For many, the cloak of abstractness fell from economics in autumn 2008. Markets cratered and firms and family houses cratered with them. News reports dredged up President Harry Truman and his plea for a one-armed economist so there could be no “on the other hand” to explain things. Bruce McCain, a Ph.D. economist from Cal-Berkeley who oversees KeyBank investment strategy for $20 billion and who possesses two athletic arms, was at the time using both of them to pound tables.
“Two trends emerged over the last decade,” McCain said. “As the world controlled birth rates, it did so too fast. Now the baby-boom issue ”“ the pig in the python ”“ is replicated in every industrialized country. But the U.S. alone has a brighter outlook because we have an echo-boom working its way through the system more so than in Europe and China. One-child policy and gender selection leave China with an enormous problem in the years ahead.
“The second issue is competition from China,” he said. “We did not adjust our style of living downward, going into debt instead. The nation is still growing, but we”™re going to have to work harder in the future and with fewer resources if we want to live as well.
“Combine these two issues and the U.S. is squarely in the vortex.”
As chief investment strategist and senior vice president for KeyBank, McCain, 58, oversees activity on $20.3 billion across the bank”™s 18 regions between Alaska and Florida. Key operates 1,028 branches, including one in Stamford, Conn., and more than 150 across New York state.
His economic report last week ”“ via a weekly in-house letter for clients titled “Investment Weekly” ”“ said in part and in brief:
Ӣ the 165,000 increase in nonfarm jobs modestly beat expectations, but also showed significant positive revisions to the prior two months;
Ӣ personal income rose 0.2 percent in March, sharply lower than the 1.1 percent increase in February, because wage growth was particularly slow. Consumption spending beat the consensus estimate, but still rose only 0.2 percent; and
Ӣ the Case-Shiller home price indexes rose 1.2 percent, the largest gain in approximately eight years, as prices rose in each of the 20 metro areas sampled.
The newsletter and a second “Economic & Investment” quarterly delve deeply into the acronym soup of consumer, private-sector and federal economics for metrics that never appear on the evening news.
McCain travels about eight weeks per year. May 9 found him and Key”™s president for Hudson Valley/Metro New York, Ruth Mahoney, in the Business Journal offices in White Plains, stitching together a day that had already featured a cancelled breakfast and would immediately feature a trip to Ulster County to address investors. “I”™m his driver,” Mahoney joked.
In a sitdown, McCain dispels any college-era thoughts of micro- and macro-economics being different animals. In McCain”™s world, the macroeconomics of international interest rates and a national debt above a trillion dollars will arrive micro-economically on your personal bottom line.
“Medicare is clearly growing too fast,” he said, citing one national metric with very personal repercussions. “We don”™t even pretend to have the pool of assets to fix it. The combined foreseeable shortfall for both Medicare and Social Security is $40 trillion.
“Another factor is the interest cost on expenses we”™ve already accumulated,” he said. “Historically, interest rates have hovered around 8 percent. If 8 percent were the case today, you could instantly add $1 trillion to the national debt.”
Currently, he said, China lends the U.S $400 billion per year and that is not necessarily a bad thing: “In the short run, the exchange of goods from China for paper from America is good. But in the long run, in the future, they may no longer be willing to buy our paper and interest rates will go up. No one would argue we are worse off for not making TVs here in America. But that won”™t last forever.”
Care for a bond? In rocky times, bonds are historically seen as low-yield, but safe, investments and the first investment option above stuffing the mattress with cash. McCain said in the current climate they remain the investment of choice for those skittish about stocks and real estate. Those who own bonds to the exclusion of a balanced portfolio, however, may be in for a comeuppance.
“Bond funds can clearly go down in value,” McCain said. “When people begin to see the value of their bond investments dropping ”“ when they open that envelope and see their returns are not what they were ”“ there will be a panic stage to the bond bubble. More importantly, bonds do not offer the protection and returns to get people through to retirement. A major feature of this recovery has been the amount of household wealth that has funneled into bonds.” As confidence increases, equities will become more desirable, he said, with the young tending toward the accumulation of wealth and the old seeking its preservation.
“Four years ago we were pounding the table,” McCain said. “That has ended. We”™re well along in this recovery cycle, but there remains a lot of fear.” He produced a graph supporting the long-term wisdom of stock investment. “Is this the ideal buying time? No. But maximum fear can lead to maximum opportunity. The reason to buy is in the long term you will do well.”
