What is clear to me is that we as Americans have developed to a very fine level the need for “instant gratification” in all facets of our life. So it is understandable to want a quick solution to our problems in the economy, the capital markets and of course the housing markets. Just because we think our problems should be solved quickly doesn't mean that they will be solved a fast as we want them to be solved.
A client called me this past week to ask my opinion on what I think is going to happen in the markets and the economy. Before I told him what I thought would happen I asked him what he thought and I was very surprised at his answer. He said he didn’t know what was going to happen, but he was very nervous and he was looking for me to tell him what was going to happen. He did make the point that President Obama had only been in office for over a month and people were expecting too much from him. (Instant Gratification) His belief that Obama could turn things around is why he voted for him for president. He has all of his IRA money in short-term CD’s waiting for the opportunity to buy common stocks. He may be waiting, as Chairman of the Fed said about interest rate for an extended period of time before he could buy stocks.
I have been saying on a regular basis in this column that I believe the recovery will come, but I don’t think it will be as strong a recovery as we have seen in the past. I also don’t think it will come over night. I expect to see slow growth, low inflation, and low short-term interest rates for the next 3 to 5 years.
The real issue, that many people are unwilling to accept, is that it took many years for us to get to this point and regardless how much we want a quick solution, none is on the horizon.
Let's get back to my client. His investment account is down but he is getting a high degree of cash flow. He made a great point that if he sold all of his income investments today, he could not get the level of cash flow he is getting today. Also, if he stands pat he has at least a chance over time to get recovery in his investments.
The real financial problem for many investors is that they have very little fixed income assets. Those of you who are my clients know that you have a significant amount of fixed income investments and the checks still come in month after month. As things evolve the need for income to support even a reasonable life style will become more and more difficult to achieve.
The retired will be the most severely affected segment of America. Their Social Security will stay flat and the money they have in the bank and money market funds will pay decreasing returns. Having the ability to generate a high level of income to carry yourself through the difficult times ahead will be very important.
My job is to monitor the investments to make sure they continue to pay the interest and dividends on a timely basis regardless of whether you need the income or not and reinvest distributions to produce more income. One of the reasons the Asian investors purchased our bonds is that they were paying a much higher rate of interest than they could earn in their own banks and government bonds. The American investors will come to better understand the value of income producing investments as we go through this recession.