Tough Year/s Ahead October 1, 2007March 8, 2017 Tomorrow: the Clinton Global Initiative – hopeful, constructive, action-oriented, and inspiring. But today . . . Listen. Even leaving aside the continuing costly catastrophe in Iraq, our economy would appear to face at least three broad challenges: This housing thing is not likely to go away in a few months. And it could be a decade or two before homes and condos in some places return to their peak prices (at least in ‘real’ terms, adjusted for inflation). Click here for an example of the pain from Sacramento. As a result, because so much consumer spending depends on home equity debt – and/or the confidence consumers feel with ever rising home values – a recession is likely . . . which would just add to the housing market woes . . . which would just deepen the recession. Global oil production may have peaked; and where a U.S. slowdown might once have triggered a worldwide slowdown, and with it a drop in oil prices, that might not happen this time. China and India and some others are growing so fast – thankfully* – that a U.S. recession might not be enough to push oil prices down. Which means consumers may continue to face high energy costs but also, perhaps, high other costs. Like food. Friday’s Wall Street Journal tells the tale. (‘The days of cheap grain are gone,” says Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern. This year the prices of Illinois corn and soybeans are up 40% and 75%, respectively, from a year ago. Kansas wheat is up 70% or more. And a growing number of economists and agribusiness executives think the run-ups could last as long as a decade . . .’) The demand for corn to make ethanol (a dumb solution to our energy problem, but that’s another column) – combined with the demand from hundreds of millions of Indians and Chinese who are beginning to be able to afford something more than bare subsistence – may take a while to absorb. In the longer run, technology may provide cheap energy, tremendous fuel efficiency, and even more productive agriculture. But for now, high food, gas, and home heating oil prices won’t make homes any easier to afford. See #1, above. * I say ‘thankfully’ because strong demand from abroad can mitigate or even forestall our recession . . . and because a rapidly growing young Asian middle class will one day be there looking to buy shares for their retirement accounts that retired Baby Boomers will be looking to sell . . . and because as those giant economies grow more prosperous, the wage gap will begin to shrink . . . and because, well, those two-plus billion people are human beings, too. We’ve been losing, and will continue to lose, a lot of high-paying jobs. It’s easy to blame the free-traders and greedy capitalists for this, but putting up trade barriers won’t cure the problem. Perhaps the only government intervention that caused more unintended harm than Prohibition, in 1920, was Smoot-Hawley, designed to prevent job losses, in 1930. Here’s how a friend of mine – with a big heart – puts it: ‘We just opened a plant in an industrial park financed a couple hours’ drive from Shanghai. Just your average 100-square-mile business park. The all-in cost for a skilled worker is $1.20 per hour. The park has two golf courses, a hospital, schools, two lakes, housing – all modern and brand spanking new. Good, clean working conditions. If you don’t move your production here, your competition does, and you go bankrupt, putting all your other employees out of work. Any suggestions?’ One suggestion is to lean on our foreign competitors to incur more of the same environmental costs U.S. companies incur. The bad news is that, having borrowed a fortune from China and others – and having ourselves shunned the Kyoto treaty and ceded to Toyota and Honda any serious concern for fuel efficiency – it’s kind of hard to boss them around, either financially or morally. The good news is that the Chinese, choking on pollution, are beginning to take steps that, long-term, will at least partially address the environmental problem while also serving to narrow the gap in production costs (because it will force theirs up). Another suggestion is to impress on our kids that they are citizens not just of a town or a state or a country but a planet – and thus part of a global economic competition. That global competition has the potential to provide prosperity for a great many people. And it already benefits us greatly, providing us with markets for our wares and people willing to make our toasters for a fraction of what it would otherwise cost us. But it also means our kids really need to learn to read and write and do math and science . . . develop personal discipline . . . and all that other stuff that plays well in the global marketplace. It would also be good idea to learn to be happy – nay, joyous! – with a simple, healthy lifestyle. It can absolutely be done. But it helps to start early because, as someone wrote, ‘a luxury once sampled becomes a necessity.’ The continued loss of high-paying jobs won’t help home prices – again, see #1, above. The Fed obviously knows all this, which is one more reason interest rates, to the extent the Fed can control them, will continue trending down. But foreigners may not be eager to hold our debt if interest rates are low, given the dollar’s likely continued decline. So printing money may not work forever, either. (And it’s not just foreigners. Many of you have been emailing to ask how you might diversify out of dollar deposits. One way, if you’ve got a lot of money, is to ask your big global bank to put some of your money in foreign bank deposits. Another way is to have your broker put you into the Pimco Foreign Bond Fund, PFUIX – unless its $5 million minimum were inconvenient. A third way is to open a foreign currency account at Everbank. I don’t know enough about Everbank to recommend this with complete confidence, but it could be worth looking into.) I could be all wet, of course – I hope I am – but don’t expect a broadly rising stock market, a robust dollar, or a rapid return to good times in the real estate market. It looks as though the American Century ended almost preternaturally on schedule, January 20, 2001, and that the next few years will be challenging. For a great many families, who’ve seen a decline in their real earnings, things are already challenging. Not to mention those who lack health insurance. Or the ever rising number losing their homes. (To be fair, it has been a positively grand six years for the rich and powerful, so the picture is not entirely dark.) But we are an ingenious and talented people. We’ll figure it out. Tomorrow: the Clinton Global Initiative.