In my last entry, “Welcome to the New Normal”, I wrote about a teleconference featuring Bill Gross and Mohamed El-Erian of PIMCO, a leading global asset management firm. Their thesis is that, following 25 years of steady bull-market growth and a set of familiar assumptions, we are currently in transition to a “New Normal.”

Gross and El-Erian see the new economic norm as being characterized by:

• de-risking and de-leveraging
• re-regulation
• potential slight de-globalization
• a decrease in investment returns
• slower economic growth (possibly one half of what we have seen in the past 25 years)

All of this raises challenges for anyone with assets to protect and grow—to say nothing of maintaining successful businesses and steady employment.

I believe there are 5 key insights from this discussion that need to be considered as we look to the future: 

1. Government balance sheets can get over-leveraged just like individuals’ can.  More and more fiscal and monetary stimulus will be required to get the same result.  Mohamed El-Erian proposed that this was akin to a “sugar high.”  If that occurs, it is unclear what the source of economic growth will be going forward. It is a real possibility that the growing economies (i.e. China, Brazil, India) will over time replace the U.S. as the largest engine of global growth. This is very important for investors to consider.
2. Cost cutting has created much of the current profit growth, and with a few industry exceptions, revenues aren’t growing yet.  Companies need to re-address their business models and strategies in this new environment. They will need to change. This has major implications for all business owners.
3. With consumption historically accounting for roughly 70% of our economic growth, it is unclear whether consumer demand will return and in what form.  Unemployment is rising and unlikely to reverse quickly, which adds to the consumer relevance question. The implications are clear for businesses that depend on domestic consumer spending.
4. There remains a volatile journey ahead. There is widespread uneasiness about whether we will experience inflation or deflation; significant reduction in risk-taking; additional corporate defaults; a continuing unstable commercial real estate loan situation; and the impact of de-leveraging on banks.  Note: It is human nature during times of uncertainty to revert to what we know about the past versus asking what is needed and required in the future. It’s also true that this thinking can have profoundly negative consequences.  
5. The reserve currency status of the U.S. dollar is unclear.  Non-dollar denominated assets and other dollar hedge investments could gain in importance over time. All investors need to be aware of this.

This list is not exhaustive, but captures a few key issues investors will face in the near future.  As I have suggested before, the need for a trusted guide (or a “transformer,” as we like to call it) in your life will be critical to the type of journey you have and the outcomes you achieve. Now more than ever.

My entire career as a financial advisor has played out in the shadow of a bull market.  Take a look at the chart below. (Dow Jones Industrial Average 1982-2007)

The Dow rose from roughly 1000 at the start of my career in the 80’s to over 14,000 two years ago.  Sure, there were recessions and corrections along the way, but it is clear that wealth creation was consistently propelled forward by a very strong and unique set of financial and economic factors.  Those of you in your 40’s and early 50’s have experienced the same economic circumstances.

But, over the past eighteen to twenty-four months the world changed, arguably forever. 

Essentially, capitalism overdid it.

The greed of several large financial institutions, the increasing appetite by individual and institutional investors for more and more return without properly considering the risks involved, the lack of oversight mechanisms that could stop or even foresee the ultimate disaster at hand, and an economy built on consumer spending beyond our means.  These issues weren’t limited to the U.S., but instead impacted the world.  

This isn’t to suggest we’ll never wealth create again. But it does mean the rules have changed.  Wealth creation will require new thinking and a new skill set. We won’t be able to use the same assumptions we relied on the past twenty five years:  stable appreciation, double digit returns, and what many have referred to as the “Goldilocks Economy”–not too cold, not too hot, but just right.

So where do we stand now? 

That, of course, is the big question.  And there is a lot of confusion and uncertainty.  I recently got some insight into the current economic environment I’d like to pass along.

I was invited to join a teleconference hosted by PIMCO, a leading global asset management firm, and their well-known Co-CIO’s Bill Gross and Mohamed El-Erian. They may not be familiar names, but the financial community listens to them closely. 

Old Normal → Transitional Period → New Normal

The basic ideas of the PIMCO presentation were the following:

1) The economic world has changed.

2) There is a growing level of uncertainty about the direction of the global economy and the direction we are heading.

3) We are shifting to a period where returns will likely be lower and long term assumptions about portfolio allocations will continue to be challenged.

4) We have left the old world, but have not reached the new world.  We are in transition. 

The Old Normal was the period we’ve all experienced for the past 25 years:  The world’s economic growth as measured by nominal GDP (Gross Domestic Product without taking into consideration inflation) grew in the 6-8% range.  As Gross and El-Erian laid it out, this growth was possible because of:

• Declining interest rates (since 1982)
• Low inflation (since late 70’s)
• Increasing financial leverage
• Increasing financial innovation
• Decreasing regulation
• Increasing globalization

But now, Gross and El-Erian say, all of that is changing.  We are transitioning to a New Normal. 

What is the New Normal?

This current moment is a time when we’ll be seeing, and in some cases are seeing:

• De-risking and de-leveraging
• Re-regulation
• Possibly slight de-globalization
• Decreasing investment returns
• Slower economic growth (possibly one half of what we have seen in the past)

As Gross and El-Erian see it, several forces are driving this New Normal:

• Housing market:  Cheap financing and speculation are gone; home ownership is declining from a high of 70%; and unemployment in associated industries could linger for a while. 
• Savings rate:  We are moving from a period of high consumption and zero or negative savings to positive savings, and moving higher.
• Global forces:  The world’s growing concern about accepting our Treasury securities and currency in exchange for goods and services, and other parts of the world replacing the U.S. as the engine of consumption growth.

So what does all of this mean for any one of us individually – especially to people with assets to protect and grow?

There’s a lot to say.  I’ll take it on in my next blog post, “Adjusting to the New Normal.”

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma—which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.  ~Steve Jobs

Whether you like Steve Jobs (or Apple Computer) isn’t the point. 

Jobs’s quote reminds me how often I let my inner voice get drowned out, or at least watered down, by the opinions and thinking of other people. 

Learning how to trust myself —really trust—myself is hard. 

Why?  Because it takes courage and self expression.  It requires a willingness to share a slice of who I am, to live my dream and not someone else’s, to not let fear get in the way.

Even writing this blog requires a new level of courage and transparency for me.  On the one hand, I am opening myself up to critique, but I also feel an incredible sense of fulfillment in following my intuition and inner voice and sharing my voice with friends, clients, and strangers.   

Whether you are creating wealth or pursuing other passions in your life, I hope you will do them in a way that expresses you and who you are. 

We can all take a lesson from artists who do this all the time. 

In fact, this past weekend I was strolling through an art fair on the streets of Santa Barbara.  I was drawn to some of the art, but more importantly, I caught myself observing the artists sitting in their booths, letting others see and experience their work, proud and confident in what they had created. 

Moving in a new direction, creating something new, or following the lead of your heart isn’t always easy or comfortable.

But, I believe that trusting in you is a skill that can be learned and honed with practice. 

After his much publicized liver transplant, I can’t help but suspect this quote now rings even truer for Steve Jobs.

I recently blogged about the issue of performance and the importance from the perspective of a wealth creator.  For more background you may want to read, “Investment Performance; How Important is it?”

I continue to be amazed that financial advisory firms aren’t listening to their own client’s, let alone the surveys. 

The message from clients is very clear: 

Wealth creators care deeply about investment performance…but not as much as effective communication. 

Communication about who they are, where they are going, what is important to them and what they are worried about.  Communication about investment solutions and strategy that is in their language and not industry jargon. 

This week I was having coffee with a colleague at another wealth management firm.  During our conversation, we disagreed on this issue of what a client really wants from their financial advisory relationship. 

He was arguing that through his firms substantial investments focused on generating portfolio out-performance, they would be clearly differentiated from other wealth management alternatives in the eyes of wealth creators. 

I totally agreed that adding value through investment performance was critically important, but that true company differentiation would come through seeing the issues facing client’s from their perspective; reducing the complexity in their lives, creating freedom to pursue the things they love.  Wealth creators would gravitate to that first.

He went on to share that a secondary focus of his firm was to enhance the way information was gathered and shared with clients; significantly improving relationships with their clients. 

I agreed completely and said the following:

Let’s put it this way, if your company was split into two publicly traded stocks; Company A—the performance company, and Company B—the enhanced communication company…

I would buy 300 shares of Company A, but…I would buy 1000 shares of Company B.

It isn’t that Company B (communication company) is better than Company A(enhanced performance company) by a factor of 3x, but instead, finding a trusted advisor that understands the value of communication will yield ecstatic clients, and clear differentiation.

Just like your health, it is sometimes easy to forget that the wealth you created is ultimately your responsibility.  

After work yesterday, I changed into my running gear and headed to the park near my office.  It was a beautifully sunny day, and with autumn fast approaching, I wanted to take advantage of one last day of summer and get in some exercise. 

This is something I do for my heart, and to take care of my body, part of my health regimen.  My doctor told me that some form of exercise 4 – 5 days a week was important in my fight to keep cholesterol and blood pressure in check.  

But the implementation of that advice is up to me.  In fact, my doctor can’t make me do it and doesn’t even know if I take a week or two off from exercising. 

While I was running, I was thinking about a new prospect I had met with earlier in the day.  He was worried about the stress that was impacting his life and his health.  On the surface he had enough money to do what he wanted with his life, but he was stuck and not confident in what to do next. 

During our conversation a few things were obvious:

• Creating a financial strategy that reduced the stress in his life was life or death
• Stress was clearly responsible for several ongoing health related issues he could point to
• His alternative was to remain in the same stress-filled lifestyle and just accept the probability of a reduced life expectancy

As a financial counselor, my role is to study the facts and use my experience and judgment to provide the best advice possible.  I can’t force anyone to make changes unless they are willing and ready.

Health and wealth go together because… they’re yours. 

Make sure you take the time to accept where the responsibility rests.

It may sound strange, but to wealth creators, not as much as expected.

In any number of publications throughout the year, you can find a survey about what investors want and need from their financial advisor.  The questions and focus are slightly modified from survey to survey, and so are the results.

However, one common theme develops from the surveys—Performance is consistently on the list, but surprisingly, never in the top one or two responses. 

As it relates to wealth creators, a subset of the high net worth segment, and a focus of this blog …I believe the surveys.  Why?

Based on experience, there are several observations that explain why this is true:

a)      The lives of wealth creators are diverse and full of many interests and passions beyond their investments.  There isn’t an over-emphasis on investment performance because they expect “good” performance in all areas of their life—business, philanthropic and personal.  So, it is safe to say investment performance needs to closely align to the performance of the overall financial markets and their specific objectives.

 b)      Wealth creators know the difference between managing money and wealth creation and therefore where to get out-sized returns.  The former assumes diversification, preservation, lower risk and lower returns, while instinctively, and from experience, they know wealth creation has the potential for much higher returns and associated higher risk.  In fact, this is the reason they are attracted to wealth creation activities in the first place. 

 c)      Technically speaking…they don’t want to be a “chump”.  Said another way, wealth creators understand the importance of compounding even small incremental return improvements over-time, but worry much more about significantly under-performing their expectations and/or completely missing-out on positive market returns over extended periods of time.

Investment performance will always be important; will always be on the “list”… just maybe not where you think.