Rodney Johnson, President of HS Dent, Answers Your Questions

   

Hello to everyone who participated in the You Can't Afford the Luxury of a Negative Thought  teleconference call in March with the President of HS Dent,  Rodney Johnson. Took me a while to post 'cause I came down with a big case of the flu. Just now getting back in the swing and catching up. Thank goodness! Below is the first set of economic questions that you asked me to ask Rodney after the call. I have a few more than came in later which I'll post in a couple of days.There is a motherlode of powerful information here. Let me know what you think, and keep your eyes open for the next You Can't Afford the Luxury of a Negative Thought teleconference call. 

1. What kind of return do essential service bonds tend to pay?

The returns used to be 4-5%, but with the recent turmoil, the interest rates are a little higher, 5-7% depending on location, rating etc.  Remember, these are tax-free, so you divide this interest rate by 1-tax rate, (in the 35% bracket it would be 1-0.35, or .65), to arrive at your taxable equivalent rate. 

2. Why have you adjusted your Dow high forecast down? What was driving your thinking before than now? 

In terms of the recent market action, we adjusted down our expected Dow high for this summer because the market fell further than we had anticipated on this first move down.  As the markets fell last fall and early this year, we thought that the Dow would hold the 1998 lows of approximately 7,400-7,600. When we went lower to the 1996 lows of approximately 6,500, then we adjusted down our rebound forecast accordingly.  We use Elliot Wave analysis to forecast short term moves, which is not 100% accurate for sure, it is just a technical tool.

3. I retired at 65 two years ago. I was rewarded with a loss of over $250K from my retirement portfolio. Is there any hope for seniors like myself to get a decent recovery in the near future?

Yes there is, but don’t put yourself in harm’s way too soon.  At 65, you’ve got another 20 years to go on average.  Remember, we are talking about this down turn lasting for several years, but not two decades!  We would advise keeping yourself as liquid and flexible as possible through the next several years (2012-2013) more focused on streams of income and capital preservation, and then be more aggressive!

4. Talk about current account deficits. Do you see the current level as being a problem? If so, what would you suggest as being the solution?

The US Current Account (what we export minus what we import) has been running at a deficit for many years because of our propensity to consume low-cost imported goods, but it also includes imported oil, which showed an incredible spike in ’07 and ’08.  With the fall of oil and the slowing in spending, the deficit is contracting.  While that sounds good, the current account normally does contract with economic slowdowns.  I believe you will see it continue to fall for the next several years, so it won’t necessitate a “solution” per se.  However, as we work more concertedly on alternative energy, this is one of those areas that could see a very dramatic turnaround, changing the playing field of international capital flows.

5. How are we going to fund social security and how big a problem do you see it as being? When you see this impacting us and how?
   

It’s not as big of a problem as it might seem.  Not because the numbers “work out”, but because Congress will never leave it in its present form.  There will be means testing and a change in the age of eligibility.  The much, MUCH bigger problems are Medicare, for which there is no fix, and state and local pensions.  On Medicare, we will ration availability of treatments, much like other systems (Canada, UK, etc.), which will lead to bigger supplemental insurance for those that can afford it.  On state and local pensions, they will have to deal with greatly increased pension contributions to make up for all of the recent losses and previous underfunding.  Where will they get the money?  From you of course, in taxes.

 

Comments

[Gayle Smith]

Thanks Alex and Rodney for a burst of reality laced with positive thinking about how to approach an ever changing financial environment! Your advice was encouraging and timely... Gayle