as always, be invested in assets that match your long-term risk tolerance. Diversification can help reduce investment risk, and I don’t mean holding three tech stocks instead of one. Consider diversifying investments globally; foreign currency bonds could provide useful diversification if the dollar’s value declines, and many foreign equity markets have fallen further than the U.S. and trade at valuation multiples significantly lower than U.S. stocks. And when buying individual stocks, learn how to evaluate balance sheets – Americans have gotten out of the habit of fearing debt, but it’s during economic slowdowns that your and your companies’ balance sheet matters most.
Do try to “get back to normal” but it would be unwise to ignore or evade the likelihood of a U.S. recession and possibly a global recession. People who save and maintain their savings can provide for themselves and others when times get tough. The best thing you can do right now is to stay productive, maintain your capital, and keep adding to your knowledge and skills. Then you’ll be in position to boost the productivity and profitability of the businesses that drive the U.S.’ and the global economy.