FPA Success Forum update: Economist excited by best wealth accumulation conditions in years

(November 7, 2003) Citing three “growth-producing” factors that are coming together at the same time, one economic expert told advisors attending the Financial Planning Association’s (FPA) Success Forum this week in Philadelphia that there is an opportunity to “accumulate real wealth unlike anything we have seen in the last 20 years.”

According to Dr. Robert Goodman, a U.S.-based author and senior economic advisor with Putnam Retail Management, the combination of the Federal Reserve Board’s “accommodative” monetary policy, the powerful fiscal stimulus being provided via significant tax cuts and a declining American dollar all add up to one thing for U.S. investors: a prime opportunity to make or protect a significant sum of money.

Comparing today’s environment in the U.S. to the one in 1981 when the government implemented the largest tax cut in American history, Goodman pointed out that even though the market had all the information it needed to predict the effect of these tax cuts back then, it didn’t understand what to do with it.

Goodman noted that no one could figure out that paring back the capital gains tax would make equity investing more attractive or that cutting the corporate tax rate might enhance the growth of after-tax earnings, so many investors missed out. “The people who waited [to invest in equities] missed a five-year period where the Dow Jones went up three-and-a-half times — not because it had to, not because it was time… but because policy changes made the economic environment conducive to the accumulation of real wealth,” said Goodman. “We have an opportunity now exactly like that situation and people are hesitant and they’re waiting like they did then.”

Goodman suggested that advisors with clients being distracted by the words “budget deficit” and the $1.6 billion US price tag of proposed tax cuts help put it all in the proper perspective. “In the next 10 years, [the U.S.] economy will conservatively generate more than $160 trillion worth of gross domestic product, which is $30 trillion of additional revenue over a decade — [$1.6 trillion in tax cuts] is miniscule, infinitesimally small,” noted the economist.

To add to the urgency of his investing message, Goodman is excited by the pent-up demand of businesses waiting to start spending again. “It’s no secret why they’re not [currently] spending, why they’ve delayed and delayed — the penalty for making a mistake in this business climate is death,” said Goodman. “[Once] the first company writes a cheque, they will all begin to spend because they can’t afford to let their competitors get ahead of them.”

Goodman noted that CEOs and analysts have done a good job of managing the market’s expectations by “underpromising and outperforming,” a strategy that will result in productivity numbers that will “knock your eyes out.” The effect will be one where corporate profits appear to explode, said Goodman, and “all of a sudden, out of nowhere, perceptions change.”

And with high levels of investor “mistrust and distrust,” Goodman also pointed to companies jumping on the dividend bandwagon to “bribe back skeptical shareholders.” Goodman views dividends as a very positive statement, and pointed to growth companies and even software giant Microsoft — which said it would never pay a dividend — as converts to this new strategy to reassure investors.

Wrapping up his presentation, Goodman predicted that the next four to five years will be “better than what a lot of people right now anticipate and the markets will reflect this in a way that was not fully anticipated by investors.”

However, Goodman warned this significant wealth accumulation opportunity will not last forever, as eventually taxes will rise again in an effort to close the gap between the rich and poor, perceptions and expectations will change again and “the market will literally drag you under.”

On a positive note, though, Goodman had a final word for advisors, regardless of what the economic environment is. “What won’t change is the need to put kids through school, for people to prepare for retirement. And what will never change is their need for your services.”

Filed by John Craig, jcraig@advisor.ca.

(11/07/03)