Laurent J. LaBrie, management and financial consultant

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The Titanic Economy 

or  "The water that you feel above your knees is not your imagination."

by Laurent J. LaBrie,  MS Business Administration

Laurent J. LaBrie is editor of Longs, Shorts, and Mini-Skirts Click here for a free sample issue. 


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Summary: Laurent La Brie believes that, like the Titanic speeding in the icy waters, America's economy and dollar are in perilous times. To not lose money and your house in the stock market, his recommendation is that people employ investment advisors who know how to invest for the long-term.

The US, in my view, remains on a dangerous and reckless course--consuming out of asset-based saving at a point in its demographic life-cycle when it should be building up income-based saving to fund the looming retirement of 77 million baby-boomers.  Record lows in the personal saving rate and the current account deficit, to say nothing of record highs in household sector indebtedness, all speak of a US that is living dangerously beyond its means.  Subsidized by unusually low interest rates, in large part underwritten by equally myopic foreign investors and governments, America has managed to keep the magic alive.  But there's nothing sustainable about that arrangement.

If America stays this course, the end game will not be pretty, the day will come when US interest rates rise -- driven by either domestic or foreign developments.  That would undoubtedly spark a painful unwinding of the Asset Economy --- all the more conceivable now that the US housing market is firmly in bubble territory.  Equally worrisome is America's anemic job creation and the related shortfall of organic income generation....  Like it or not, the United States remains mired in the mother of all jobless recoveries -- making the perils of excess consumption all the more worrisome.  
~~Stephen Roach, Chief Economist of Morgan Stanley, December 6, 2004.

Note that these aren't the words of some loony gloom and doomsayer but come from the #1 economist of one of the largest investment houses in the world.  Also, it is not political rhetoric.  It was written a month after the election.  So, I'm not alone in forecasting problems ahead for the US economy. Many leading economists agree with me.  The Bank Credit Analyst, one of the most widely followed and respected research groups in the world, has entitled 2005 "A Year of Living Dangerously".  They are known for having forecasted boom years for the 1980's so they are not gloom and doomers either.

My comments on Mr. Roach's observations.  
  1. I have been singing the song of Paragraph 1 for at least 5 years, saying that we are due to hit the wall in 2007-2009.
  2. My problems with Mr. Roach's ideas start in paragraph 2. With unemployment approximately 5%, the rate long considered optimal, I can't agree that this is a "jobless" recovery. (Economists say that any less than 5% means that people are not changing jobs to ones they fit better.) With the employment rate peaking at 6.4% during the post 9/11 slowdown, it is probably more correct to call that time the "jobful recession." There is reason to believe that these numbers are approximate, since not everyone declares their unemployment. I could be considered by some as unemployed, and I'm not in that number.
  3. I agree that the economy is in a precarious position.
  4. I don't think US interest rates will rise significantly for a decade, so I don't believe that this will be the precipitating force of the fall.  I forecast a stock market crash that will move people to buy bonds.  This, of course will lower interest rates.  I think if we have a major terrorist strike, this could hasten the fall.  But, it would have to be more significant than the WTC attack.  An attack on the water supply or something similar that strikes more than one city and a few thousand people would be needed to hasten the fall.
  5. My scenario continues to be slow economic growth for 2-3 years until a major stock market decline occurs.  That decline is more likely to be a slow decline of 20-30% a year for 2-3 years than a 1929 style crash.  This disrupts the economy as businesses can't raise capital except through borrowing.  People lose jobs and can't pay their mortgages.  Banks come in and take their homes and housing prices decline as the housing bubble bursts.  Some people find out that the money they borrowed for their house is more than what the house is worth. This means that they have more debt than asset and a negative equity in their home.  They lose more than the money they put into it and go bankrupt.  Their cars have to be sold also to pay their housing debts.  Detroit, which has already had a hard time turning a profit on cars, is hit hard as few people will replace that second car they can't afford.  Auto industry and housing industry get clobbered and the companies that supply them get fewer orders.  America goes through a 1930's style depression in the 2010's.
 What to do?
  1. Don't listen to those saying, "Oh, it will never happen."  The ship has already taken on water, sinking 31% of the way into the water.  See comment 7 below for details.
  2. Get out of debt.  Debt is not biblical and God knows why.  Get the house paid off or move to a smaller one while you can get a good price for your large one and while there are still smaller ones available.  Pay off those credit cards so that if you lose your job, you are not going to lose the things you need to live.
  3. Reduce your exposure to the US Dollar.  The dollar you stashed in your wallet or mattress in on 1/1/2002 is now worth 69 cents.  To make this more visual, if you were on the Titanic and the top of your head was the equivalent of the dollar having no buying power, the water level would be up to your thighs.  If you haven't made 31% on your investments in 3 years, you also have less money.  Those who followed the Longs, Shorts, and Mini-Skirts stock advice have matched that return, so the water is only lapping at our toes.  But the stock markets have increased only 17% over that time.  So, with regard to what you can buy with the proceeds, most likely your stocks and mutual funds are worth 14% less than they were 3 years ago.  The water is up to your shins.  (Past returns are not necessarily indicative of future returns.)
  4. Have the right investments.  This is my department and I hope to steer as many as possible effectively through it as we rotate between sectors as timely and swiftly as a sailor in a storm trims and fills the sails to get to port without capsizing.  There is no guarantee that we will make it, which makes the whole thing so exciting!  However, you will be a lot better off than those who are having a fun party, going down with the ship, "buying and holding".  Many professionals don't remember or accept what happened in 1929, nor do they believe what Morgan Stanley and dozens of other knowledgeable people have said is likely to come.  I'd venture to say that none of them were around the last time it happened and few Americans have any personal recollection of those days.  There is no institutional knowledge among the pilots, and most are saying, "Ignore that water on your knees, this is the new economy!"  

I am not saying you are going to drown.  But for those of us who are under baby boomers or below, I can virtually guarantee that the water will come up to your waist.  And I believe it will hit the average American's chest, as the dollar loses another 20-40 cents and they have 1/2 of what they have now.  

If you have more than $50,000 saved up, it is time to have a professional investment manager to help you.
Write me an e-mail at e-mail address if you want to get in our lifeboat.


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"A good manager is a man who isn't worried about his own career but rather the careers of those who work for him... Don't worry about yourself! Take care of those who work for you and you'll float to greatness on their achievements."---HSM Burns Copyright Laurent J. LaBrie 2004-2014
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