The New Normal
I recently traveled to San Diego for Schwab’s annual conference. The time and expense to go were beneficial because I felt it was important to understand the direction and nature of our new economy.
There is a recently coined thought called the “New Normal”. The concept was developed by Pimco’s (bond mutual fund company) CEO, Mohamed El-Erian. I admire Mr. El-Erian as a leading mind in the investment world. I just happened to be reading his book on the plane; and when I arrived he was one of the pre-conference panelists. It was both informative and a thrill to hear him live.
The New Normal says that our world has permanently changed after the US financial crisis. In the recent past, the United States was the world’s single financial super power. This will not be the case moving forward. We will most likely be one of several financial power centers. Currently, the US dollar is the world’s currency reserve, meaning most all financial transactions are conducted in our dollar. In the near future there could be multiple currencies that financial transactions are conducted in.
Why is this important? Because when there is financial turmoil, the entire world sends their money to us and purchases US treasury debt. The US is the safe haven to the world, and they stuff their resources into our mattress. If we spend more than we make, we can simply print more money and pass out IOU’s, no need to balance our books. This may not be the case in the future.
Other important factors in the “New Normal” include:
- Slower US growth in the future as we deal with our huge debt at both the consumer and federal level.
- Faster growth in Asian economies- emerging economies are having, and will continue to have, a growing influence on the global economic growth rate.
- In the past ten years, the US stock market has experienced two 100 year floods (The 911 terrorist attacks and the banking crisis). This frequent stress will happen more often (although maybe not at the same magnitude).
- The past world economy was driven by the US consumer who financed their spending with debt. The economy in the future will increasingly be driven by government spending.
The world is changing folks, and thus our methodology for successful investing must also change. In future blogs I will expand more on this “New Normal” and how I plan to deal with it in managing portfolios.
Ron Dickinson, CPA, CFP, MPA-tax
Comments
new normal
Well if you accept the premis of the new normal do you start to become a forex trader now? Or will it take a failed bill auction for the rest of the world to look past the U.S. for a reserve currency? Is that prospect so beyond comprehension to be absurd? Or if it is something to ponder how do you protect yourself from the end of the world as we know it? Paul Hansen hpaulmine@aol.com
New Normal Implementation- Ron Dickinson
I don’t believe the “New Normal” calls for the radical demise of the good old USA, but rather the slow marginalization of our worldwide influence. My traditional models had 80% of assets in US assets. My new inflation hedged portfolios have 50%. 50% in Stocks with ½ of this in US and ½ Internationally (and 1/3 of the international in Asian stocks), 20% in bonds split ½ US and ½ International. The remaining 30% is allocated to hard tangible assets of real estate, commodities, inflation indexed bonds and infrastructure assets.
If you look at where the growth is coming from in the next 10 years, the great minds I listen to say that most all of it will come from Asian economies and very little from the US, as we digest our debt load. We will also have greater volatility and shocks to our economic system., thus the need for some hard assets. I’m not willing to move all my money to China and dump the US, but I am willing to bend a little bit.