The New Normal Is: Abnormal - It Won’t Last

Much has been made of the new catchphrase “ The New Normal ” which is becoming in the phrase du jour for news outlets and talk shows.  While the phrase was initially coined by PIMCO’s Mohamed El-Erian (or at least caught on after his statements on the economy), the press has taken it to a whole new level and in a different direction. Now, ABC News has an entire section of their website and a segment on The New Normal and 20/20 just did a segment on it last week.  The premise of The New Normal in this context has generally been that America is now learning to be more frugal.  We learned our lesson!  They delve into these stories where the advertising executive that was making $250K per year and didn’t save a dime for retirement is now serving up coffee at a Starbucks doing what he has to do to make ends meet. The New Normal as Initially Described by El-Erian “ For the next 3–5 years, we expect a world of muted growth, in the context of a continuing shift away from the G-3 and toward the systemically important emerging economies, led by China. It is a world where the public sector overstays as a provider of goods that belong in the private sector. (As one of our speakers put it, we have transitioned from a world where the private sector provided public goods to one where the public sector provides private goods.) It is also a world in which central banks and treasuries will find it difficult to undo smoothly some of the recent emergency steps. This is particularly consequential in countries, such as the U.K. and U.S., where many short-term policy imperatives materially conflict with medium-term ones.” He goes on to posit that markets will revert to historical means, the financial system will become delevered and government will play a bigger role in peoples’ lives.  I don’t think what’s being sold by the mainstream media for the “new normal in America” is what Mr. El-Erian had in mind. The New Normal in the Press As the media is portraying it now (and I wonder how much of the current fear, economic slump, spending reductions and subsequent layoffs can be attributed to the constant barrage of media hype over the past year), America has seen the light.  We’re now a country of frugal savers, cost cutters, no longer interested in keeping up with the Joneses.  Personally, I feel this view is completely naive and within 2 years, we will revert back to our mean, which is a culture of excess, jealous self-loathing, low self-esteem that drives excessive spending (the “bling” and “cribs” phenomena), and other “excuses” to feed our insatiable appetite for material things.  With a low value assessed to our inner worth, Americans tend to try to buy the perception of worth in the eyes of others. I recall for the longest time, my wife would see an expensive car drive by or someone we’d meet would pull up in the latest $50,000 car and she’d be awed saying, “Wow, they’ve got some money” or something to that effect. I tried to explain time and time again that there is virtually no correlation between the actual net worth of an individual and their vehicle. After a few experiences where it became evident that people we knew were either leasing their cars, in serious debt or just had different priorities than us (where we chose to put funds toward a house, retirement, having kids

and other expenses, some people chose to focus on a car - to each his own), she eventually came to the realization that you can’t judge a person by their car.  Most people don’t figure this out until it’s too late, after they’ve already played the game. If you believe what the press is touting, America has turned the corner. The only temporary barrier at the moment is restricted credit availability, a rise in unemployment and a temporary press blitz scaring people on the fence into being savers for now. If you consider prior events like 9/11, Obama’s win, etc., each time, it was practically accepted that we were in a new America - things were going to be different from here on out - and within months, things always revert back to the old normal, not a new normal.  What’s different about this time around? How many times have you heard the story about the couple close to retirement that had to totally rethink their retirement plans and keep working because they lost so much in their portfolio during the recent market crash?  Well, didn’t this just happen a few years ago when the .com bubble burst?  We don’t learn. With unemployment on a path to hit 10%, the reality is, there’s only about 5% of the working population who experienced a layoff and may change some habits temporarily. With a standing 5% of the eligible workforce always collecting benefits in the best of economies, the remainder is 1 out of 20 people.  What about the other 19 out of 20 that have seen no layoff, no or little change in income, etc?  What about the current population of college students that grew up watching their parents free-wheeling spending habits, heavy reliance on credit, material consumption to extremes?  This population will soon be entering the workforce in a recovering economy ready to emulate their peers.  Only the newest line of clothing will do.  The happy hours and new BMW like their co-workers are the only way to fit in. You tell me these kids are going to be out clipping coupons, cutting their bounce sheets in half and putting low flow shower heads in their $3000/month rented apartments in Manhattan? What’s My Point? The point is I don’t believe the hype.  And I don’t think you should either. Where there’s a will there’s a way.  While credit is tight now and it’s tough to get a cash-out refi, within a few years, the industry will have emerged with new “financial innovations” and other legal ways to give Americans what they want - unsecured credit - whenever they want it.  The best thing we can each do individually is to live within our means, live responsibly, have a reasonable emergency fund, continually rethink your career ambitions/training to be employable in the future economy, invest wisely for a rainy day and not live to excess.  However, a large enough portion of Americans will no doubt revert back to their normal, which is unfortunate. I’d Love to Hear Your Thoughts. Do you believe we’ll truly emerge from this with a New Normal?  Or we’ll see more of the same? Related posts: How Does Deferred Compensation Work? Weekly Links: Emerging Markets on Fire Edition 40 Year Mortgages - And 50 & 60 Year Mortgages While We’re at it Best Weekly Links - “Sucker’s” Edition Start an Investment Club: How To, Rules and Reality Checks

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The New Normal Is: Abnormal - It Won’t Last