In today's installment of my six part series on how to successfully work as a settlement, retirement or income planning expert in this era of historically low interest rates, I outline what I believe are some foundational economic concepts and their likely impact on how we plan for them and what strategies best serve our clients in the months and years ahead.
First, let me drive home again as I have in other posts and in each video installment that I am NOT saying that those looking to retire and others who need planning for a personal injury or litigation settlement, should be totally out of the stock market, or totally avoiding real estate. Any balanced financial or settlement plan would be incomplete unless there are elements of the plan tied long term to equity, bond and real estate markets.
However, what I am saying is that for the vast majority of my clients, who are made up almost entirely of personal injury or settlement recipients, those saving for or in retirement or lawyers planning how to structure income into future years or retirement plans, that their primary need is not to time markets but instead to obtain secure, guaranteed income that they can't out live or out spend and will show up on time every single month.
Given those facts, my analysis and economic outlook is tilted toward other planners, advisors, lawyers or savers who are sitting on cash in the bank, expecting a lump sum of cash soon or are wondering how to generate sufficient income to live, so that they don't have to seriously invade principle or take excessive risks in these markets. These are typically not people who can wait for the market to come back long term, who can wait for real estate to once again turn into a positive cash flow generator or who can handle the potential of a bond market collapse if rates take off in the future.
So, if we understand the type of person I am speaking to here, you can better appreciate what I am about to say next, which is that if you are an advisor you can not plan or explain that which you don't understand or believe firmly yourself. You have to frame up a market outlook and planning method that is based on sound principals that not only helps your client today, but protects them long term against market and political forces that would undermine their ability to provide for themselves or their families.
What we believe at Wahlstrom & Associates after several months of careful review is that the U.S. economy and markets are in for another tough 24 to 36 months of low economic growth, low interest rates, cash hoarding by savers and corporations and the inevitable exhaustion of the federal government to provide further stimulus. However, once we get through this cycle, which we believe was prolonged by the massive stimulus that averted a depression, but which didn't address the systemic tax, business and investment issues suffocating the US economy, that we will inevitably see both asset and monetary inflation that will spike interest rates to record highs. To support these beliefs, I suggest you check out the following commentators and market facts:
- Arthur Laffer's WSJ article on the coming 2011 recession due to subtantially higher income tax rates in the US and most states. Excellent reading from someone who understands that economic activity is driven by millions of individual decisions that are shaped by incentives such as how much tax they pay for their economic activity and hard work.
- Bill Gross of PIMCO and his monthly commentary on "The New Normal" of substantially lower equity and real estate market returns in a US economy buried in debt and with limited ability to shape it's market destiny until it is worked off.
- New home contracts plunge 25% immediately after the $8000 stimulus is gone and new loan applications drop despite historic low mortgage rates. You can't restart real estate and building with out jobs, secure income and wage growth which there is no evidence of at this time.
- Companies and banks are holding record amounts of cash on hand due to fears of a double dip recession and lack of access to capital that a second recession would bring. If they aren't investing but hoarding cash, economic slow down is becomes a self fulfilling event.
So, with a short term certainty of painfully low rates, increased credit risks, high marginal tax rates and with equity and real estate markets flat or declining, all coupled with the substantial risk in the future of monetary inflation and interest rate hikes, what is a settlement planner to do to assist their clients?
Tune into next weeks installment to look at some strategic ideas we are using at Wahlstrom & Associates to assist injury victims, savers and those in retirement who are struggling to secure income and protect their assets. The next segment is entitled " Income is now King, cash is merely a Prince" and goes into why secured, stable, lifetime income is going to have greater and greater value in the new market reality we are facing in the years ahead.
In the mean time, read up on these stories and get over the fact that things aren't going back to what they once were, but that people can survive and even thrive in the coming years if you reshape your planning outlook and start to educate both yourself and your clients about the new risks and opportunities that will appear in the coming years.
( Mark Wahlstrom is generally regarded as the nations leading expert in Structured Settlements, Settlement Planning and Structured Legal Fees)