Thursday, August 26, 2010

The New Normal

Once, when I was in the eighth grade, the boys in my class were discussing what to do with their bar mitzvah money. One of the boys mentioned something called a money market, which he explained was just like a savings account, and paid around ten percent interest. To my young, impressionable, pre-teen mind, that number became the benchmark against which all other rates of return were judged; for years, I considered ten percent to be a normal passive rate of return on money.

Fast forward many years. I became a financial advisor. I had already learned that ten percent money market returns were an aberration. In fact, no relatively safe investment could be counted on to deliver a return approaching that number. One would have to take on the full measure of volatility in the stock market to potentially average ten percent over time.

Fast forward to today.

Bill Gross is the co-Chief Investment Officer of PIMCO, a Newport Beach, California money management firm. PIMCO’s flagship Total Return Fund, under the stewardship of Gross, has grown to become the largest mutual fund in the world. Last summer, Gross and company described the economic circumstances and market conditions that they believe will face us over the coming years. They called it “the new normal.”

What is the new normal? Among other things it means slower economic growth, high unemployment, low interest rates, and tepid, “half-sized” – that is to say, four to five percent – stock market returns. In other words, you know the financial crisis we’ve been trying to shake? Well, get used to it. “All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago,” Gross insists.

The new normal will naturally have ramifications in the Jewish world, and in particular, the frum world. Consider:

• Yeshivos today, most of which were never—even at the height of the economic bubble—flush with funds, are under enormous financial strain. Some are being starved out of existence.

• While Information Technology is poised to be one of the growth areas of the new economy (along with Healthcare and Biotech), many frum people who are “in computers” do not currently possess the knowledge and skills for these jobs. According to a friend of mine who works for a cutting-edge IT firm, many are only trained for obsolete systems and have not kept up with the rapid changes in this field.

• For awhile it seemed like every former yeshiva guy and his brother-in-law were mortgage brokers, working very long days and weeks financing and refinancing properties for anyone and everyone who came along—making terrific commissions along the way. No longer. Fewer people are buying houses, fewer people are qualifying for mortgages, and those who are and do are finding that some banks (Chase, for example) are not taking mortgage loan applications from independent brokers.

• The frum world will always have its share of entrepreneurs, but with the severe tightening of credit, many are not getting the chance to borrow the money required to build, or even expand, businesses. Established real estate investors are finding deals, and many have cash on hand to finance them. But many younger people who are trying to get started in that business have it tough.

• One of the biggest supporters of kollelim in Eretz Yisrael saw his fortune—in the hundreds of millions—evaporate in a matter of weeks. I happened to meet him briefly by chance when he was borrowing office space from a client of mine, and watched as he sat hunched over on his cell phone trying to keep his kollelim from going under. He will survive, but many of his beneficiaries are already leaving kollel and returning to America.

And the setbacks did not begin in the last two years.

In 2003, The Wall Street Journal reported how Indians were quickly replacing Jews as the premier diamond dealers in Antwerp, Belgium. The Jews, who had at one point controlled 70% of the trade, saw their influence dwindle to just 25% in a few years. That number is even smaller today. At the time, Henri Rubens, one of the community’s leaders, declared the end of the glory days noting, “We were too complacent. Now that we realize it, it's too late.” Mr. Rubens went into real estate.

These past few decades have been remarkable for the Jewish nation, and for the Orthodox in particular. We have grown both materially and spiritually, and the two often worked hand-in-hand. Much of our largesse was committed to building a strong infrastructure of homes, shuls, yeshivos and mosdos.

But the last couple of years have been challenging; the infrastructure is showing strain and even some cracks. Many feel that we simply have to get through this rough period before going back to “normal.” But what if we’re in for a new normal? What if we need to adjust our thinking and our budgets accordingly—not just for a few years but permanently?

God will surely provide us with what we need; but our definition of “need” may have to be adjusted. Should a more moderate financial future face us, we must not allow it to slow down our spiritual growth. Our commitment to Torah and mitzvos, to educating our children and feeding our poor, to learning diligently and working honestly, must not waver.

But what we spend on our homes, our cars, our vacations, and even our simchas may need to be reigned in considerably.


Blogger Orthonomics said...

Can I use this as a Guest Post titled "The New Normal"? Please let me know. I will check the box to have responses emailed to me. Thanks.

Thu Aug 26, 04:42:00 PM  
Blogger CJ Srullowitz said...

Sure thing.

Thu Aug 26, 05:39:00 PM  
Anonymous Mark said...

I completely agree. And sometimes I wonder if it's "punishment" not only for the complacency of the majority, but also perhaps for the crimes of the tiny minority.

Thu Aug 26, 06:10:00 PM  
Anonymous Mighty Garnel Ironheart said...

I agree very much with most of your points but not the principle one.
As an avid follower of economic changes over the last 30 years, I recall being told in the early 1980's that high inflation was the new normal (remember 15% returns on GIC's?).
In the mid-late 1980's I recall being told that US dominance in world economics was over, and that Japan being the new leader was the new normal.
In the early 1990's I recall being told that the coming recovery would be "jobless" and that high unemployment was the new normal.
In the early 00's I recall being told that the tech bubble had ended the revolution and that their remaining as small businesses forever was the new normal.
So as people settle in now and tell me that what we're seeing today is the new normal I just shake my head and wait to hear in 5 years how "things have never been better" just like I have time and time before.

Fri Aug 27, 08:31:00 AM  
Blogger CJ Srullowitz said...

Garnel (or should I say, "Mighty Garnel"?),

I, too, am not a big fan of "this time it's different" projections - both positive and negative. I am also an eternal optimist in the American dream, particularly as we have the only currency that states, "In God We Trust."

Nonetheless, I think that what's happened over the last two years is fundamentally different from any of the other historical ups and downs of the economy.

Particularly in the frum community, these dangers are not going to go away even if the economy recovers. We have been living off too much debt (credit cards and otherwise), overspending, undersaving, taking help from parents and in-laws (who are getting older. Now WE are the parents and in-laws!).

The challenge to live a more austere lifestyle was here all along. The recession just exposed it.

Fri Aug 27, 03:27:00 PM  
Blogger Neil Harris said...

Yet, even in this "new normal" tution is going up, Artscroll put out a "new" siddur 2 weeks ago, and more and more people with the frum community are needing assistance.

I think that there will be a trend soon of DIY (Do It Yourself) Chessed opportunities coming forth.
Professionals (and I include stay-at-home parents) from various fields should come forth and offer assistance and expert advise.
Those who write, can help with coverletters, whose who are in plumbing can offer cost effective suggestions, those who are budget shoppers (we just has a city wide lecture offered within the community in Chicago from a woman who budget-shops) can suggest ways to cut costs, those who learn can offer free tutoring.

It use to in the "old country" that your last name was based on your profession. Maybe this will be come the new "Torah im Derech Eretz" letting your profession help a fellow Jew.

Fri Aug 27, 03:31:00 PM  
Blogger CJ Srullowitz said...



I think most people feel that with 5-figure tuition bills, they don't feel like saving on the small stuff. But that small stuff adds up.

People should do more stuff around the house - mow their own lawns, make minor repairs on their houses - instead of calling someone else to do it.

Fri Aug 27, 04:22:00 PM  
Blogger RAM said...

We may be in an epoch where nothing will appear normal. The lack of normality or familiar circumstances may be our particular challenge. We need to see HaShem's hand behind apparent chaos.

Fri Aug 27, 04:35:00 PM  
Blogger Barzilai said...

and remarkably, real estate prices in Yerushalayim continue to rise and construction goes on. I guess their market is the demographic that just realized that "what we spend on our homes, our cars, our vacations, and even our simchas may need to be reigned in considerably."

Fri Aug 27, 05:39:00 PM  
Blogger CJ Srullowitz said...

I think the chaos of the first half of the 20th century will be hard to top. This will be a more dull reorganizing.

But we always need to see Hashem's Hand in everything.

Fri Aug 27, 05:40:00 PM  
Anonymous Mighty Garnel Ironheart said...

CJ, I certainly didn't mean what will happen to the Jewish community in the coming decades. In that specific case I fully agree with you. A huge percentage of the American population, our brethren amongst them, are about to find out what happens when you live beyond your means for far too long and come to believe that you are entitled to such a lifestyle.
But America as a country, as a society, as a cultural force will recover. Remember the late 70's? You have to go through a Carter to get a Reagan.

Mon Aug 30, 05:15:00 PM  
Blogger Neil Harris said...

I had to purchase (well get a loan that I'm paying off monthly) a car last week, b/c mine died and was beyond repair.

The first thought I had was that my payments had to be in a range that wouldn't affect my tuition payments (currently to three different institutions). I'd rather attempt to catch up on utilities, than skip a tuition payment.

Tue Aug 31, 12:59:00 PM  
Blogger micha said...

I would also prefer to catch up on utilities than skip a tuition payment. HOwever in practice, I choose to pay utilities. Two reasons:

1- Yeshivos won't shut off the heat mid-winter, nor ruin my credit report -- making it impossible to replace a dead car.

2- There is no way I can plan ahead to pay my entire $96k (down from last year's $127k) POST SCHOLARSHIP COMMITTEES total uition debt for the school year. Generally I find foundations to provide private scholarships; IOW, I shnur for much of that money. But since there is no way for me to pay $9,600 per month anyway, it's all an obtainable goal and I just pay what I have.


Wed Dec 08, 03:45:00 PM  
Anonymous cyberdov said...

2 points -
1. re the comparison of high inflation to low-to-moderate growth, the former seems abnormal on its face, while the latter does not.
2. we do indeed need to reconsider what we spend on different areas of life, but that should *include* yeshiva tuition and other such items - we should take a hard look at what we really need to do to achieve the goal, which is not necessarily the same thing as to continue to follow the same tactics. Vehamaskil yavin.

Wed Dec 08, 04:45:00 PM  

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