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| Your Wealth at Risk |
Watching and Waiting
Eileen P. Gunn
03/01/2005
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“When things are up, people believe the rules have been rewritten so that they will always be up, and they will take risks and be more generous,” says Rosabeth Moss Kanter, a Harvard Business School professor who recently authored Confidence: How Winning Streaks and Losing Streaks Begin and End. “When things are going down, people become depressed and risk-averse. Again they say all the rules have been rewritten so things will never turn around, and they become passive and hoard what they have.”
Today ambivalence reigns. In November 2004, the Bureau of Labor Statistics counted 1.5 million people who were “marginally attached to the workforce” (the same number counted 12 months earlier). They wanted to work and were available, but had not looked for work during that month. Among these were 392,000 “discouraged workers” (also about the same number as a year earlier) who had halted their job searches “specifically because they believe no jobs are available for them.”
TOP VIEW
Uncertainty over deficits, oil prices, war and a litany
of other perceived threats has left many overly cautious and hesitant to act. As
doom-and-gloom headlines and limp markets attest, certain investor fears are
well founded. Yet, with no quick fixes in sight, some find the only route is to
embrace uncertainty and move ahead with important decisions. |
With wages barely keeping pace with inflation and the job market uninspiring, consumers, although willing to spend and take on additional debt, are not willing to wager on the future by saving or investing. Grafer, for example, has long steered clear of the stock market. He also recently cashed in what little money he had in high yield bonds. “The returns weren’t all that great, but there was more risk than there had to be,” he says. He moved that money into market-neutral hedge funds and other vehicles where protecting principal is as important as seeking gains.
Corporate America has become even more cautious. “The companies in the S&P 500 are sitting on a ton of cash,” notes Howard Silverblatt, a market equity analyst for Standard & Poor’s in New York. Not including the financial services firms, this group was holding onto a collective $622 billion at the end of November 2004, compared with $260 billion at the end of 1999. “I don’t know if you can connect the dots directly back to terrorism, but I think if you asked a CEO over cocktails, he would tell you that’s somewhere in the back of his mind,” says Dean Dordevic, a portfolio manager at Ferguson Wellman, an investment advisory business in Portland, Ore. “They have accumulated all this cash and are being conservative in case something goes wrong.”
Simultaneously, Kanter points out, “We don’t have a hot new technology or industry that will lead a recovery.” During World War II, Korea and Vietnam, an increased demand for goods and services revved the economy (see “Of War and Wealth,” below). According to Wayne Hummer Investments in Chicago, the GDP grew by 112 percent between 1940 and 1945. Similarly, it swelled by 28 percent during the Korean War. By comparison, today we are not seeing new orders that are going to make or break the quarter, says Tobias Levkovich, chief U.S. equities strategist at Smith Barney in New York.
With the economy remaining slack, the U.S. government has not been able to collect taxes on higher incomes to compensate for lower tax rates. Consequently, the mounting costs of the war against terrorism and of homeland security have contributed to an alarming budget deficit. “Higher spending and lower taxes are things that happen quite often in wartime, but this has a different feel than a wartime economy,” explains Benjamin Pace, chief investment officer at Deutsche Bank’s Private Wealth Management Group in New York. “Our economy is relatively weak. And the clear consequence of high deficits is usually higher interest rates, which would slow the economy down more.”
A weakening dollar makes this scenario all the more likely. Creditors, especially those overseas, have been willing to lend money to the United States cheaply for years because of the dollar’s stability and strength. If the dollar falls further, these investors—like McMillan—might go looking for better returns and more stable environments elsewhere. This might spark a sell-off in bonds that could further weaken the dollar, igniting inflation and a stock market sell-off. Meanwhile, to continue to make U.S. bonds an attractive and worthwhile investment, the government may have to raise interest rates. But this would make credit—including consumer credit—more expensive, and could tip the country into a recession.
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