In early September, I dropped by for my monthly haircut and coffee with my 90-year-old barber, Shirley, who I first introduced in this column two months ago. As usual, he was full of wisdom and wit. While he searched my bald head for new growth, we covered a number of topics, including his two children, Cajun food and the positive impact of the fiber initiative on our community’s growth.

Near the end of our visit, Shirley’s son Steve stopped by the shop to tell his Dad hello and to talk about his recent trip to Italy. Soon, like most residents of Acadiana, we allowed our conversation to drift over into food, politics and our national economy.

I have always been a staunch Republican, while Steve is an independent. A lifelong Democrat, Shirley has always been conscious of our government’s role in meeting the needs of the less fortunate in our society. However, in his personal life Shirley has always been both fiscally and socially conservative. Shirley was married to the same woman for over 60 years, and he has been careful to always live well within his means. Like many of his generation, Shirley has lived in the same home for the last 55 years. He relies on the wisdom of his father, Leonce, who taught him, “You can’t dance faster than the music.” Having lived through the Great Depression, Shirley avoids the use of “plastic,” believing it is best to buy things only after you can afford to pay for them in full. He has never purchased a latte from Starbucks; for a fraction of the cost, he brews Mello Joy dark roast coffee at home in a drip pot he has owned for many years.

Near the end of our visit, Shirley confided that in recent years he has become very concerned about the “impasse” (gridlock and deep divisions) within Congress. He is also worried about the recent expansion of credit by individuals, businesses and our federal government. He is worried about our government’s ability to pay for its ambitious agenda, without loading future generations with debt. He looked at me inquisitively and asked, “Dave, what do you think, does America owe too much money? Are Medicare and Social Security benefit payments secure?” Both Steve and I identified with Shirley’s concerns.

Unfortunately, many Americans began to feel the impact of the situation described by Shirley at the end of 2007. Even longer before the 2008 turmoil began, research, books and articles hinted at possible negative trends developing within the U.S. economy. You may recall a number of news clips and articles that criticized President Obama for carrying Fareed Zakaria’s book, The Post-American World on a flight shortly after the last presidential election. The book, which paints a very positive long-term portrait of America’s future, outlines a number of growing problems that many believe could have an increasingly negative impact on our economy over the next few years. According to Zakaria, “As it enters the 21st century, the United States is not a fundamentally weak economy or a decadent society. But it has developed highly dysfunctional politics.” He believes gridlock and special interests will make it very difficult for us to make progress in solving major problems like health care, Social Security and tax reform. “On every dimension other than military power- industrial, financial, social, cultural- the distribution of power is shifting, moving away from U.S. dominance.” Many believe that it is easy to find substantial evidence of these trends discussed in the media every day.

The last two years have been a humbling experience for many investors. As a matter of fact, the combined market volatility experienced during 2001 and 2002, and again in 2008, has wiped out virtually all of the gains of the S&P 500 over the previous 10 years. The performance of U.S. equities during 2008 and early 2009 was one of the worst on record since the Great Depression; 2008 has been called a “black swan,” an occurrence that is totally unexpected — something that is not supposed to happen.

Some economists forecast even more volatility over the next five to 10 years and recommend a shift in investment strategies in order to protect their clients’ portfolios. It is felt that traditional “bottom up” investment analysis may no longer be enough. So, many investors are left wondering what they can do to protect and grow their nest eggs during the difficult period that may lie ahead.

Mohamed El-Erian, co-CEO/co-CIO of PIMCO, one of the largest investment management companies in the world, has served as CEO of Harvard Management Company. He has been featured by Bloomberg, Forbes, Financial Times, CNBC, The New York Times and The Wall Street Journal. In his book, When Markets Collide, El-Erian makes a number of compelling points. He outlines three factors that he believes already have, and will continue to, result in deep changes to the drivers of key global economic and financial relationships.

The first is a fundamental realignment of global economic power and influence. There has been a gradual hand-off from the developed economies to a set of countries that previously had little, if any, systemic influence. “The second is the pronounced accumulation of financial wealth by a set of countries that includes some that were previously more used to being debtors and borrowers than creditors and investors,” El-Erian writes. “The third is the proliferation of new financial instruments that have deeply altered the barriers of entry to many markets. These instruments were largely responsible for the financial meltdown experienced by our financial industry last year; Warren Buffett calls them ‘time bombs’ akin to ‘weapons of financial mass destruction.’”

The result of all of these developments is that conventional investment diversification, at least in the short-term, no longer delivers the same amount of comfort it once did.

El-Erian believes the magnitude of the U.S. deficit has created a clear sense of disequilibrium. This situation has, to a large extent, been hidden by the short-term willingness of developing countries to fund it cheaply, allowing emerging countries to become creditors of the U.S. If these countries decide to stop this funding, the results could be devastating. These previously unthinkable developments are causing a “sea change,” a major redefining of the global financial system.

To make matters worse, while all of this has been occurring, many feel that our leaders have not taken the necessary steps to make meaningful progress in solving the growing deficits in our Social Security and Medicare programs. These are looming time bombs, that, when combined with our growing debt, could cause inflationary pressures and further weaken the dollar as we climb out of the current recession.

According to El-Erian, Harvard Management Company (one of the largest and most successfully managed endowments in America) has revised its portfolio to address this global shift. In 1980 U.S. equities represented 100 percent of the allocation to public equities in its portfolio. The share fell to 69 percent in 1981 and to 48 percent in 2000. By 2008, the share was 35 percent. As a portion of the total holdings of Harvard’s endowment, the importance of U.S. public equities fell from 65 percent in 1980 to 12 percent in 2008.

In an attempt to address all of the concerns outlined above, some advisers have been adding creative, defensive strategies to their clients’ portfolios. There is a growing trend to recommend a tactical element to each portfolio in order to address the increased volatility in our markets.

Like Harvard Management Company, a growing number of portfolio managers also recommend an increase in international fixed income and equity allocations, along with commodities, in order to react to the escalating globalization trend in our economy, while providing protection against the possible further devaluation of the dollar. It is not uncommon to see sophisticated investors increasing their investment exposure to the emerging markets. 

Many financial analysts are confident that recent market gains provide strong evidence that our economy and our markets are in the process of torpid rebound. This may prove to be true, but there are strong indications that we may be entering an era where we will have to accept the growing reality that the U.S. can continue to lead, but will no longer dominate the changing global economy. In either case, a dash of global diversification may make sense, as our leaders wrestle with the realities of financing expensive entitlements, our growing debt, health care and global competition.

Even though he is 90 years old, Shirley is worried about the future of the U.S. economy. In spite of his worries, he buys American-made products, and shuns overseas investments. When it comes to managing his own money, Shirley likes to keep things simple. He has decided that the best way for him to deal with market volatility is to keep all of his savings insured by the FDIC. I know Shirley too well to argue with him, even though I know his strategy is not appropriate for most of us.



Dave Romagosa is a registered principal with, and offers securities through, LPL Financial, a member of FINRA and SPIC. He is president of Cornerstone Financial Group and has been a financial adviser in Lafayette since 1969. He has a master’s degree in financial services and holds the Certified Financial Planner designation. He is a member of the adjunct faculty at UL Lafayette, where he teaches a course in finance.

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