A Decade of Change


“The only reason for time is so that everything doesn’t happen all at once”
                                               -Albert Einstein 



The end of this month doesn’t just mark the end of the year, it marks the end of this decade. The two-thousand-teens (I guess?) started way back on January 1, 2010 as we all were still in shock over the financial crisis and stock market crash that followed. Here we are a full ten years later and many people are still suffering from the memories of that event. Every time the words recession or correction are thrown around, we all think back to that 60+% market sell off and double-digit unemployment, rather than the five to ten other, more manageable recessions we all lived through depending upon our age. They say with age comes experience, so as this decade comes to a close and I enter the fourth decade working in this business; what have we learned that we can put to use?

We’re Getting Older and We're Not Ready for it:

When I say we’re getting older I am not using the normative “We” referring to you the reader and I the writer because while we are obviously getting older if we are doing proper financial planning we should be very much ready for it. I am instead using the collective “We” as in the average of everyone in the United States, and really the world. The average age in the United States was 30 in 1980; its projected to be 38 in the 2020 census. The percentage of American’s over the age of 65 was about 11% in 1980, it’s currently 17% and it’s projected to be 21% by 2030. In 1986 we made big changes to the Social Security System and over the years we’ve added things like Roth IRA’s and modified retirement contributions to make it easier to save for retirement – but these changes have come much slower and with much less impact than the dismantling of pensions and the increase in health care costs. The time to make modifications to our retirement systems so they don’t put a huge financial drag on our Government budgets (both Federal and State) while still allowing older Americans to retire with dignity has long passed us by. All that is left over the next couple decades are bad choices, the promises we have made regarding Social Security income and Medicare benefits have already become too large a percentage of our budget. Currently Social Security (only old age benefits, not disability or child survivor benefits) and Medicare (once again, just Medicare, not Medicaid which pays for the disabled and poor - including long-term care) account for 49% of all projected government revenues in fiscal year 2020. They’re not 49% of the budget because we’re running an over $1 Trillion dollar deficit, but if we had a balanced budget they would be 49% of it. This should grow to 56% of revenues by 2030 based on the Congressional Budget office projection – of course that projection assumes the 2018 tax-cut expires after the 2027 budget year and we go back to higher tax revenue – at our current tax structure just Social Security and Medicare will use up well over 60% of government revenues; and this is all revenues: Payroll Taxes, Income Taxes, Corporate Taxes, Fees, Licenses, Tariffs etc. Yes you paid into Social Security and Medicare but that money was spent as it came through the door. We have funded this deficit by selling bonds and so far we have found many willing purchasers for those bonds. The best, bad choice is to keep issuing those bonds and growing our debt, but at some point there may not be enough purchasers of that debt which leaves us with worst bad choices; some combination of benefit cuts, tax increases and / or debt monetization, that’s where the Federal Reserve just creates money out of thin air by buying the debt, more about that next.


Maybe Everything We Know About Inflation is Wrong:

After the 2008 financial crisis the Federal Reserve essentially monetized the debt – buying trillions of dollars of U.S. government debt trying to pump money into the economic system and keep us from going into a depression. Debt monetization is supposed to lead to inflation, and maybe it did in that we were perhaps headed for “deflation” where everything contracts in price and we kept the inflation rate at or near zero for the first few years of what we called Quantitative Easing. But then the Fed kept buying the bonds, and kept interest rates very low for a full decade – in fact they have somewhat silently started buying up debt again after there were some liquidity concerns in short-term loans between banks a few months ago. Yet inflation has been very tame for the whole decade. For some perspective, in the 70’s the average annual inflation rate was 7.25%, in the 80’s it was 5.82%, it dropped to 3.08% in the 90’s and then to only 2.56% in the ‘00’s, for the teens it’s been all the way down to 1.80% on average – lower than the 2% rate the Federal Reserve would have told you in the 1980's was impossible. As I mentioned back in October based on a presentation by Brad McMillian of Commonwealth, it seems that demographics have more to do with inflation rates than the Federal Reserve does. This is a huge lesson from the last decade, not that we shouldn’t worry about inflation but that we should worry less about the Federal Reserve when it comes to inflation. As for inflation overall, that very tame 1.8% still means that average prices are almost 20% higher than they were in 2009 so while it’s less of a worry than it was in the 70’s, it still has an impact.

Everything is slowing

From population growth, to economic growth to wage growth, the rate of growth has slowed from the long-term averages. The U.S. population should top 330 Million people by the end of this year, but that is only a 0.66% annual growth rate in total population since the 2010 Census. If you start in 1970 and move forward to 2010 the average annual growth rate has been just about 1% per year. I’m not a social scientist so we can let them figure out the reasons for the slowing growth rate, but it certainly doesn’t help with the aging population problem, as there are less new people entering the work force in comparison to the numbers that are retiring. Economic growth is similar, while it has rebounded from the anemic 1.79% annual growth rate of the 00’s, that number included the huge downturn caused by the Financial Crisis so it wasn't that surprising. What has been a surprise is that we didn’t have any kind of major rebound from that “Great Recession” period. Coming out of the recessions of the 70’s and 80’s we saw a couple years of growth in the 5-6% range, making up for the negative growth of the recession years. In 1983 GDP growth almost hit 8%! So even in the 70's, which we all remember as the decade of Stagflation and gas lines the economy grew by an average of 3.29% per year – in this last decade, excluding the fourth quarter that isn’t over yet – we have only averaged 2.24% growth. Wage growth has also slowed, but that in and of itself isn’t the problem – the real problem is what I’m going to discuss next.

The Wage Gap is Real and Alarming

I try to stay out of politics with this newsletter, so I am going to offer no solutions for this problem. For the sake of this article let's assume I don’t care if the solution to this problem comes from a new government program or a market-based solution – what I care about is finding a way to correct it. What I refer to when I say wage gap, is the huge disparity in income between those who have jobs that require higher levels of education vs. those that do not. Since 1980 the average wages of those with at least an Associate’s Degree have increased by an inflation adjusted 14.4% (that’s total, not per year) over the same time the wages of those with only a High School diploma or less have DECREASED by 12.3%, adjusted for inflation. The more education you have, Bachelor’s Degree, Master’s etc. the bigger this gap becomes. So why doesn’t everyone just go to college? A lot of people have heeded that advice, in 1980 only about 17% of the population over the age of 25 had a Bachelor’s degree – in 2018 that percentage has risen to 35%. That is misleading, because among that number are older people who are either already retired, or started their careers at a time when a college degree wasn’t as necessary for their profession. If we do a cut off of say everyone born after 1965, the number with Bachelor’s degrees gets closer to 45%. But that still leaves tens of millions of adults with only a High School degree or less; and let’s face it – not everybody is going to do well in a college setting. It used to be that if you had two good arms and two good legs you could earn a decent living; working in a factory, loading or unloading goods, driving a truck, etc. These jobs haven’t gone away completely, but there are far less of them and the jobs you can get without an education are more and more retail or service jobs with very low pay. Is this a failure of our education system to some extent? - Yes, but the change has also come so quickly it’s understandable we haven’t been able to adapt. Since right before the financial crisis to last year, manufacturing has grown by more than 30% in the United States, but manufacturing employment is still over a million workers lower than it was in 2007 – and the workers need more technical skills than ever before. The average motor vehicle assembly plant worker makes $29.00 an hour; that is over $60,000 a year. The median household income in the United States is about $61,000 so with just a little overtime you can have a higher income than most people. The average warehouse worker makes $15 an hour, that works out to only $31,000 a year, so even if you get paid time and a half for overtime you would have to work 65 hours a week, every week, to make the Median Income. By the way, auto manufacturing jobs have decreased by over 40% since 2000 while warehouse worker employment is up over 90%. A huge percentage of Americans are falling behind no matter how hard they work, meanwhile there are jobs requiring technical, medical and financial skills that go unfilled. 

Bear Markets Are Not Inevitable

Let me get this section past our compliance people by saying that Bear Markets have happened in the past and are likely to happen in the future. But we typically see at least one a decade – yet here we are in December of the last year of the decade and we haven’t had one. A Bear Market is different from a market correction, a market correction is when the market drops 10% from its previous high. We had three of those in this decade; in the second quarter of 2010 we had an almost 12% market drop, in the third quarter of 2011 we saw a market correction of almost 15%, and then in the fourth quarter of last year we had a 14% downturn. A Bear Market is a drop of at least 20% that is typically part of an overall economic slowdown, sometimes a full recession. It has been more than ten full years since our last Bear Market. We had two in the 70’s, two in the 80’s, one in the 90’s and two in the 00’s – but nothing for the last decade. But this is also a little misleading, the 1990’s bear market was in the year 1990, so from then until the tech bubble burst in 2000 was over nine full years. Moreover, does it really matter? We had two bear markets in the 1980’s as mentioned, but we also had average market returns that decade that were 4% higher per year than we’ve seen this decade. Plus, once we pulled out of the 1981-82 recession the two technical bear markets we experienced until the year 2000 lasted five and eight weeks respectively. What we actually saw was a 17-year substantial expansion with two little technical blips – what we’ve seen since the financial crisis is ten years of moderate expansion without any blips. If instead of decades we split the last 40 years into two twenty-year periods we saw the 80’s and 90’s give us almost 17.5% average stock market returns while the twenty years of the 2000’s have seen average returns under 5%. Maybe slower growth creates less booms and therefore creates less busts – but I’d rather have the higher returns and a few more Bear Markets. 

The Future of Money is Uncertain

Go back to any time period and you’re going to find things to worry about, so I’m not going to say the world today is more complicated or dangerous than ever before. But I think one thing we knew for certain ten years ago is what constituted money. Money was dollars in the U.S., Euros in Europe, Yen in Japan and etc. But now money may be Bitcoin, or Libra, or Ripple, or ZCash or Venmo or who knows what. I have started using Apple Pay (this is not an endorsement, just an observation) because sometimes I forget my wallet – but I never forget my phone. Wave your phone over the credit card thingy – hold down my thumbprint and bingo – Venti Americano with room for milk. Now in reality money has never really existed, you can’t eat it or wear it so it’s always just been an exchange medium whether that is a gold coin or a paper bill or even a gift card or poker chip. But what has been the case is that the U.S. dollar is the reserve currency of the world, accepted everywhere and the medium we use to price internationally traded products like Oil, Soybeans or Copper. That hasn’t changed, but may be changing. The Chinese very much want to end the U.S. monopoly on currency that has existed since the end of WWII, and there are a fair number of other countries that would happily go along with that change. Now the dollar isn’t going to stop being A reserve currency – but what happens if it stops being THE reserve currency? There are a lot of theories. Of course; there were a lot of theories that said the Fed would cause runaway inflation, Interest rates can’t stay below 3% for very long, and you can’t go ten years without a Bear Market. The reality is we don’t actually know, because it has never actually happened – and maybe it never does. But I would have put the odds of the U.S.’s reserve currency role being diminished during my lifetime at somewhere less than 1% back in 2010, I would put that percentage somewhere above 30% today. 

I guess what we’ve learned most is how little we used to know – economics mirror life in that way. We’ve found that many of our most closely held theories about how the economy works and how it reacts to certain inputs have been proven false. As such, our faith in the institutions that preached those ideas; the Fed, the ECB, The Treasury, and the Economic Departments of our major Universities has perhaps justifiably waned. When conventional wisdom lets us down, we look to more extreme solutions and the inability to compromise between those solutions has left us not being able to solve some of our big problems as a country. But contrary to what this article may make you think -I’m not a pessimist. Yes, we have a lot of people who are not educated correctly for this new economy – but we also have the most educated, most productive work force in the world. Yes, we have an aging population, but that same group is healthier and richer than the generations that preceded them. Yes, we have a government debt problem, but on the consumer side the average American has cleaned up their balance sheets, paying much less interest and with much lower defaults on loans than we’ve seen since the 1990’s. 

So, what will the 2020’s bring? According to Doctor Who, WWIII will start in 2024, according to Planet of the Apes, we destroy ourselves and the Apes take over in 2026 – and according to the Terminator films we’re winning our war against The Machines so android Arnold Schwarzenegger is sent back in time to 1984 to kill John Conner’s mother from the year 2029. I hope our next decade is more mundane, and much less violent than our Science Fiction community imagines it will be. But whatever it brings, we hope to be there with you, helping to make sense (and dollars) of it.


Statistics for this article come from:  The Congressional Budget Office, The Bureau of Labor Statistics, the U.S. Census Bureau and Standard & Poors.


Happy Holidays
Wishing all our clients and newsletter readers a very Merry Christmas, Happy Hanukkah and a Prosperous New Year!
candles_romantic.jpg
Matthew H. Keeling, CFP®
Keeling Financial Strategies, Inc.

759 Falmouth Road, Unit 2
Mashpee, MA 02649
508-539-0900

Securities and Advisory Services offered through Commonwealth Financial Network, Member FINRA / SIPC, A Registered Investment Adviser 

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