Expect the Bumpy Ride to Continue

January 17, 2012: Thanks to the help of President-Elect Tom Clymer, the Historic Rotary Club of Charleston hosted a presentation by his colleague, Mark Vitner, one of the country’s most respected economic analysts and commentators on the world’s financial systems.

Mr. Vitner has the gift of articulating some of the world’s most complex economic and financial concepts in simple and practical terms. Without burying us in econo-speak jargon, he effectively spotlighted the critical influential factors on the US economy and trade opportunities.

At the outset, he cautioned us with sobering words about the macro-economic picture of Europe and the impact further troubles on that continent could have on us. He also cited the recently released GDP (Gross Domestic Product) figures from China (up 8.9% over last year) saying that we should expect that number to be revised downward (largely due to the suspect speed with which they published those figures). At the same time, he lauded Spain for its leaders’ ability to raise money for debt service, giving it a relatively strong credit position.

Bottom line, however, is that in his view “not one concrete thing has been done to fix the European crisis.” Inevitably, there is more bad news to come by all measures.

He also educated us on how to digest seasonal news of consumer spending trends: for example, while the U.S. experienced a 3.4% increase in consumer spending in Q3-2011, that strength in spending came from savings, not from job or wage increase growth. Also, while overall income was reported to grow approximately 3.4%, inflation outpaced income at 3.7%! And job growth is coming largely from four main sectors: Home healthcare, Retail, Hospitality/Tourism and Temporary Staffing. Keep in mind, of course, that in those sectors, wages are much lower than other private sector jobs, on average just slightly over minimum wage.

Another significant area of concern is the rate of business investment, which is slower than it should be, indicating deeper concern among business leaders that the time still is not optimal to purchase goods and services that can help them advance.

Among his statistical illustrations, Mr. Vitner noted that while housing starts have been slow to flat, “the housing industry will start to show more signs of life.” But, we need to ease credit terms as still he’s seeing only 1 in 3 deals don’t close due to cash (liquidity) or credit issues. This is the combined result of restricted credit and much more conservative appraisals, offsetting otherwise “normal” valuations. “We now have a ‘new normal’” said Mr. Vitner. “We need to absorb the two million plus properties that are now on the books before we see significant signs of stable growth…”

SC – State of Extremes

Narrowing the aperture some, Mr. Vitner focused on South Carolina distilling our economic picture to the extremes of growth in Charleston, Columbia, Greenville with the strangling poverty and challenges in our rural areas between these industry and tourism centers. And while the financial snapshot of recent housing activity in Charleston, for example, is a saw tooth picture, “Charleston is doing well and is not as volatile as the national average.”

Where does this leave us?

Key factors we all need to watch as the globe struggles with an inextricably linked financial system:

1. Asia’s real estate market bubble

2. European debt crisis

3. Credit availability

4. Trade wars and currency devaluations

5. Geopolitical tensions

When asked in the Q&A period about “which stocks or companies are the best bets,” he replied with a flight to safety response: “You want to follow the areas of strength, that means big bluechips who have the depth and resources to weather difficult times and who are well positioned for growth; and look at other low risk opportunities.”

Finally, when asked if elected president what his priorities would be, Mr. Vitner said, “Regulation is a critical issue. It’s not so much the number of regulations and regulators as the zeal of the current regulatory climate that is hampering progress. When businesses are sued and fined, that hampers growth and innovation in other areas. It slows the wheels and pushes capital to the margins. And, instead of retooling the ‘Alternate Minimum Tax,’ I’d argue for an ‘Alternate Maximum Tax. Finally, we have to fix immigration reform to it is rational, facilitating those who have real promise to help the world, and preventing the glut of illegal wage earners who are stealing jobs from our own people.”

We look forward to Mr. Vitner’s return to our club next year, when we hope the economy will have stabilized somewhat albeit with a new Administration possibly at the helm.

Thank you, Mr. Vitner, for your unvarnished and easy-to-follow insights!

Submitted by Mark Danes, Keyway Committee