I bumped into an old friend in front of the meat case of a local grocer here in Portland, Oregon. Well into his eighties and still enviably fit, he was quick to point out that inflation had not only impacted his grocery bill but his fixed income as well. "As long as Bernanke pretends to be able to control inflation," he mused, "I will lose ground. And", he quickly added, "I was not prepared to lose any ground until they put me in it!"
As we stood an spoke, he pointed out that what is now on sale was a regular price for many of the store's merchandise just six months ago. "Do they think we don't notice?" He wasn't so much blaming the retailer, an entity that often gets the blame for higher prices, a sort of "kill the messenger" mentality that consumers adopt during periods of rising prices as he was blaming Ben Bernanke. The Federal Reserve Chairman is not seen as being very helpful to a group often referred to as the middle class and with good reason. His job has become a political undertaking rather than a purely economical one as many of Greenspan's predecessors treated it.
Without a doubt, and if the polls are any indication, Bernanke will get the fall guy mantle in this mess. Although Henry Paulson of the Treasury and Christopher Cox of the SEC deserve their due for exacerbating the situation (one seems focused on the shareholder before the taxpayer and the other focused on the appearance of doing something, anything) and the president with his never-met-a-spending-bill-I-didn't-like Congress led us down this path, it is the call for control of inflation that will ultimately get the blame.
More than a fair share of Beltway outsiders have seen this coming and are now asking why has the economy been allowed to play itself out to such devastating effect?
The Economy is Good
Depending on whom you speak to, it is because the economy is good. And because the economy is dependent on capitalism, which, when it works by weeding out the bad participants and allowing the good operations to rise, some segments need to suffer, some businesses need to fail, and some thinking needs to be readjusted.
Why then, if capitalism needs these three things to work is only the consumer seemingly feeling the pain?
By our natures, those lofty folks on high who determine how the course of the economy will be plotted have determined that businesses can't fail, especially those tied to housing or anything remotely related to government sponsored enterprises, such as the public and poorly run Fannie Mae and Freddie Mac.
Those same folks have determined that in order for businesses to adjust their operations to meet the growing demands of consumers and marketplaces both here and abroad, they must be able to raise prices. And those same lofty economic gods want all of this to happen without the force of labor demanding wage increases.
To do that, unemployment must rise (and the White House has predicted that the next president will face this obstacle along with a much larger than anticipated deficit) and this instills the inherent fear that if you were to ask for a raise, you would probably be let go instead.
The Economy is not so Good
But the economy is not so good, also now a fact that Washington is finally coming to grips with. Commodity prices, even with recent retreats, have raised to a level that forces the consumer to absorb those higher prices, many of which are now ingrained in the necessities.
Once that happens, any fall in those prices as we have seen over the past week, results in a simple wait and watch rather that forcing any further economic action. This game has gone global and may signal an unpredicted alliance between central banks in the US and Europe is unavoidable. Where autonomy once ruled, cautious balance now takes center stage.
The economy is not so good for other reasons than the wild ride in commodities. The apparent ability of businesses to absorb those costs and pass on higher prices and in the profit-challenged period, cut dividends, has made our self-directed retirement plans more vulnerable than they may have been had the markets simply dropped in value.
The dividend cut is going to be the hardest to take. Not just for the individual shareholder but the average worker using index funds in their retirement plans. In normal times, over half of the S&P 500 pays dividends to their shareholders. That number may fall below 40% before this is over.
Second on the list of not-so-good economic news is the continued fall in housing. The second wave of potential defaults comes in months as option ARMs expire. These mortgages, mostly tied to the prime sector and even those with relatively good FICO scores, may not be able to pay the increased costs of the under-priced roof over their heads. This fall will be doubly difficult as these consumers are the real consumers, the ones who keep things humming along, buying what they want and doing so on credit.
And lastly, the not-so-good economy may find a Federal Reserve that is willing to get ahead of the game - for the first time in months, by raising rates in the midst of this crisis. Much of the short-term patchwork orchestrated by the Fed, the Treasury, and the SEC is just that, short-term. Not to beat an old cliché, but the horse has left the barn. Closing the door now seems more of an afterthought than a preventative measure.
The Innocent Bystander
Because no bystander is ever innocent, we need to brace ourselves for a wholesale change in thinking. It has been suggested that retirement is not what you assumed it would be and until now, that has meant different things to different sectors of the economy.
The young, we are told, have many years ahead of them to allow the markets to gain and grow and wipe out any long or prolonged downturn. That may no longer be the case if, while you are riding each of the up-and-down-and-up-again market swings, we live as if there is no tomorrow.
The middle-aged worker has now seen the future and it is much bleaker than previously thought. And the close-to-retirement aged employee is now the I-think-I'll-work-another-couple-of-years investor with the hope that the markets will recover some, if not all of its luster, in a relatively short time.
To that, I offer the following thoughts on how to outlast this downturn.
First: whatever your retirement savings has dwindled to, it is still off limits as a source of emergency cash.
Second: Any value investor will tell you that now is the time to buy, not sell. If you are unsure where and how to invest that cash, use index funds. In other words, shift your investments and if you can afford it, increase your pre-tax investment percentages.
Third: Downsize your lifestyle. The pain will be temporary - no slump has lasted forever. What is also temporary (and this is unfortunate) is the memory of that pain. If you can take anything from this economic morass we all seem to be treading through, it would be this: remember what it was like to be on the edge when you appear to no longer be there. While there are not many Depression era survivors still around, those that are, still practice austerity. Lesson learned.
