But I have a problem developing confidence in the earnings numbers, both reported earnings and, of course, estimated earnings. It's not just the constant restatements, the admitted frauds, the understatement of options expenses, and the fact that pensions are becoming a drag after some years of contributing to the bottom line. My bigger problem is with the working assumption that when revenues do begin to recover, profit margins will zip back to the levels we knew in the late 1990s. A Wells Fargo chart of profit margins over the years suggests that the run-up in margins in the last decade was an aberration, and that what look like depressed profit margins today are actually "high normal" by longer-term standards. A snapback is far from guaranteed.
Space constraints prevent even a cursory treatment of productivity, demographic and trade concerns. I'll just mention that Mr. Greenspan's vaunted productivity figures may be unrealistic (Grant's, April 25, page 10), aging populations and projected smaller work forces in most developed countries put social contracts at risk, and the splintering of traditional alliances over the Iraqi war cast a pall over global trade prospects.
The U.S. and world economies seem to be struggling simultaneously with cyclical and long-range shifts of serious magnitude. The adaptation process could alter many financial and economic relationships that we have considered "normal," so that they will no longer serve as reliable guides to appropriate investment behavior. Though we are understandably inclined to repeat what has worked for us in the past, our survival as financial advisors may require substantive change.
In future columns I will offer some ideas for a new, different way of allocating portfolio resources to achieve both diversification and reasonable returns.
J. Michael Martin, JD, CFP, is president of Financial Advantage in Columbia, Md.