A conversation about the economy sparks interest with most Americans. As gas prices soar and foreclosures still climb, entrepreneurs and consumers alike are worried about their financial futures.
A group of business owners and Bank of America executives gathered last week at the Los Angeles Marriott Downtown for a broad discussion on economic issues.
The afternoon featured Bank of America Chief Market Strategist Joe Quinlan, who oversees the development of investment strategies and solutions for the various channels of Global Wealth and Investment Management. In this role, Quinlan is in charge of developing, communicating and executing the firm’s overall domestic and global investment strategy.
After greeting those gathered, Quinlan quickly moved to discuss some of the most pressing economic issues beginning with the housing crisis.
He cites that interest rates were too low for too long; enabling people to do things that they shouldn’t have done. “The architect of the mess, that they are dealing with today, is really Mr. Greenspan and the Federal Reserve (Feds),” said Quinlan. “The Feds allowed a lot of this mortgage origination to seep outside of the traditional parts of the banking sector.”
Quinlan concedes that although the housing issue is not over, with inventory at unprecedented levels, the nation will recover – it’s just going to take time.
Yet, there is a silver lining. “Exports are the stars of the economy, right now,” he said.
“Our exports, goods and services – services being very good and very competitive – are running about $150 billion a month. That’s basically what India exports in a year.”
This contradicts a widely held belief that Indians and Chinese are going to rule the world. Quinlan states, “It’s simply not true… They are a great economy, but they have a lot of problems…They are going to share a common stage with the United States, but they are not going to over-run us. We are tremendously competitive.”
“And with earnings, you see the dichotomy. Globally, we are talking Caterpillar, IBM, Honeywell, and so forth. They are going gang busters. At this point in time, while there is a recession, or near recession, we’ve got a strong global backdrop.”
On the home front, consumers account for 70 percent of the Gross Domestic Product (GDP).
Quinlan observed that consumers have “used houses and ATMs to purchase things that maybe we shouldn’t have. We upgraded across the board. We super-sized our houses, our cars, our meals – everything. We’ve been living beyond our means for too long and now we have to pay the piper.”
Although consumers are eagerly awaiting the $155-160 billion fiscal stimulus checks (tax rebate checks) that are in the mail, Quinlan compares them to a “shot of cortisone. They go in your back; they feel good; but in about two months, the pain is back.” He believes that the consumer boost isn’t going to put the economy on any firmer ground. In fact, he stated that it will be even shakier.
“What’s the first rule when you are in a hole? Stop digging,” he said.
Circling back to the silver lining, he offered that there couldn’t be a worse time for an election, but politicians would see it the other way around. There is always a lot of negative noise, ignoring the positive news – how we are making lots of money in India and China; how European companies are very competitive.
Quinlan used California as an example. “You are an export state. You’re part and parcel to the global economy more than any other state,” he said.
Quinlan found it “amazing that Mr. Obama and Mrs. Clinton are talking about rolling back NAFTA. We should be rolling it forward not backward.. How can you take on NAFTA, repeal it or re-negotiate it, while we are dependent on foreign oil? Canada and Mexico are two of our most secure suppliers. Our neighbors are not happy with us now. We’ve got to be smarter about it.”
Contrary to popular belief, the nation’s number one import from China wasn’t toys with lead paint – it was captital, which the U.S. needs because we are a large debtor nation. In 2006, the interest we paid on foreign debt was something like $175 billion in 12 months.
China is one of our second largest holders of U.S. treasuries. Without their capital, we could all be looking at higher interest rates. But the good news is that they will continue to send us money because we have financial systems and good rules of law. Conversely, in China, there are not too many places to put your money. And their market, the Shanghai index, is one of the worst performing this year. They were off by 50 percent, which indicates that there is a slowdown in the economy in China
Sometimes companies leave the U.S. or go overseas because they don’t see any other choice. Microsoft recently put a new research center up in Canada. Why Canada? Because Canada’s immigration policy is such that they can pull in the best and brightest talent from around the world.
On the flip side, Chinese manufacturing wages are going up 15-20 percent a year. So, Chinese companies are moving production down to Viet Nam.
Events that occur around the globe ultimately affect us in some way. Africa is not stable, particularly in Nigeria. The United States imports more oil from Africa than we do from the Middle East. So, what’s happening in Nigeria and Western Africa can directly affect the U.S. consumer.
The grass is not always greener. “We’re making out China and India as taking over the world. I see them stumbling…Go beyond Shanghai and Beijing and see how they live and how they survive…You see households with a tremendous amount of income going to education, to medical with no pensions or unemployment. The unemployment count continues to rise,” said Quinlan. “China has to grow up and stop cheating and stealing intellectual property rights and play fair in trade negotiations.”
Quinlan stated that India, with a larger population than China, is so poor, yet its potential is so great. “The media likes to make it out as if the Indians are taking over the world. It’s not true. You see reverse outsourcing because Indian wages are rising about 15-20 percent a year,” he said.
In closing, he remarked that we want these emerging markets to grow and that the bigger risk is that they fail or do not grow.
“There is one world out there and we are only 20 percent of the world’s GDP and we are only 4.5 percent of the world population. It’s in our interest to integrate … as opposed to being stand-offish,” Quinlan said. “We need the world more than ever before. It’s a win-win proposition. But, whether we pull if off remains to be seen.”
