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STATE EDCs IN EVERY REGION OF THE U.S. LOOK BEYOND THE ECONOMIC HIT OF COVID-19

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STATE EDCs IN EVERY REGION OF THE U.S. LOOK BEYOND THE ECONOMIC HIT OF COVID-19

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At the end of 2019, there was a quiet sense of economic optimism in the air. 

The American economy had expanded by a greater than expected 2.1 percent, bringing overall growth for the year to a respectable (albeit unspectacular) 2.3 percent. While it may have been the lowest GDP expansion seen during the Trump administration, the foundation had been laid for what conceivably could have been a successful election year in 2020.  

This was, of course, before the coronavirus pandemic arrived. Fast-forward into 2021, and the landscape looks entirely different to what was being forecasted by analysts at the back end of 2019. 

While some economists warned that a recession was overdue following more than a decade of successive growth years since the financial crash of 2007-’09, nobody could have foreseen what has been the biggest blow to the U.S. economy since the Great Depression of the 1930s. 

And the figures, whichever way you analyze them, do make for depressing reading. 

Around the time of writing, nearly 500,000 people had died either with or because of COVID-19, with slightly more than 28 million cases recorded, making the United States one of—if not the most—devasted countries to be hit by the virus. 

It has been a public health crisis of astounding scale, one which is, thankfully, being addressed with a series of vaccinations that is a feat of human ingenuity and endeavor given how rapidly they have been developed, tested and approved by medical authorities. 

But while there is light at the end of the tunnel in this regard, attention will soon turn more squarely to the monumental economic fallout that the events of 2020 have created. 

As nations across the world responded and took steps to protect their populations, a trail of financial destruction inevitably followed. Economies have ground to a halt as localized and nationwide lockdowns have greatly limited the means by which the world’s workforce can move and keep the economic wheels turning. Certainty, the one thing businesses and investors crave, has been diminished. 

The exact amount of economic damage caused by COVID-19 is mightily difficult to predict accurately, but the headline figures which have come out of various analytical houses during the course of last year are stark. 

In July 2020, for example, the World Economic Forum (WEF) reported a GDP contraction at an annualized rate of 32.9 percent, the deepest decline since records began just after the end of World War II. The WEF also confirmed that more than 30 million Americans were receiving unemployment support at the time. 

More recently, in December 2020, the University of Southern California published a study that calculated possible losses in real GDP of between $3.2 trillion and $4.8 trillion over the course of just two years. This depends on a range of variables, including the extent and duration of business closures, how quickly areas open up, infection rates and fatalities, and consumer appetite to spend.  

Much of the United States’ overall recovery will depend on the support provided and actions taken from state to state, areas which have adopted drastically different levels of measures in response to the public health threat. 

From California to Florida, interventions have varied markedly, but there is no denying that every corner of the country is facing a battle to emerge from the other side of the economic troubles that lie ahead. 

So, against a nationwide backdrop of unwanted broken records, how have responses to these challenges been coordinated at a localized level? We start in the Upper Midwest.

Michigan 

Josh Hundt, the chief Business Development officer and executive vice president with the Michigan Economic Development Corporation (MEDC), witnessed first-hand the devastating impact caused by the coronavirus. 

“It comes as no surprise that as the global pandemic spread across the country last spring, industries and businesses felt an immediate impact to production and revenues streams,” Hundt says. “In Michigan, one of the state’s hardest hit in the early days of COVID-19, the manufacturing of PPE and life sciences equipment became essential services seemingly overnight.

“In the face of this adversity, Michigan’s Arsenal of Innovation was set in motion with manufacturers retooling their production lines to support the frontlines and create new revenue streams in uncertain economic times.”

MEDC responded in kind by immediately launching the COVID-19 Emergency Access and Retooling Grants through its Pure Michigan Business Connect program. In total, 12 businesses received retooling grants and produced 2.5 million units of PPE in a matter of months, generating $27 million in new sales, vital revenue to support their workforces and viability of operations. 

“As our manufacturers pivoted, small businesses all across the state faced unprecedented challenges as a result of the necessary steps to slow the spread of the virus, and overall changes in consumer behavior in the pandemic,” Hundt continues. “Again, the MEDC stepped in to help provide more than $240 million in relief over the past year to help our small businesses weather the economic storm and keep their workers employed.”

In total, 23 relief programs have provided support to more than 24,400 companies in Michigan and helped to retain 200,000 jobs. Hundt and the MEDC were also aware of the hardships endured by minority-owned businesses, issuing more than 9,000 awards to minority-owned, women-owned or veteran-owned business statewide. 

“In all corners of the state and across all industries, Michiganders have joined together to find innovative ways to use every resource available to fight this virus,” he says. “As we begin to look toward long-term recovery efforts, the MEDC and the state of Michigan remain committed to ensuring Michigan businesses of all kinds have the resources and opportunities to survive, succeed and grow here.”

New Mexico 

The Southwest state of New Mexico recorded a rate of 171 COVID-19 fatalities per 100,000 people as of Feb. 19. 

New Mexico has adopted a county-by-county, three-level restriction system (red, yellow and green), which details numerous measures surrounding retail, food and drink establishments, gatherings and more. Brought in at the start of December, the tiered approach is designed to enable maximum flexibility in a bid to restart New Mexico’s economy.

Impetus is needed if August 2020 figures are anything to go by. At that time, more than 97,000 residents were in receipt of unemployment benefits, this after more than 250,000 new benefit claims were made in the five prior months.

Around 30 companies in the state had declared bankruptcy, with four in 10 restaurants temporarily closed and 3 percent closed permanently. Meanwhile, consumer spending had fallen year-on-year by 12 percent. 

However, the state Economic Development Department’s (EDD) economic diversity and job expansion drive has done its best to support businesses throughout the worst of the pandemic. 

There are two flagship initiatives being pushed. First is the Job Training Incentive Program (JTIP), designed to assist businesses as they create jobs for new workers and advance skills of existing employees. In 2020, JTIP pledged training reimbursements to 75 businesses across the state in support of 2,380 jobs, around 30 percent being targeted in rural areas. 

The second major scheme is the Local Economic Development Act, known as the LEDA job-creators fund, which made strategic investments in 18 companies that will create 2,500 new jobs. The beneficiary companies have committed to invest $761 million in New Mexico over the next decade, $150 million of which is being spent on staff wages. 

The EDD has also been working to keep the public informed about existing financial assistance programs, publishing a weekly newsletter that lists economic assistance resources for communities and businesses, and hosting more than 30 webinars since the start of the pandemic in March.

Oregon 

A particular pain point in this Pacific Northwest state has been the disproportionate impact COVID-19 has had on travel. Home to a tourism industry that boomed in decade leading up to 2020, Oregon saw travel-related spending increase by 4.2 percent to some $12.3 billion in 2018, activity which provided employment to more than 115,000 Oregonians.

COVID-19, unsurprisingly, has hit hard. While Oregon avoided the worst of the virus when it first arrived in early 2020 in America (and, more specifically, neighboring Washington), deaths have passed the 2,000 mark during the winter period. 

As a result, authorities have issued statewide guidance around social distancing, mask wearing and how to undertake a range of activities safely. Alongside this is a four-grade restriction system based on the prevalence of the virus, the highest risk areas subject to the toughest measures, which include closure of indoor entertainment venues and exercise centers. 

Tourism and leisure activity are thus enormously reduced. Quarantines, travel directives, event postponements and restrictions placed on venues have all created hardships for the sector, with passenger numbers passing through Portland International Airport still well under 50 percent of pre-COVID levels.

The wider economic impact has been profound. In its Economic and Revenue Forecast published in September, the Oregon Office of Economic Analysis said the state’s economy remains “in a Great Recession-sized hole,” although not as a big a hole as feared previously. For instance, expectations are that the labor market will return to a healthy state by mid-2023.

In response, several economic associations have come together and pooled resources to help companies in all sectors get back on their feet. From business reopening tools and occupational health and safety advice to free COVID-19 safety training and social media drives, many activities are taking place in line with the statewide mission to vaccinate the population and restore public health. 

Early on in the pandemic, the Oregon Economic Development Association (OEDA) released a series of economic development priorities for COVID economic recovery, a framework that has informed its ongoing response. It advocates a range of measures, including flexibility for local non-discretionary funds to target those that need support the most and protection of existing state development resources such as the Strategic Reserve Fund and Special Public Work Funds. 

The OEDA also supports moves to ease tax burdens on small businesses through loans and grants, as well as the continuation of incentive programs to encourage investment into the state. 

“Undoubtedly, more communities will experience significant drops in local wages and employment opportunities,” states the OEDA in its plan for recovery. “Oregon needs to leverage our existing programs to bring sustainable jobs to disadvantaged communities and keep capital flowing to employers looking to invest. Allowances should be made for companies that may be seeing temporary employment reductions related to the pandemic which jeopardize an existing program qualification.”

The OEDA also makes several process-based recommendations, which stress the need to engage a wide range of stakeholders, ensure fair distribution of federal funds, and determine the needs of local employers. 

New York 

New York State experienced more COVID-related deaths (46,436 as of Feb. 19, 2020) than any other U.S. state except California (48,259 as of the same date). And the economic crisis that currently faces New York City because of the region’s rapid virus transmission is similarly shocking.

In total, the pandemic cost the Big Apple 570,000 jobs in 2020. Its performing arts, retail and hospitalities that would usually have thrived have been some of the hardest hit, with around 1,000 store locations shutting last year.

Such action has resulted in a surge of joblessness, particularly among young people, with 19 percent of all city workers under the age of 25 having lost their jobs by summer 2020. Fast forward to January 2021 and total unemployment stood at 12 percent–a figure that would have been even greater had 240,000 New Yorkers not dropped out of the workforce altogether.

A lack of tourism, dwindling commuter numbers and evacuating residents all put further pressure on a struggling economy. Yet, the New York City Economic Development Corporation (NYCEDC) has been taking various actions to support the individuals and small businesses bearing the brunt of the pandemic-induced recession.

The Queens Small Business Grant Program is one such endeavor. Signed on Jan. 19, 2021, it will provide $15 million in grants to small businesses in the borough, each eligible of receiving up to $20,000.

“Small businesses are the backbone of our communities and their success is key to the city’s long-term economic recovery,” said James Patchett, president and CEO of the NYCEDC.

“We’re thrilled the fund will provide much-needed relief to Queens businesses, particularly to those in the neighborhoods and populations hardest hit by COVID-19.”

The NYCEDC also launched the NYC Small Business Resource Network, a one-stop shop built to accelerate the recovery of small businesses and strengthen the city’s economy. Here, $2.8 million in grants—funded by the Peterson Foundation—are available, with most of these set to go to the minority-, women- and immigrant-owned businesses that have been disproportionately affected.

Approximately 1.3 million people are employed by the city’s 236,000 small businesses, a figure that truly demonstrates their importance to its economic success.

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Investing During a Financial Crisis

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COVID-19 has had an impact on everything from our health to the way we shop and even global markets. Few countries have escaped the virus, leading to a huge economic crisis.

While it might not seem like the best time to invest, now is actually a great opportunity for investors. So, what should you know about investing during a financial crisis?

Why could now be a great time to invest?

There are a lot of potential benefits of investing during an economic crisis. As the global markets have been hit, you’ll find stocks and shares are cheaper now than ever before. This gives you the opportunity to invest in stocks that would have otherwise been unaffordable before the crisis.

Most people are getting out of their investments due to fear and panic. This leaves the markets wide open for new investors. It is said that the worst thing you can do during a financial crisis is nothing. So, if you’re willing to take the risk, now could be the perfect time to invest.

High risks, high rewards

While there are benefits of investing during a crisis, the high risks can’t be ignored. Not all markets will recover, meaning there is a big chance you could lose what money you do invest.

Of course, the higher risks mean the rewards are also higher. During a financial crisis, you can expect investments to be riskier but much more lucrative if they pay off.

A great way to minimize the risk is to use the services of financial advisers. They will be able to help you determine which investments pose a lesser risk.

Things to avoid when investing during a crisis

If you do decide to invest, there are a few things you’ll want to avoid. For example, if you don’t have any savings to fall back on, investing is probably a bad idea.

You’ll also want to avoid touching your portfolio for at least seven years. So, if you’re looking to touch your investments soon, you’re not going to find it profitable to invest during a crisis. Also, ensure you’re choosing less risky stocks where you can. Some stocks are definitely considered riskier than others, particularly in sectors that are struggling to survive.

Overall, investing during times of financial crisis can provide great opportunities for businesses. However, it can also be extremely risky. It’s important to understand your options and seek professional advice if you don’t want to lose further money during an economic downturn.

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The Bear is Back: A Global Pandemic

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The U.S. stock market fell into a bear market on March 12, 2020, ending the bull market that began in 2009. The bull market had begun on March 9, 2009, and peaked on February 19, 2020. The S&P 500 rose 400% between 2009 and 2020, the Dow Jones Industrials rose 351% between 2009 and 2020 and the NASDAQ Composite rose 674% between 2009 and 2020. However, since February 19, 2020, we have seen dramatic declines in all three.

Figure 1. S&P 500, 2009 to 2020

The GFD US-100 Index provides coverage beginning in 1792. By our calculation, there have been twenty-four bull and bear markets since 1792 with four occurring in the 1800s, seventeen in the 1900s, and three in the 2000s. The worst bear market was in 1929-1932, led by an 89% decline in the Dow Jones Industrials. Two prior bear markets in this century both had declines of 50% in 2000-2002 and 2007-2009. By comparison, previous bear markets, such as those occurring in 1987 and 1990, only lasted a few months before a bounce-back.

What is interesting about this current bear is how quickly and how sharply it hit markets throughout the world in response to the spread of the Coronavirus. This was a quick, simultaneous financial pandemic in every nation of the world. In many countries, the 2020 bear market is simply a continuation of the bear market that began in 2018.

The extent of the bear market in 22 countries and for global indices is provided in Table 1 which uses data from the GFDatabase. The table shows the date of the market top, the value the index hit on that date, the change from the previous market low, the current value of the market, and how much each market has fallen since the top in 2018 or 2020. The only major market in the world which has not fallen into a bear market this year is the Chinese market, the country where the coronavirus originated. However, the Chinese market had already been in a state of decline since 2015.

Figure 2. Shanghai Stock Exchange “A” Shares Index, 2010 to 2020

So far, global markets have fallen by around 30-40%. The question is, how much more are the markets likely to fall?  Will this be a short-lived bear market as occurred in 1987 and 1990 or a more extended bear market as occurred in 2000-2002 and 2007-2009?

Figure 3. United States 10-year Bond Yield, 2010 to 2020

It should be noted that fixed-income markets have already hit their bottom in the United States. This occurred on March 9 when the 10-year bond fell below 0.5% as we had previously predicted in the blog “230 Years of Data Show Rates Will Soon Hit 0.50%.” Yields have slightly risen since then. Moreover, the Shanghai Index bottomed out on February 3, 2020, when the stock market reopened after the Chinese New Year and has not participated in the worldwide sell-off. Both of these indicate that this bear market will not continue for an extended period of time. We will update Table 1 on a regular basis so our readers can follow the changes in this COVID bear market.

Table 1.  COVID Bear Market Statistics for 22 Countries and 4 Regions

 

Country

Index

Market Top

Value

Change

Market  Low

Value

Change
Asia
Australia All-Ordinaries 2/20/2020 7255.2 133.16 3/23/2020 4564.1 -37.09
China Shanghai A Shares 6/12/2015 5410.86 165.15 12/27/2018 2600.05 -51.95
Hong Kong Hang Seng 1/26/2018 33154.12 80.98 3/23/2020 21696.13 -32.76
India BSE Sensex 1/14/2020 41952.63 82.79 3/23/2020 25981.24 -38.07
Japan TOPIX 1/23/2018 1911.31 59.77 3/16/2020 1236.34 -35.31
Singapore FTSE ST All-Share 1/24/2018 877.87 40.38 3/23/2020 540.6 -38.42
South Korea Korea SE Price Index 1/29/2018 2598.19 57.21 3/19/2020 1457.64 -43.90
Taiwan Taiwan Weighted 1/14/2020 12179.81 56.41 3/19/2020 8681.34 -28.72
Europe and Africa
Belgium All-Share 4/13/2015 13859.94 104.31 3/18/2020 7202.21 -48.04
France CAC All-Tradable 2/12/2020 4732.14 56.27 3/18/2020 2888.89 -38.95
Germany CDAX Composite 1/23/2018 625.19 50.07 3/18/2020 363.83 -41.80
Italy FTSE Italia All-Share 2/19/2020 27675.06 39.43 3/12/2020 16286.37 -41.15
Netherlands All-Share Index 2/12/2020 904.31 54.15 3/18/2020 574.88 -36.43
Norway OBX Price 9/25/2018 523.06 70.44 3/16/2020 329.67 -36.92
South Africa FTSE All-Share 1/25/2018 61684.8 246.26 3/19/2020 37963 -38.46
Spain Madrid General 4/13/2015 1203.82 99.78 3/16/2020 608.26 -49.47
Sweden OMX All-Share Price 2/19/2020 732.67 68.35 3/23/2020 478.95 -34.63
Switzerland SPI Price Index 2/19/2020 731.04 140.71 3/16/2020 548.52 -24.97
United Kingdom FTSE-100 5/22/2018 7534.4 99.27 3/23/2020 4993.89 -33.72
Americas
Brazil Bovespa 1/23/2020 119528 217.51 3/23/2020 63451.55 -46.91
Canada TSE-300 2/20/2020 17944.1 51.52 3/23/2020 11228.49 -37.43
Mexico Mexico IPC 7/25/2017 51713.38 206.16 3/23/2020 32936.6 -36.31
United States DJIA 2/12/2020 29551.42 351.37 3/23/2020 18576.04 -37.14
United States S&P 500 2/19/2020 3386.15 400.52 3/23/2020 2236.7 -33.95
United States NASDAQ 2/19/2020 9817.18 58.52 3/23/2020 6860.67 -30.12
Global
Emerging Markets MSCI Emerging Free 1/29/2018 1278.53 85.69 3/23/2020 758.204 -40.7
Europe MSCI Europe 1/25/2018 1926.57 47.52 3/23/2020 1152.698 -40.16
World MSCI World 2/12/2020 2434.95 35.63 3/23/2020 1602.105 -34.2
World MSCI EAFE 1/25/2018 2186.65 46.52 3/23/2020 1354.3 -38.07

 

___________________________________________________________

Dr. Bryan Taylor is President and Chief Economist for Global Financial Data. He received his Ph.D. from Claremont Graduate University in Economics writing about the economics of the arts. He has taught both economics and finance at numerous universities in southern California and in Switzerland. He began putting together the Global Financial Database in 1990, collecting and transcribing financial and economic data from historical archives around the world. Dr. Taylor has published numerous articles and blogs based upon the Global Financial Database, the US Stocks and the GFD Indices. Dr. Taylor’s research has uncovered previously unknown aspects of financial history. He has written two books on financial history.

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U.S. DOLLAR PROVIDES THE MUSCLE FOR ECONOMIC SANCTIONS

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Money Talks

From drug kingpins to terrorists and from human traffickers to money launderers, the United States has nearly 8,000 economic sanctions in place, and the list is growing. Particularly in the post-9/11 era, the U.S. government has leveraged the global preeminence of the U.S. dollar to turn off spigots of funding for sinister activities and unwanted behaviors by state actors.

Among additional sanctions against Iran, Russia and Venezuela, The Trump administration earlier this month tightened travel restrictions to Cuba stating, “Cuba continues to play a destabilizing role in the Western Hemisphere…these actions will help to keep U.S. dollars out of the hands of Cuban military, intelligence, and security services.”

The muscle behind an array of U.S. financial sanctions derives from the reach and power of the U.S. dollar as the “lead currency” in the global economy. This status makes it possible to not only prevent U.S. individuals and companies from doing business directly with a sanctioned entity, it makes it risky to do business with third-country companies that do business with sanctioned entities. Acutely aware of their vulnerability, non-U.S. companies also frequently take steps to minimize their exposure to possible violations of U.S. sanctions lest they jeopardize their access to the U.S. financial system.

The U.S. Dollar Reigns

How strong is the dollar’s foothold in the global economy? The U.S. dollar was used in 88 percent of global foreign exchange transactions in 2016. For comparison, the euro was the medium of exchange in 31 percent of transactions in 2016, the Japanese yen in 22 percent, the British pound in 13 percent, and China’s renminbi in four percent (as two currencies may be involved in exchange, these numbers will add up to more than 100 percent).

Companies selling their goods and services outside the United States often accept dollars as payment because they can easily turn around and use dollars to pay for imported products and inputs. Or, they can hold onto their dollar revenues with confidence they are storing value.

Why is the Dollar Preferred?

The dollar is the world’s lead currency because it meets three key conditions.

First, the dollar is fully tradable and exchanged at relatively low costs. The U.S. government does not restrict the purchase or sale of the dollar.

Second, the dollar holds its value against other currencies. The United States is still considered a stable and open market economy, current tariff vagaries notwithstanding. At the end of last year, just under 62 percent of all central bank reserves were held in U.S. dollars.

Third, the United States is still the largest economy in the world, equivalent to 24 percent of global GDP. Below is a snapshot from the International Monetary Fund comparing the world’s largest economies. We have a large money supply, providing liquidity for the global economy.

Into the Arms of Another

Some have argued bad actors like North Korea will find always find ways to evade U.S. sanctions. Buyers of Iranian oil will seek alternative currencies for their transactions, both diluting the effect of sanctions and hastening reduced dependence on the dollar.

Several European countries developed a clearinghouse to enable companies to avoid the U.S. financial system in transactions involving Iran as part of their effort to salvage the nuclear pact the Trump administration pulled out of last year before restoring a slew of sanctions against Iran.

Despite initial discussions about a wider scope, Europe’s Instrument in Support of Trade Exchanges (INSTEX) will, at least for now, only facilitate trade in humanitarian goods such as pharmaceuticals, medical devices and agri-food products, all of which are already permissible under U.S. sanctions. Despite European government grumbling about being beholden to the U.S. dollar, there appeared to be little appetite on the part of European companies and commercial banks to risk U.S. penalties by using such a clearinghouse for other types of transactions.

Will the Euro or Renminbi Overtake the Dollar?

Not anytime soon.

The euro covers a large economic zone featuring sophisticated financial market institutions, but the politics surrounding continued support by members of the euro zone and unresolved debt discussions with southern states (we were talking about Grexit long before Brexit) are holding the euro back in overtaking the U.S. dollar.

Although the renminbi’s share in global transactions is still low, it should be noted that usage and overseas holdings of China’s currency by individuals, businesses and central banks has expanded in the last decade, enabling China to break through in 2016 to join the top five most-used currencies. The Chinese government is making a big push to internationalize its currency through global infrastructure investment funds associated with its Belt and Road initiative and through renminbi-denominated commodities futures contracts, among other initiatives.

China’s currency, however, is not freely convertible, its performance has been volatile, and the degree of state and private debt in China’s financial system remains murky.

The Dollar’s Achilles Heel

For the time being, most experts believe there’s no real threat to the U.S. dollar’s dominance. Europe would need to address skepticism regarding the monetary union’s future, China would need to implement significant reforms to its financial sector, and much-hyped cryptocurrencies still have long way to go to challenge the conventional system of global payments.

These are all big “ifs”. Instead, the dollar’s Achilles’ heel is of our own making. One of the biggest risks to the dollar’s long-term value is continued fiscal imbalances in the United States and the sustainability of our debt burden.

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. She is a nonresident Senior Fellow at the Chicago Council on Global Affairs and an adjunct fellow with CSIS. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught International Trade for the last fourteen years as an Adjunct Associate Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.

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JONES ACT REPEAL WOULD BOOST U.S. ECONOMY: STUDY

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A recent study by the Organization for Economic Cooperation and Development (OECD) found that repeal of the Jones Act would produce economic gains for the U.S. of up to $64 billion.

The Jones Act mandates that all cargo shipped between U.S. ports be transported on ships built in the U.S. and bearing the U.S. flag, as well as owned and crewed by Americans. But by eliminating foreign competition, the law significantly increases the cost of shipping between American ports, argues LIBRE Initiative President Daniel Garza.

“First signed into law nearly a century ago, the Jones Act raises costs for every American consumer–particularly those in areas that are relatively isolated and which depend heavily on shipborne commerce,” Garza says. “It also hurts the competitiveness of exports, undermining job growth. This study by the OECD shows that not only will repealing this outdated law boost our economy, it will even increase the competitiveness and economic output of the shipbuilding sector–the very industry the law is supposed to be helping.”

Reform would introduce competition that would force a reduction in the cost of U.S.-built ships, potentially leading to an increase in demand of 70 percent–expanding the size of the shipbuilding sector from $841 million to $1.43 billion, states the OECD report. “It’s far past time for Congress to repeal this outdated law,” Garza says. “Doing so will help American consumers and producers. What are we waiting for?”

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If The Bull Market Turns Bear, Is Your Portfolio On The Right Cycle?

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The current bull market – at 10 years and counting – is the longest in the nation’s history. But instead of celebrating that longevity, plenty of people are worried about how much longer the good times can last, and whether we could be headed for a recession.

What does that mean for investors fretting that the next bear market will devastate their investment portfolios?

For one thing, those investors might want to ask themselves whether the stocks they are invested in are cyclical or non-cyclical, says Dr. Joseph Belmonte, an investment strategist and author of Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection (www.buffettandbeyond.com).

The answer could be critical, he says, because cyclical stocks perform well when the economy is humming along, but struggle when things turn sour. That’s largely because cyclical stocks are companies that provide something that’s not essential to daily living or that consumers can at least postpone purchasing.  

“Sometimes a cyclical stock will begin to decline nine months before the market begins to weaken because of a pending recession,” Dr. Belmonte says.

Examples are stocks for companies such as car manufacturers, higher-end retail stores, and mortgage companies. Specific examples are Ford, General Motors, Caterpillar and Macy’s.

Non-cyclical stocks, on the other hand, are the stores or companies people flock to for bargains when times grow tough. Some of these stocks are Dollar Tree, Costco and Ross Stores.

But for investors, just knowing the answer to the cyclical, non-cyclical question is not enough, Dr. Belmonte says. They still need to review a company’s numbers.

“If properly used, the numbers will tell us almost everything we need to know about a company,” he says. “If we use the correct numbers in the correct way, the bottom-line results will tell us which companies we want in our portfolio.”

The problem, Dr. Belmonte says, is that most analysts and investors use the wrong numbers when trying to decide whether a stock is a good or not-so-good option.

A comparable method of measuring the efficiency of a company’s operations. That’s why Dr. Belmonte is a proponent of what’s known as clean surplus accounting. He says the most prominent investor who uses this method is Warren Buffett. Here’s a quick overview of how clean surplus accounting works:

-Traditional accounting determines the return on equity (ROE) by using earnings from the income statement divided by the book value (owners’ equity) from the accounting balance sheet. “This is not a good measure of comparing one company to another because that’s not what it was meant to do,” Dr. Belmonte says.

-Clean surplus instead uses net income from operations as the “return” portion of the ROE. It then constructs its own “owners’ equity” as the “equity” portion of ROE.  The return on equity, as configured by clean surplus accounting, is truly a comparable method of measuring the efficiency of a company’s operations, Dr. Belmonte says.

-Net income minus dividends, of course, will net a different owners’ equity than will earnings minus dividends. It is this new calculation of owners’ equity (net income minus dividends) that allows a truly comparable return-on-equity ratio to be developed. And it is this comparable ROE ratio that is the foundation of the success of clean surplus, Dr. Belmonte says.

With a potential recession looming on the horizon, Dr. Belmonte says, it’s vital that you review your portfolio, examine whether you have cyclical or non-cyclical stocks, and then put those companies to the clean surplus accounting test.

About Dr. Joseph Belmonte

Dr. Joseph Belmonte, author of Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection (www.buffettandbeyond.com), is an investment strategist and stock market consultant. He is fond of saying, “If you want to live on the beach like Jimmy Buffett, you’ve got to learn how to invest like Warren Buffett.” Dr. Belmonte has developed hedged growth income strategies for family offices, and has lectured to numerous professional and investment groups throughout the country. His weekly video newsletter is sent to thousands of investors, money managers, and academics both nationally and internationally.