Columnists Opinion

ON THE MONEY: Explaining how economy works isn’t always easy

By John Grace

Contributing Columnist

When visiting with family, my 11-year-old grandniece out of nowhere hit me with this question.

“Uncle John, explain to me exactly how the economy works in one sentence.”

I found myself smiling as I wondered which adult put her up to that question. But she was looking at me so intently I couldn’t get distracted surveying the room to identify who the guilty parties might me. The source didn’t matter because the question was right up my alley.

The good news is you don’t need to be a savant or above average in math skills because I have my summary here for you. First, let me explain.

In 1999, I became master certified and a charter member with Dent Research where I learned reading the economic tea leaves may not be such a random walk on Wall Street. We are all unique, but thanks to the U.S. Census Bureau we have access to all kinds of data that is unbelievably useful in being able to discern when things come into and go out of favor.

The first hurdle to overcome is to identify the source of the data and the purpose of the firm making an argument. When financial advisors, for example, represent a stock brokerage company that happens to underwrite stocks, it is well within reason for us to encourage you to buy stocks.

The arrangement may be perfect for the broker and the firm, but not necessarily always ideal for you the investor. By paying for independent, objective research with no dogma or product to sell it is reasonable to me that the data that is studied comes before an opinion is formed.

Unfortunately for many situations, it is the opinion that drives the conclusion. Then one must defend their opinion. Now we have a perfect environment for the arguments to begin, followed by shouting and perhaps fighting or the silent treatment.

Before I summarize what we have been studying over the past 18 years, let me show you what got my attention. I am always interested in the work that is based on the study of and changes in demographic trends and their impact on our economy and the markets.

With your tax dollars at work at the U.S. Census Bureau, Dent Research, for example, looks for predictable consumer spending patterns, combined with demographic trends to help forecast the economy in years and decades ahead.

Just as securities brokers assert now is a great time to buy stocks, realtors opine that now is always a great time to buy more residential real estate. Very logical arguments can often be motivated by profit motives.

One example we have discussed here is the consequence of studying the material of a research company. The board of directors at Jays Foods bought the argument that the firm had a great product — potato chips — with great sales history so it couldn’t be a better time to expand into more space, hire more people, take on more debt and buy more transportation equipment to bask in the sunlight of greater sales in the future.

Unfortunately, the practice of consuming potato chips peaks at age 14. Not one well educated, smart person in management or on the board went to the U.S. Census Bureau looking for data to show how many 14 year olds were in the pipe line. Now you know why the family owned firm founded in 1927 in Chicago filed for bankruptcy in 2007 while the remaining assets of Jay’s were acquired by Snyder-Lance Inc.

If such a simple study had been completed so that the decision makers could tell the number of 14 year olds was not growing in number, but in fact was in a plateau, which would clearly be followed by a decline, the firm may have hunkered down to stay in business.

We are unique, individuals who for the most part do exactly the same thing at the same time, by age. Focus on the average consumer, not you or your friends who may be exceptional:

At 14, Americans on average consume the most potato chips. At 21, they enter the work force (later if they went to college). At 31, they become first-time home buyers. At 42, they make the biggest home  of their life.

At 63, is the average age of retirement and between 86 and 88 is the average age of death for men and women.

Politicians are notorious for telling us exactly what we want to hear. Who doesn’t want to see the economy grow above 2 percent? But don’t just get high on the promissory note.

Ronald Reagan said it best. “Trust, but verify.” Sometimes the truth is sobering. This is certain, Father Time and Mother Nature remain the undisputed trump cards.

John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.