“Ping,” says economist Todd Buchholz, “is a terrible sound.”
Speaking to the 2015 NAFA Annuity Distribution Summit audience on Oct. 15 at the historic Biltmore resort in Coral Gables, FL, Buchholz was referring to the 2008 Olympic Games when both the U.S. men’s and women’s 100-meter relay teams dropped their batons in Beijing, sending out pings heard around the world.
According to Buchholz, “Economies have metaphorical batons, too, when certain sectors must transfer growth to others, say from trains and cement to consumer goods like socks and trousers. But those economic batons can be dropped just as easily as a relay runner’s.”
Modern economists, according to Buchholz, attempted to pass a slippery baton in recent years when they misunderstood U.S. economic growth patterns.
After a boom time propelled by oil and gas drilling, with particular growth coming from fracking, driving jobs in states like North Dakota, Oklahoma and Texas, many experts predicted oil would top $130 a barrel. They believed the baton would ripple through multiple sectors, driving significant economic growth.
In April 2014, Buchholz appeared on TV with Maria Bartiromo and delivered a bearish report, stating oil would drop to $50 a barrel. Today, oil remains below the $50 mark, falling to $48.70.
Optimistic economists didn’t let the swooning oil prices deter their bullishness over the American economy. According to Buchholz, here’s what many predicted: With oil at $50 a barrel that meant more money in the pockets of consumers, hence, consumers with all those extra dollars will rush to retail outlets and spend money, driving the U.S. economy.
What would Milton Friedman do?
Unfortunately, that growth never occurred. Buchholz says the 2014 U.S. economy meandered and the 2015 economy initially went negative, before correcting to meandering status.
If only today’s economists had heeded the ideas from Milton Friedman’s Permanent Income Hypothesis. Nobel Prize Winner Friedman stated that people have a long-term view of how much they make. So, when a bump occurs, like the drop in oil prices, consumers don’t run to the local mall and hand over their hard-earned money.
“It’s going to take a long time,” says Buchholz, “for people to change their attitudes about money and the economy and their spending habits.”
Friend or FOE
Buchholz describes the current economic situation with the acronym FOE:
Federal Reserve’s new world sparks risky schemes
Oil and gravity
Euro under pressure
He says the Fed’s insistence on keeping interest rates low has made the U.S. “the best looking horse in the glue factory.”
Europe is in turmoil; China is cataclysmic; and, the U.S., according to Buchholz, chugs along, sorry — meanders — “at a flabby pace,” but a pace that at least is inching along in the right direction.
Those low rates keep the U.S. attractive for interest rate-sensitive sectors like housing and cars, but those plusses have helped keep the dollar stronger than its global partners, thus keeping foreign tourist dollars out of U.S. soil.
It’s a Wonderful Life
How does all this global economic talk help advisors? Buchholz points to the story of Amadeo Giannini, the real-life model for George Bailey (the Jimmy Stewart character in It’s a Wonderful Life.)
Giannini founded the Bank of Italy (which would become Bank of America) in San Francisco on October 17, 1904. The 1906 earthquake that leveled San Francisco sent local bankers to a dark place. They said they wouldn’t reopen their banks for six months. Like George Bailey did in the movie, Giannini said his bank would stay open and that he would guarantee everyone’s money.
Giannini succeeded on many levels, but Buchholz said his great gift, and the gift advisors need to mimic, is that he knew his customers — he really understood their motivations and desires; he knew what made them tick and because of that he could react swiftly to market swings to help them reach their goals.
Buchholz said to maximize the relationships advisors have with their clients, they have to ask themselves this vital question: How well do you know your clients?
One way to better know your client is to know what they read. “It’s important to look at what you read,” Buchholz said, “then look at what your clients read.”
If there’s not any overlap, according to the economist, then you may have a problem.