[Longtime readers of Rick’s Picks will know they’re in for a bracing dose of reality when our good friend Doug B. – known hereabouts as The World’s Savviest Financial Advisor – mounts the soap box. In the essay below, Doug asserts not only that full-blown recession is back with a vengeance, but that this time the easy remedies will not even seem to work.  He notes that Baby Boomers in particular will have to tighten household budgets drastically,  and to plan on working well past past the age of 65, if they are to have any hope of retiring with dignity. RA]

“Hey, Rocky, watch me pull a rabbit out of my hat! Nothin’ up my sleeve!”

“AARRRR!!! (pulls out the Rhino)  Looks like I don’t know my own strength.”

“Maybe you need another hat.”

And now here’s something you’ll really enjoy.

After all, it is part of the American optimism to believe in the unknown positive. The concept of another rabbit in the hat as investment strategy was popularized by Stan Salvigsen and Mike Aronstein back in the mid-1980s. When faced with a bearish outlook, and in the absence of any clear positives to identify to offset all the negatives, we in the financial services industry prefer to believe that there has got to be another rabbit in the hat. The concept is predicated on the fact that no one knows what the magician will do next. The hand is quicker than the eye. Mother Nature watches from the wings, though. So the magician walks on stage and his prop is a pedestal table with a small vase on it. He removes his top hat and sets it on the table. With a wave of his wand, he reaches in, pulls out a scarf and drapes it over his shoulders. Another wave of the wand, and presto! Out comes a bouquet that he places in a vase. How did he do that? Another wave of the wand and out comes the rabbit. The audience is amazed! And for all of us Baby Boomers, there’s Bullwinkle.

Today we are faced with the second recession in the Secular Credit Collapse. It has come close on the heels of the first one, the one that everyone has held their breath during, believing in the promise that the old, expansive paradigm was still in force. But the intervening recovery, the one that began in mid 2009 and is now ending, never rebuilt the household balance sheet, much less the tax base. We got back 70% of the stock market drop, but that was about it. The household didn’t have their bet there. They had it on very stylish real estate.  In the words of the lame journalists on the Street, the recovery, such as it was,  just kicked the smelly old can down the road. And it required taking the government to its secular peak to achieve what meager relief occurred. So here we are with a laundry list of major negatives that are very, very clear, and a mere rabbit won’t do. If we ever needed the rhino, it is now.

Boomers Hit Wall

The government has heard the voice of the people, and balancing the budget is the New Deal. The Fed is clearly out of bullets. The yield curve in Brazil and India is inverted and China is nearly so. Europe is reading up on TARP.  And then there are the Baby Boomers:  the all-powerful economic cohort throughout the developed world has finally and inexorably hit the wall. At 57 years old, they are left with no other choice but to slash the household budget and shed (i.e., liquidate) the heavy shackles of the ill-timed real-estate mania. They are entering the second stage — the stage in which they understand that their behavior must change if they are to have a hope of retiring with dignity. In the first stage of the credit collapse they were reassured that they should hold their breath and wait to come up on the other side. Steep economic declines beget dramatic V-shaped recoveries, they were told. But in this stage (compounded by it being the home stretch), they are going to get out of the water.

Fair enough. Replacing $150,000 in household income (the 80th percentile of 57 year households) through savings can’t happen by retirement age in eight short years, since their attempt at wealth-building in the real estate market has crashed. They will work longer and take a machete to their budgets now, and it will work itself out. Anyone who thinks that the 80th percentile American Baby Boomer will not succeed in retirement is unrealistically negative. But counting on the rhino to maintain asset values under these circumstances is equally laughable.

Time to Get Serious

So, sentiment-wise, let’s get serious. Who in 1937 believed that, five years later, we would have a world war? Stop believing in the next rabbit for a minute and figure out how to pre-empt this thing. Before you can say boo! we will be fighting to preserve the system, and it will be really tough and long — but above all, successful.  In the  meantime, let’s leave rabbits and rhinos to cartoons and magicians.

With a tip of the hat to Stan, Mike and Ray Devoe.

***

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