Insights on what you need to start planning for
TOWER Investments provides a range of investment solutions, including financial advice through TOWER Financial Advisory Services.
Portrait of the "New Normal"
Q: What are the key features of the "New Normal" that investors need to get ready for?
Sam: One of our bond managers, Pacific Investment Company (PIMCO), has characterised the post-recovery economy as the New Normal era and identified three key aspects of this time ahead:
Major issues: government debt, employment, retirement, and healthcare
Q. What other issues are likely to arise in the era of the New Normal?
Sam: Many governments have gone deep into fiscal deficit due to launching huge "borrow and spend" emergency fiscal stimulus packages in the aftermath of the global financial crisis. This debt burden has to be paid back before its mounting cost starts to crush the life out of economies required to support it. The deleveraging theme applies here, but is complicated by the fact that the heavily indebted state becomes proportionately larger within the economy relative to the private sector, but it is the private sector that must produce the wealth the state needs to pay off its debts.
The state's hunger for debt funding and refinancing starts to compete directly with the private sector for scarce credit, crowds out private sector borrowing, eventually causes interest rates to rise, and the breakeven threshold for starting new business ventures to increase. Where governments resort to higher taxes to accelerate paying down debt they depress consumption, saving, investment, income growth, returns to capital, and economic activity in general. A protracted period of trade-offs arises, in which governments dampen economic growth by paying off their debts as fast as they can without killing the goose - the private sector - that lays the golden eggs.
Q. Are there any other areas of concern once we get into the New Normal?
Sam: Certainly there are. We can pick just three of a range that matter: employment, retirement and healthcare.
Chronic unemployment and underemployment will be a protracted problem under the New Normal, especially for advanced economies. Some industries have become permanently smaller or simply disappeared in the wake of the global financial crisis. Affected workers are not always easy to redeploy and may suffer loss of skills, and high costs are associated with retraining and upskilling. Youth unemployment represents a huge social risk and there is urgent need to foster research and development and new industries to absorb these young workers.
Against this background of employment scarcity, households will save harder and become more risk averse. There will be a reduced tax base of employed income earners for governments to collect revenues from, greater welfare dependency, and increased social tensions between haves and have nots.
On the retirement front, we are facing intensified concerns regarding an ageing population and provision of adequate retirement income. Government debt blowouts to pay for emergency fiscal stimulus have come with the worst possible timing when we have baby-boomers heading en masse into retirement. The adequacy of private provision by individuals and households, and of publicly funded social safety nets like New Zealand Superannuation, are now acute problems.
In many countries public policy debate is now focusing on stabilising future taxpayer-funded pension spending relative to GDP, with methods on the table such as increasing statutory retirement ages, reducing taxpayer-funded benefits, boosting private retirement savings contributions, and introducing new or redesigned private contribution systems. New Zealand has had its head in the sand on this issue in assuming the present New Zealand Superannuation scheme is cast in stone, but increased private provision through the likes of KiwiSaver is the best "insurance policy" for countering poverty in old age for our Baby Boomer households.
Health care costs are under pressure and containing them as a stable proportion of GDP is likely to prove an even bigger headache for indebted governments than retirement incomes. Age-related health spending, medical treatments and technological advances need careful cost management and evaluation. Risks to households include possible moves toward more public/private cost sharing to discourage moral hazard in "overtreatment" and greater reliance on private health insurance expected of those who can afford it.
Getting ready for the New Normal
Q. What can we do to prepare ourselves for the New Normal?
Sam: People need to change their expectations and if need be rebalance their personal and household priorities between consumption, savings, investment, debt and personal risk management (insurances).
It is prudent to cut debt and consumption in order to save and invest more, and reduce expectations about future income potential. Voluntary reduction in present standard of living to enhance the future standard could be a smart thing to do, along with investing more in retirement savings because of potential risks ahead to accessibility of public pensions and healthcare services.
People could look more closely at their personal risk management planning through their types and levels of insurance cover, including health insurances, because it could be a lot harder to recoup significant financial losses or meet high healthcare costs in the New Normal.
Certainly people should avoid the typical Kiwi trap of overspending on their residential properties so that they don't end up "asset rich and cash poor" in old age. This means paying greater attention to rebalancing total wealth to hold higher proportions of financial assets in relation to residential property assets than is now commonplace.
More generally, seeking professional financial advice could be one of the best decisions people ever make as they go into the New Normal era wherein "easy money" will be much harder to come by for most people than it was before the global financial crisis. TOWER's financial advisers are able to assist in this area.
Further information
To contact a TOWER financial adviser, please visit the www.tower.co.nz homepage and click on the "Find an Advisor Now" link.
The opinions expressed in this interview are those of Sam Stubbs only, and not those of TOWER.
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