Stories Sell

Happy Ending?

The stories our leaders tell us matter, nearly as much as the stories our parents tell us as children, because they orient us to what is and to what could be. Our brains evolved to expect stories with a particular structure, with good guys and bad guys, a hill to be climbed or a battle to be won.  

 In that context, Americans needed their president to tell them a story that made sense of what they had just been through, what caused it, and how it was going to end. We are all scared and angry. Many have have lost their jobs, some their homes. This was a disaster made by Wall Street’s best educated, who speculated with our assets and therefore our futures. It was caused by politicians like Phil Gramm who told us that if we just deregulated we would be more competitive. Unabashed greed and recklessness were the unintended consequences.

We are suffering from the same ending we experienced 80 years ago, when the same people sold our grandparents the same bill of goods. Can we draw on their wisdom?

Like most Americans, at this point, I have no idea what the President believes on virtually any issue. The president tells us he prefers a “balanced” approach to deficit reduction, one that marries “revenue enhancements” (a weak way of describing popular taxes on the rich and big corporations that are evading them) with “entitlement cuts” (an equally poor choice of words that implies that people who’ve worked their whole lives are looking for handouts).

When 400 people control more of the wealth than 150 million of their fellow Americans, when the average middle-class family has seen its income stagnate over the last 30 years while the richest 1 percent has seen its income rise astronomically, it bodes ill for the U.S. economy. Now that Standard & Poor’s has downgraded the U.S.’s AAA credit rating, it is important to respond boldly and, at the same time, lower expectations.

The first step is for our political leaders to frankly acknowledge the problems at hand: The U.S. economy will face a hard slog for an extended period; the political system is polarized; and, under current policies, the budget deficit will remain large.

Expect Slow Growth
We can expect sluggish economic activity for years, not quarters, and we face the risk of another recession. Those who in January were predicting growth of 4 percent or more for 2011 did not sufficiently appreciate the evidence from economists that foretell what most often comes after a systemic financial collapse is a decade of weak growth. (Read “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises.”) Two years ago Bill Gross of PIMCO called it the “new normal.” I sense he was right.

Government Opportunity

We should take this opportunity to reconsider what government should properly do. We need to invest more in roads, bridges, railroads and the like, and the best way to do this would be to create a new infrastructure bank in the same mold as the Tennessee Valley Authority.

The Executive branch needs to lead us again with a simple but strong narrative repeated over and over to keep our attention focused on the slog ahead and importantly the light at the end of the tunnel.

Our Opportunity

Rahm Emanuel, the former White House chief of staff, once famously remarked that one should never let a serious crisis go to waste. It may be time to make nuanced shifts in your portfolio.

This correction is likely near a bottom and therefore, valuations in the U.S. are now attractive on a long-term basis. Price to earnings ratios on forward (future) earnings for most major U.S. stock market averages are under ten. On an earnings yield basis, stocks look remarkably attractive relative to bonds.

On a relative basis, stocks are about as cheap as they have ever been compared with bonds.

 Hard Assets - It’s too late to buy gold and other precious metal safe havens for this cycle. In the long-run no one knows. But, a price drop would happen quickly, if at all.


 Bonds - Keep your powder dry. Shorten bond durations and look to corporate notes for a little yield, or Canadian or German government bonds if you must own sovereign debt. There is very little value left in the U.S. Treasury curve at this point.


 Equities - Financials have completely broken down, but have dropped to extremely attractive long-term values. Consumer staples and utilities act defensively during market downturns, but leadership usually shifts to other sectors at the bottom of the market. Consumer discretionary, industrials, materials and tech should lead as the economy finds stable footing.

CBlakely CFP, CTFA  08/2011

Sources: This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, Reinhart, Rogoff: The New York Times Sunday Op-ed page July 2011, Bloomberg LP. PIMCO