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Economist Buchholz Sees Signs of Financial Hope

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These are the most tumultuous economic times any of us have ever lived through,” said Todd Buchholz, the opening speaker for the general session of Day Two at the 2011 LIMRA Annual Conference in New York.

Buchholz, a former director of economic policy at the White House during the Bush administration, is also the managing director of the $15 billion Tiger Hedge Fund. He has also published in the Wall Street Journal, Worth and the Financial Times as well as regularly appearing on CNBC.

As the big opening speaker for this morning’s event, Buchholz offered a mix of snarky observations on how pear-shaped the global economic environment has become, but he also tempered that with some reality-check bits of cautious optimism.

As economists, our forecasting record has been miserable because the building blocks of the global economy have shifted, and our old economic models have been shredded,” Buchholz said. To prove the point, he produced from his pocket a shiny red Hot Wheels version of a Ford GTO. The toy car, he noted, cost more to buy than a single share of GM stock.

The reasons for why economic conditions have changed so sharply in the last 20 years were threefold, Buchholz said. First, the collapse of Soviet Communism and the rise of China and India as world trading partners flooded the global marketplace with labor, creating a sense of hyper-competition. Second, all of those new workers wanted three meals a day and other products, creating a corresponding rise in commodity costs. The third was an extended boom of mergers and acquisitions that not shook confidence by rewriting entire industrial profiles overnight. In one anecdote, Buchholz mentioned how, during the Daimler-Chrysler merger, German executives, unable to pronounce the name. “Plymouth,” simply remarked, “he Chrysler is silent.”

A risk all of this creates, Buchholz said, is a backlash against capitalism itself, as typified by the Occupy Wall Street movement, whose relatively few followers have nevertheless captured global media attention. But it also creates a backlash against free trade, which results in counterproductive protectionism and tit-for-tat trade wars (as seen when the U.S. recently put a tariff on Chinese tires, so the Chinese responded by putting a 100% tariff on American chickens). Free trade, Buchholz said, has done more to eradicate poverty than any social welfare program, citing poverty numbers worldwide, with sharp dips in Asia during the same period of time when so many flooded the labor market.

To improve things, the United States needs to address three immediate problems. Buchholz said. The first was that the Federal Reserve has hiked its rates too much recently, given short-term trends in related financial markets. But this, he said, was relatively minor, and overall he defended the policies of ?? Ben Bernanke, whom Buchholz said has been under attack for his loose monetary policy. But it is that same policy that is the only reason why the GDP has been positive since 2009, Buchholz pointed out.

OPEC has tightened the noose on energy costs, raising crude oil back to $90 a barrel, another cost driver. If oil can retreat in time for Christmas, Buchholz said, it would free up consumer spending, which is a big boost to the economy.

He also noted that the Euro fell too far, and that despite the financial chaos in the Eurozone right now, the Euro is still a very strong currency. “Try taking your family out for a burger and fries in Paris right now,” he said. “It will set you back $30.” But what makes bad news for American tourists makes good news for American exporters, and heavy manufacturers such as Caterpillar, John Deere and Boeing are all enjoying increased shipments, even to the point of considering relocating some operations back to the United States. The longer the dollar/euro imbalance remains, the more it strengthens American industry to power a recovery.

But despite such indicators, Buchholz stressed that it was just as important for people to maintain a clear outlook on other factors. He felt that economists’ concerns of a double-dip recession were overdone, just as he disagreed that there was a risk of returning to the stagflation that made the 1970s such glum economic times. “Inflation is not baked into the cake,” Buchholz said, “and interest rates are bound to go up.”

Consumers are tired of not spending, after three years of forced austerity, and signs that restaurants and hotels are enjoying increased business point to signs of a larger recovery. Sales of pickup trucks, a subjective indicator of the health of small entrepreneurship, are also creeping upward, a hopeful sign. And household debt and other financial obligations are looking better overall as people have paid down debt and begun to save.

A big concern is still the job market, which is showing some signs of improvement, but the problems there are deeply uneven along skill lines. Buchholz praised the Clinton administration’s focus on creating 20 million net new jobs during the 1990s, many of them skilled white-collar jobs while shedding blue-collar manufacturing jobs. Now, while unemployment is only 4% for college graduates, it is more than 20% for those with no high school degree. Investing in education, Buchholz said, is the single most important initiative the country can take to ensuring long-term economic recovery and sustainable prosperity. “If you don’t have skills in this economy,” he said, “then you’re competing with the last guy to put down a rickshaw in Shanghai, and that’s no way to live in a modern economy.”

But as part of a global economy, challenges to U.S. prosperity are also tied to challenges abroad. China, for example, cannot be counted on to save capitalism, as Buchholz put it, because it has deep, fundamental problems with its own economy, starting with demographics. In 25 years, Buchholz said, China “will look like the Old Country.” Meanwhile, the “one child” policy has left a huge gender mismatch; “tonight, there are 65 million men in China who cannot get a date,” he said.

In the Eurozone, The PIGS – economies of Portugal, Italy, Greece and Spain – remain a flashpoint, but none so much as Greece, which is insolvent, but there is no consensus over whether to bail the country out, let alone keep it in the Eurozone. As Germany and France dither and delay, Buchholz said, it worsens a sense of uncertainty, but at the same time, the Eurozone needs to put some kind of protective barrier around Italy, which is a much larger economy, and simply cannot be bailed out by the likes of Germany. The most likely agreement, Buchholz said, is that Europe will have to buy more bonds from its central bank while bondholders will take a 60% to 70% haircut, and even then, it still might not work. In the long run, this might not be such a bad thing, however, Buchholz pointed out. Iceland, for example truly went insolvent, but it has already re-entered the financial sector, proving that the free market is indeed a forgiving one.

In closing, Buccholz recapped the major challenges facing today’s workers and businesses, but he also noted that historically, times of trial are also rich with opportunity for those brave enough to seize them.