The Persistence of Change

Change keeps coming at home and abroad — governmentally, economically and technologically

Just more than eight years after the 2008 Great Recession, unemployment is at 4.7 percent after hitting a high of 10 percent due to the crisis in October 2009. Now, company balance sheets are healthy with plenty of cash and interest rates are still exceptionally low but coming off of zero percent emergency levels.

Certainly with a new presidential administration, things will continue changing. The pendulum swings throughout a decade from heavy regulation to a more laissez-faire environment. I have seen this cycle during my 25 year career and it is currently visible.

In the years leading up to 2008, requirements for mortgages and loans in general were lax. The theory coming from the government was “everyone should own a home.” Such relaxed standards for mortgage loans are cited as one of the primary reasons for the real estate bubble, as people were getting loans they couldn’t afford believing that real estate prices always rise. (Note: whenever anyone tells you an asset class “can’t lose” or “can’t go down,” please run.) This relaxed atmosphere was shattered by the start of the Great Recession in December 2007. Real estate and stock prices took a deep dive and fingers were pointed.

Let’s ignore the fact that the government backed the idea that home ownership was a given for the population, since they conveniently forgot when it blew up in their faces. The government bailed out companies and started to look for ways that it would never happen again. The “Too Big to Fail” label was deemed a problem and prompted increased regulation for banks and financial institutions. If you ask people at banks or families and individuals who want loans, they will now tell you that the hoops, paperwork and requirements for procurement have become burdensome. The additional regulations add costs, time and tons of paperwork. The regulation and low interest rates make it difficult for small institutions to continue to thrive independently, so the big companies are getting bigger through mergers and acquisitions.

The rhetoric coming from the new White House touts lower taxes and less red tape. Whether this is even possible in reality is a question. The culture will most likely move to a more business-friendly environment. This is particularly good news for small and medium-size businesses that are hurt the most from overly burdensome regulations and don’t get the tax loopholes from which many large corporations benefit. The pendulum never rests on a solid middle ground so changes will come and laissez-faire may return.

With a recovering U.S. economy, the anticipation of rising interest rates is on the front burner.

I have mentioned my respect for our current Federal Reserve chair, Janet Yellen, and she and her cohorts continue to move interest rates slowly higher. However slow, their methods are transparent and understandable. They announced that three interest rate increases were expected for this year and all increases are data dependent.

Overall, we believe interest rates will remain relatively low. Even with incredibly low interest rates, we have the highest yield among the developed countries (based on 10-year government bond yields). We are still far from the average historical interest rate, which is 5.32 percent. If rates behave as they did historically, we will stay in a low trend for a while, which could continue to spur the economy. It allows for financing through borrowing so companies feel safe making investments at lower cost. The government also benefits from low rates because it reduces the relative cost of interest payments on government debt.

Considerable change is imminent overseas, as Brexit is officially upon us. The U.K. notified the European Union of its intention to leave the 28-nation bloc. This gives the United Kingdom and the E.U. two years to work out mutually acceptable trade relations. The U.K. currency, the pound sterling, took a dive against the dollar after the vote last June and concerns abound.

Scotland, which voted to remain in the EU last June, is due to have a second referendum to leave the U.K. around the same time the U.K. leaves the EU in spring 2019. Historic upheaval seems unavoidable there, however, companies will still want to do business in the United Kingdom so cooperation will come and agreements will be made. Oftentimes, opportunities come in a crisis. It will be interesting to see how this historic event proceeds and its after-effects.

Technology continues to breed uncertainty and opportunity. No matter what happens in economies, regulation or interest rates, there is no stopping innovation. My friend just got a new car that parallel parks itself. On the horizon are driverless cars, home companion robots and space travel. The future is almost here.

Change, of course, is inevitable. We can only hope that it brings with it progress, as well as opportunity.