By Lisa Ditkowsky, CFP®
Thousands of Chicagoland executives gathered once again on January 19th, 2016 for the Executive Club of Chicago Annual Economic Outlook Luncheon at the Hyatt Regency on Wacker Drive. Personal Finance Maven, Terry Savage, owned the same moderator spot that she has rocked since the luncheon's inception in 1980. The bestselling author is currently a Huffington Post contributor, CME Board Member and Tribune Content Agency Syndicated Columnist.
Terry Savage is famous for giving the panelists no room to wiggle out of her pointed questions about the economy and their economic forecasts. Savage is to making economists squirm what Barbara Walters is to making actors cry. She spent the first few minutes with Chicago superstar economist Diane Swonk trying to get Ms. Swonk to divulge her next career move in life post Mesirow Financial. No dice.
On Savage's chopping block this year were regulars Dr. Bob Froehlich and Diane Swonk, as well as newcomer to her lineup, Brian Wesbury. Dr. Bob Froehlich is Director at American Realty Capital and Chairman and CEO of The Kane County Cougars Baseball Club. Diane Swonk, a 16-year Outlook Luncheon staple, is now a Distinguished Fellow of National Association for Business Economics and Chief Economist Alum of Mesirow Financial (11 Years). Brian Wesbury is Chief Economist at First Trust Advisors, L.P.
"There were no down years in the stock market in presidential election years from WWII to 1999 - until 2000 and 2008." - Savage
Terry Savage opened the Economic Outlook by describing the movement of the markets in 2016 as "a giant exhale". She said that a year ago we were expecting an imminent Fed interest rate increase, worried about Ebola, and that "China was on our minds". Savage then added, "We now know that China has a market that can wreak havoc on the world." She garnered laughs by pointing out, "Free market and government control are concepts that are totally inconsistent with realty." The audience laughs intensified when she said that last year we were arguing about whether "TRUMP" was too big on his building in Chicago, not whether Trump's "ego is too big to be President."
Savage likes to bookend with year-to-year conference date "market dots" to prepare the audience for the economic forecasters' own 2016 "dot plots". She said that on the morning of the luncheon last year, the DOW was at 17,618, compared to 15,988 one year later. The NASDAQ was at 4661 vs. 4888 a year later. She reminded us that the 5.73 percent gain made by the NASDAQ in 2015 brought about a new acronym - "FANG" (Facebook, Amazon, Netflix, Google).
"There were no down years in the stock market in presidential election years from WWII to 1999 - until 2000 and 2008," Savage said. For 60 years this must have been reassuring to people who believe that hope springs eternal in election years. Now, according to Savage's statistic, this could mean that in the 21st century, there exists a 50 percent chance of a down market in an election year. Savage then said, "Every time the S&P closes flat, the year after has been double digit gains." That is certainly an optimistic thought for 2016, although realistic and optimistic are often polar opposites.
"The U.S. dollar has soared recently over the last four years, hurting our manufacturing sector by making our exports more expensive," Savage explained. She said, "Today we have $28.87 oil vs. $140 a barrel during the height of the financial crisis" and "The world is awash in commodities." She explained that at the very least, we have "precious metals deflation".
As Savage ended her economic intro, she returned to China. "The difference between the Chinese stock market and ours is that when they get scared, they can't get out," she said, emphasizing along with many top economists that China is that song that just won't get out of our heads in 2016.
Each year, Savage looks to her panelists to forecast 2016 interest rates, the unemployment rate, the stock market, GDP and political impact.
DIANE SWONK - IN BETWEEN ECONOMIST JOBS AND STELLAR IN HER BELIEFS
"Inflation is tepid, and I still think inflation will remain tepid this year." - Swonk
Diane Swonk began Terry Savage's focus with her 2015 prediction that the Dow Jones Industrial Average (DJIA) would end 2015 at 18,499, having been close when it reached 18,351 in mid-2015. Swonk had predicted a 50 basis point Fed rate increase, compared to the 25 basis point actual increase, 5 percent unemployment which was accurate, and 3 percent GDP vs. the 2 percent marker as of Q3 2015.
"Main Street is finally strong enough to right the ship," Swonk started out. She spoke of the global race in both the developed and undeveloped world. A big concern of Swonk's is that "we won't employ the unemployed and underemployed fast enough."
Swonk was more conservative this year with her GDP prediction, seeing 2 to 2.25 percent GDP Growth. She believes that unemployment could go as low as 4.5 percent taking into account the reemployment rate. Swonk commented that "Chair Yellen is right" and "There is still considerable slack in re-engaging people in employment." This was the first of approximately three pats on the back Swonk cheerily delivered for Janet Yellen, indicative of how very different it is to listen to an economist talk about the Fed versus a money manager. Swonk has long been quoted in the media as saying wage growth is a lagging indicator and acknowledged, "I would like to see wages accelerate faster than I think they will." Swonk prognosticated on the Fed's direction for 2016 - "The Fed has no intention of hitting the brakes anytime soon...because she wants to raise wages and see people reemployed."
Swonk was quick to point out that we will see a resurgence of the consumer in 2016, and it will be led by the Millennials. Swonk said there is "easing of conditions for the U.S. consumer, and that's going to play into falling prices at the pump and more." Swonk's very own Millennials are 21 and 18 years old, and she said the 34-year-old Millennials are now having children. "Millennials are waiting longer to buy homes, but they are trading up, having kids," she said.
"I am worried and concerned that we will continue to see tepid investment by companies," said Swonk. However, she noted a "silver lining" in our inventories. Swonk talked about Paul Ryan and Nancy Pelosi getting together on a massive government spending bill, which will extend tax breaks to businesses, and commented "What strange bedfellows!".
"Inflation is tepid, and I still think inflation will remain tepid this year," said Swonk. She almost purposefully detached this observation from the Fed, because clearly, she showed that she is a friend of the Fed(s). A bunch of us who were trying to handicap the odds, playing off Swonk's dialogue, are long the idea of Swonk ending up at The Chicago Federal Reserve or with a FRB FOMC (Federal Reserve Board Federal Open Market Committee) seat soon. When questioned on this in passing, Swonk brushed it off to us with a smile as "interesting," "no" and "but I am having lunch with my friend, Charlie (Evans), soon".
Terry Savage flat out asked Swonk if she would be running for political office, and to this Swonk definitely said "no", that not since "Honk For Swonk" in the 8th Grade has she run for political office. "You can take the girl out of Detroit, but you can't take Detroit out of the girl," Swonk explained her slogan jokingly. She does love her homeland, and four years ago heavily plugged a certain automotive manufacturer with full disclosure that she has families' pensions to look out for. Swonk started out on stage by saying how good it feels to finally be "free" from the compliance chokeholds of Mesirow Financial and get to finally say what she wanted to say. That is why it was almost ironic that she played it so safe with her speaking. She was unencumbered by an employer (probably in between jobs for the first time in her working life), and she spoke much more conservatively and dressed much more conservatively than the past five years.
Every year, Diane Swonk tells a couple of ex-husband jokes, and this year, all references to ex-husbands vanished. She only spoke lovingly of her two Millennial offspring and loving husband who messed up a text and accidentally told her to end up dead (meaning "knock 'em dead"). Usually, Swonk throws in a lot of self-deprecating humor about why she loses husbands and jokes about her materialistic Millennial daughter trying to scheme for her Jimmy Choos and Christian Louboutins. She has even been known to wow the crowd by wearing fishnets and flashing her biceps to give her Economic Outlook Forecast at the January event. This year, we joked to ourselves that Swonk took a page out of Nancy Reagan's stylebook, out of the ordinary for her (a good Fed outfit? Perhaps.). Regardless of what heights Swonk reaches in her career as an economist, she decided to create her own Limited Liability Corporation in IL on February 4, 2016 and created Diane Swonk & Associates, LLC (with the assumed name "Diane Swonk Economics").
Diane Swonk summed it up with her nutshell predictions for 2016 and warned, "Markets do come and bite you in the back." She thinks that the second half of the year in the market will be significantly better than the first half and that the Dow will flirt with 18,000, reaching at least 17,800. "Profits will come back just a little," She sees the 10-year Treasury reaching 2.5 percent. Swonk predicts unemployment will lower to the 4.5 to 4.7 percent level depending on labor force participation. She sees GDP ending 2016 between 2 to 2.25 percent.
Swonk wrapped up her economic forecast by throwing a curveball in the form of a bonus economic tip. "Currencies are where the action is," she said, "Brazil and South Africa are at the top of the list."
BOB FROEHLICH - FROM THE STEEL MILLS TO TOP OF THE INVESTMENT WORLD
"Europe will be headed toward 2 percent (GDP) but not quite make it. Japan will be worse, doing nothing." - Froehlich
Dr. Bob Froehlich's LinkedIn Profile reveals that he worked four summers in the early 1970s as a General Laborer in Pittsburgh steel mills before embarking on his storied career at the top of the finance and television-commentating worlds. Economists in particular seem to look fondly upon their first jobs and all the economic opportunity that they deem has been afforded to them as a result.
Bob Froehlich, a perennial Bull, predicts we will end the year at 20,015 with 4 percent GDP. Terry Savage joked about him smoking crack during lunch, to which he retorted, "There's a fine line between being wrong and being early."
Froehlich is perhaps Savage's toughest interview at the Economic luncheon each year. He goes on and on, and it is near impossible for Savage to unearth answers from him or redirect him with her questioning. It is clear that Savage wants to steer him toward talking about the U.S. economy instead of rambling about the world. As usual, Dr. Froehlich threw his global zingers first. "From a global perspective, I think the U.S will do quite well, be among the best, like being the tallest midget in a circus." So, the global economy, to Dr. Bob, is a circus.
"Europe will be headed toward 2 percent (GDP) but not quite make it," he said. "Japan will be worse," Froehlich added, "Doing nothing."
Froehlich is especially concerned about emerging markets. "The emerging markets bubble has imploded," he said. "Emerging markets is getting destroyed" and "Russia and Brazil are in a recession." Froehlich called this "bad for commodities". He said that China is slowing down from its double digit growth. He believes the Central Bank and Japan will be staying low or going down in terms of interest rates (note: the Bank of Japan interest rate has since gone down twice to zero and then to negative 0.1 percent from positive 0.1 percent on 02-01-16).
Froehlich sees three major themes for 2016. "Number one: Volatile financial markets; that's the story of 2016. You better get used to it," he said. His number two themed belief is "We will have extremely erratic growth in the U.S. Economy." Froehlich pointed out that last year we paid $120B less in gas, and most consumers put it in savings. He said we had some quarters of great growth and that others were "bad like emerging markets”. Number three: "We're going to have panic about China. Industrial production has collapsed, no exports, the stock market has collapsed," Froehlich said. It is true that China's service economy has risen to represent a whopping 51 percent of GDP, per recent widely cited economic reports.
Froehlich shocked many by reminding that in China, only a small portion of families' wealth is kept in the stock market. "The stock market doesn't drive consumer confidence like it does in the U.S," he said. He noted that of household net worth in China, less than 20 percent is in the stock market. Froehlich feels bullish that "Wages will go up 9 percent" in China. "You will look for reasons not to invest in 2016, and you will see plenty of them," he said, adding that "When things look the worst, then it's the best time to invest."
Froehlich turned his optimism likewise to the United States. "You are focusing on the irrelevant stuff in the news every day. You are missing the best time to invest," he told the audience. Then, the baseball team owner turned uber-patriotic.
"We are the leader in medical devices," Froehlich assured everyone. "We are the 9th manufacturing economy in the world."... "We make stuff."..."We have a lot of energy."..."We import more stuff than we export," he explained with examples. "We are the world tech leader. One third of all investment in technology is in the U.S."
Froehlich continued with his fervent brown-nosing of America. "Foreign investors love the U.S. They hate our politics, but they love our companies, our stock market, our bonds, backed by the full faith and credit of the U.S. government." "They burn our flag in the morning, and they buy our stocks and bonds in the afternoon." The audience chuckled.
Dr. Bob rattled off more reasons to invest in America. "70 percent of the banks in the world have their reserves in U.S. dollars," he said. "9 of the top 10 global brands in the world are in the U.S," Froehlich explained. "They love our brands."
"We are the most productive economy on the face of the earth," Froehlich waxed rhapsodic. "With less than 4 percent of the world's population, we create 20 percent of the stuff."
Froehlich admitted that this is a "choppy U.S. economy." However, he said, "If you can put the TV on mute and realize that we are the most productive economy in the world," opportunity abounds.
Froehlich predicts 2016 GDP to be at 2.75 percent, the 10-year treasury at 2.4 percent, unemployment at 5 to 5.1 percent, the number of Fed rate hikes to be 3 to 4 and the DOW to end the year at 19,019.
BRIAN WESBURY – THE HIGH-OCTANE ECONOMIST – "OUR GOVERNMENT DID IT!"
"The sugar high of QE (Quantitative Easing)...The Fed gave them (banks) all this money, and they never lent it out...There is no party of free markets left in this country."
Brian Wesbury, the First Trust Advisors Chief Economist, wanted to start out by giving all a highly politicized history lesson. He delivered his analysis of recent economic history in the vein of Bill Maher.
"Trauma is the best word for 2008 and 2009, Wesbury began. "People today have post-traumatic stress disorder." He said facetiously, "There are flocks of black swans ready to bring back 2008." Yes, Wesbury insisted, "If you understand what really happened, you can get rid of your PTSD."
Wesbury called the book "The Big Short", "The Big Lie". He referred to new book release "Hidden in Plain Sight" about the supposed real reason for the credit crisis and subsequent recession. Wesbury explained that in 1992, Congress told Fannie Mae and Freddie Mac that 30 percent of the mortgages they bought had to be from low to moderate income people. "By 2006, this was 54 percent of all loans it bought," he said. "Then by 2008, it was 76 percent of all subprime debt outstanding. Banks only owned 24 percent," he added.
"In reality it was our government who did it," insisted Wesbury. "Of course everyone got involved in packaging it." He called TARP (The Troubled Asset Relief Program) "Hank Paulson's Bazooka" and "$700B that he (Paulson) forced down Wall Street's throat so he could say he saved investors from Wall Street."
Wesbury referenced "the worst part of the financial crisis" when, "Markets in 2008-2009 were down 40 percent, and financial stocks were down 80 percent." He further clarified by stating, "The (worst) thing was mark-to-market accounting," whereby valuation must be marked down to only the bid. "That's what TARP really paid off, he said. He said that early 2009 got rid of mark-to-market accounting and that companies could write off according to cash flow instead. That is when the crisis ended, Wesbury explained.
The First Trust Advisors Economist went on to explain "the sugar high of QE (Quantitative Easing)." He said, "The Fed gave them (banks) all this money, and they never lent it out."
"BTW, Japan has been doing QE since 2001; it is a lie that QE promotes growth," explained Wesbury. He then quoted George Bush - "I had to violate free market principles to save the free market," which he compared to saying "I had to kill that guy to save the 10 Commandments."
Wesbury is skeptical of the Republicans who passed TARP and finds it odd that they are the ones that passed TARP." Wesbury said, "There is no party of free markets left in this country."
The First Trust Advisors Economist, Wesbury, went on to predict 2 percent GDP this year, that the Fed will raise interest rates 3 to 4 times, that the 10-year Treasury bond will finish the year at 3 percent, unemployment will end 2016 between 4.75 and 4.8 percent and the DJI will end 2016 at the 18,500 mark.
TERRY SAVAGE TRIPLE TEAMS HER ECONOMIC TRIO WITH HER POINTED QUESTIONS
"High defaults in the junk bond market (in 2016)...It's an ecosystem, and one of those things missing is credit...we are starting to see a credit ease," - Swonk
"We are growing because tech, of nano tech, fracking, and smart phones, not because of QE and TARP." - Wesbury
"The country is so polarized. We don't elect a king, we elect a President." - Froehlich
As usual, Terry Savage wanted predictions, predictions and more economic predictions from her savvy trio of economic minds. Savage wrapped up by going in for the predictions with convictions, and Diane Swonk set off the intended domino effect with her bold call of "High defaults in the junk bond market" in 2016. Diane Swonk also sounded a swift warning for emerging markets and opined, "Brazil, South America will come back to haunt us." She explained, "Quantitative easing allowed people to go into emerging markets and paper over their problems." Savage translated, "The loans they took out in U.S. dollars and can't pay back."
Froehlich, the eternal optimist said, "Last time it was Greece that was going to end the world." He sarcastically added, "Then it was Cyprus until no one could find it on a map." But, he said, "Look at corporations, job market, savings rates. Corporations are stronger, industries are stronger, corporate earnings are stronger."
Wesbury went straight for the guttural laughs by asserting, "Greece peaked in 50 B.C." Economist Wesbury followed that up with his opinion, "Japan was the second biggest economy in the world in 1989. We were telling our kids to learn Japanese, to read Japanese management books. What a stupid waste of time!"
Whereas, here on the home front in the United States, Wesbury said, "The iPhone 6 is $300.00 with $300M of technology from 1991." He said that it is definitely technology that is driving our economy in the U.S. "It's not a fake recovery," he said, "We are growing because tech, of nano tech, fracking, and smart phones, not because of QE and TARP."
Diane Swonk returned to the importance of credit and wages in determining economic outcome. "It's an ecosystem, and one of those things missing is credit...we are starting to see a credit ease," said Swonk. The former Mesirow Financial chief economist said that we made credit easier when there were stagnant wages and when people could not afford to pay off the credit. Swonk specifically likes "credit card companies, consumer credit, HELOCS" and sees "growth and profits for credit card issuers." She says that she has watched credit for 30 years and specifically warns investors, "Do not short Millennials, they are the largest, most intelligent (group)."
Wesbury said that the United States had record car sales in 2015, and he attributes lower gas prices to helping aid this statistic. "This is the first time ever that we are running a surplus against OPEC," said Wesbury.
"Rubles are 'Russian' in the Middle East," Wesbury played on words. He said that in the U.S., "When we become energy independent, the Middle East will catch on fire."
Wesbury called "Trump tariffs" like "The Smoot-Hawley Tariff Act", a disaster for the economy." The Smoot-Hawley Tariff Act of 1930 was widely credited with expanding the Great Depression. "I would pick Marco Rubio," Wesbury said on January 19th. Perhaps a wise move by Swonk and Froehlich, Wesbury was the only economist to name his candidate at the January 19, 2016 Annual Economic Luncheon in Chicago.
Swonk told Savage, "The extremism out there is bad in terms of The Federal Reserve." Swonk said, "Congress thinks it can do monetary policy better than the Fed when it can't do fiscal policy." A lot of people think that the Fed should be audited and accountable because few understand what it is that The Fed does. Swonk says that the Federal Reserve was tapped last year to fund the highway funding bill still keeps her awake at night.
"The country is so polarized," said Froehlich. "We don't elect a king, we elect a President."
Wesbury said, "Financials are the most undervalued sector." He shared the enlightening statistic, "Banks earn an extra $7B on excess reserves for every 25 bps (basis points) the Fed raises interest rates." The banks do not have to pay more on their savings accounts and checking accounts to customers just because the Fed raises interest rates. Banks can continue to widen the spreads, between the interest rates they earn on reserves and that which they pay customers, tilting the pot toward their own pockets if they so choose.
Swonk finished with her refrain of, "Don't mess with the Millennials," as if a stuck in a groove of vinyl that keeps repeating.
Savage wrapped up another star-studded luncheon long on Millennials, long on optimism for the American consumer and U.S. technology, short on emerging markets, commodities and excessive quantitative easing, and long on optimism that the individual in America is greater and more powerful than the grand sum of America's parts.
Lisa Ditkowsky, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in the article may not develop as predicted and there can be no guarantee that strategies promoted will be successful.