Transcript: Outlook 2011

This week on Intelligent Investing, we're taking a look at the crystal ball and coming up with some predictions for 2011.

What's likely to move the real estate market next year? Find out from Boston Properties ( BXP - news - people ) Chairman Mort Zuckerman. What is to become of Wall Street in the age of reform? Jack Bogle takes a look at the market from 30,000 feet and more than half a century if investing. Plus, James Wolfensohn, former head of the World Bank, brings his unique perspective on the global economy and philanthropy.

John "Jack" Bogle On Fundamentals

Steve Forbes: Well, Jack, good to have you with us again. I have to ask you a question--I think I know the answer--in terms of what you see ahead for 2011, the next 12 months. Your time horizon seems to go beyond one year.

Jack Bogle: Yeah, nobody can predict. While the economy will probably stumble its way a little bit higher, I don't look for anything big on the economic front, any big gains. But we'll probably stumble through this recession and this slow growth that's following it. But in terms of the stock market, there's no point in predicting the stock market for a year because a stock market is based on two simple things. One is fundamentals, which I call investment return, Lord Keynes called it enterprise, and emotions, which he called speculation.

And emotions drive the stock market in the short run. And in the long run, it's all about fundamentals, the discounted value of the cash flow that our corporations generate over time, over a long period of time, intrinsic value, we call it.

So we can guess the intrinsic value on approval a little bit. GDP seems to grow at about the same rate as corporate earnings, so we can expect some growth in corporate earnings. We have a dividend yield to add to that, admittedly a very low dividend yield, around two percent. But I think the outlook for investment return is good for next year, but the outlook for speculative return, whether people will pay a lot more or a lot less for stocks at the end of the year is problematic. However, over the long run, it is investment return that drives the mare.

It is, as I say in the book, if there's a gap between perception and reality, it's only a matter of time, Steve, until reality takes over. And 10 years is not a lifetime, but you can look at 10 years where reality's going to be very important, and perception or speculation much less important. So if you look at it the next decade, which is, I don't go for shorter periods, we can see that 2% dividend yield. We can see maybe 6% earnings growth from corporate America. And that's an 8% return on stocks.

I think speculation will be a little less at the end of that period. That's a sheer guess. But maybe it will sheer a lower price earnings, multiple the price you pay for each dollar of earnings at the end of the period. So maybe the return on stocks will be about 7%. That's reasonable expectations for the coming decade, which means your money will double in a decade. So that's not bad. It's not what we're used to, but it's not bad.

Forbes: After the past 10 years, that sounds pretty good.

Bogle: Well, of course after the previous 20 years, the last 30 years look pretty normal. You know, it's all cycles back and forth. Emotion drove the market way upward in the first two decades, '80s and '90s, and then both fundamentals slowed down, and the emotional side--

Stocks can't sell at 40 times earnings for a decade, believe me. And they didn't. So that was the main reason that the returns were so poor. And compare that maybe 7% return on stocks with the return on bonds, which the hidden secret is that bond returns for the next decade are almost entirely shaped by today's interest rate.

So if we want to call that, using some government, some long, some short, some corporates, 3. 5% maybe. That means that bonds will give you about a 50% cumulative return over the coming decade. So those are the reasonable expectations. But reasonable expectations aren't always met, so I would tell investors be a little careful out there. There may be some things that are not very pleasant on the horizon, maybe a chance, I would say, 1 out of 15, 1 out of 10, 1 out of 20 that we have some really, really tough times coming. So maybe lean to the conservative side.

Mortimer Zuckerman On Real Estate

Forbes: So commercial real estate 2011, residential real estate 2011. Is it possible to have an outlook?

Mortimer Zuckerman: Yes, I mean, I think it will reflect primarily the macro economy. I mean, commercial real estate in particular frankly has done relatively well because the business community has known what to do. They know how to reduce their cost. Residential real estate, we talked about it before. I don't know where that bottom is. And we don't know where that bottom is. So the one thing we have to do is to get the economy working as well as we can.

And that is going to be a very difficult measure because politically we are deadlocked. So I frankly would have a stimulus program that in the short term and a major deficit reduction program in the intermediate and longer term. And they should be joined together so people do not feel as if we're going to spend our money and have nothing but huge debts to show for it. I'd have to do it as a package deal.

(source:forbes.com)

2011 Predictions for Manufacturing

Today's marketplace is becoming increasingly dynamic and volatile. As consumers become more sophisticated, they demand the right product at the right time, at the right price, and at the right place. Whereas quality was the competitive weapon of the 80s, customer responsiveness, or time-to-market is the differentiator today.

In many industries, hyper-competition is forcing many enterprises to fundamentally change the way business is conducted in order to survive. Given these challenges, traditional paradigms for business management are ineffective.

Single Value Chain Planning

Supply chain management success today is defined by the speed and effectiveness of responding to constant and unforeseen changes. With globalization of sourcing and manufacturing, shifting resources, facilities and inventories across the world, more and more companies are relying on effective supply chain planning to truly synchronize supply, based upon actual and forecasted demand. The Single value chain planning will make the entire process more responsive thereby enabling companies to perform simultaneous material and capacity planning across multiple distribution and manufacturing facilities and time horizons. This integrates information, materials, labor, facilities, logistics, etc. into a time-responsive, capacity-managed solution that maximizes financial resources and minimizes waste.

Manufacturing companies have also begun cross-selling and up-selling to the same customers and to enable this they are restructuring their supply chains. In other words, efficient and effective value chain management optimizes value for the customers' customer.

Innovating for Non-Rraditional Markets

With globalization of supply and more customer-specific fulfillment mandates, the need for supply chain technology is not abating. Pressure to innovate and introduce new & exciting products at shortest possible lead time to retain existing customer base and attract new customers is building up.

Emerging growth markets do not accept shredded versions of existing products. They want the same value at a lower price point; so as a result, there's quite a lot of innovation. During the worst global recession in decades, manufacturers focused on cost cutting, retaining customers, and operating a lean supply chain. As economies recover, future market leaders are making bold strategic moves to gain share.

Supply chain organizations are under intense pressure to meet demands for greater customer intimacy; lower cost of goods sold, and increased global business processes. To succeed, these organizations are identifying that they need to change their supply chain technology footprints and as a result supply chain executives are seeking new capabilities and technology features for their next-generation supply chain solutions. Investments in the ability to speed development and create more targeted products and services will position individual manufacturing companies to fully capitalize on economic growth, improve margins, and fundamentally strengthen long-term competitive position.

Redefining Business: 'Manufacturing' Economy to a 'Service' Oriented Economy

Today many manufactured products contain a large "service" component. Aside from sheer size, the most crucial aspect of the service sector's ascendance is the thorough integration of services with virtually every other aspect of the present-day global economy. In all economies, the service sector by its very nature comprises a very heterogeneous set of activities.

There is an increasing interest in service business in manufacturing companies, a transition from products to services and integrated solutions. This gradual migration toward service offerings, a move sparked by products rapidly becoming commodities and by growth in the number of customer "touch points" over the lifetime of a manufactured product will be used for differentiating the total offerings & creating sustainable competitive advantages.

(source:industryweek.com)

Housing and Economic Predictions for 2011 and Beyond

Perhaps I should be pleased that my predictions for 2010 proved more accurate than those of many of the so-called experts, but gloating has little appeal when most of the country continues to suffer the effects of the worst recession in decades. And although those same “experts” have announced that the recession ended more than a year ago, that seems little consolation to the millions of unemployed or millions more who have lost their homes. These are indeed troubling times, and our troubles are far from over. But since this is a longer post than last year, I’ll jump right in.

● Interest rates: There are no surprises. Interest rates will remain low throughout 2011, with mortgages probably remaining close to 5% and 10 year Treasuries around 3.5%. The government/Fed will continue to keep rates at near historic rates, for doing otherwise would put the brakes on an economy that is stuck in first gear. Inflation still seems a possibility, but at this point, only a distant one.

● Home prices: While many had predicted home prices to stabilize by the end of 2009, that didn’t happen. Through July of this year, prices have declined another 3.3% year over year. There has been no stabilization. Although home prices are down about 35% from the peak, they’re still about 10-15% above the trend line of the past 100 years. In addition, there’s still an incredible overhang of potential foreclosures and short-sales, and the market must absorb those before we achieve stabilization.

In 2009, the “cure rate” for delinquent mortgages fell off a cliff, and if anything, that trend has only worsened. Only a small fraction of loans in default are self-curing today, providing a “shadow inventory” of up to 7 million homes. Prices will remain under pressure until those homes are absorbed. And, adjusted for inflation, home prices will NEVER recoup the losses of the past 3 years.

● Foreclosures and short-sales: Distress sales, now at the highest rate since the beginning of the recession, will remain a huge portion of home sales, hovering near 35-40% throughout 2011 and comprising as much as one-third of sales in 2012.

A new concern for some is the possibility that the government is considering allowing the housing market to collapse, especially since none of their efforts to salvage it have been successful. While I don’t think that will happen in the near-term—prices would fall dramatically, endangering both banking and the overall economy—I do expect to see a prolonged effort to withdraw government support from the housing and mortgage markets. Loss of government support will ultimately make homes more expensive and more difficult to finance—but that’s a 3-5 year scenario.

Housing Tax Credit: While there has been some mention of extending another Homebuyer Tax Credit, the administration seems to have little appetite and no funds for doing so. With no support from NAR or NAHB, and with only marginal results from previous credits, it seems unlikely that we’ll see another in 2011.

● Employment: The key to a sustainable recovery is the creation of millions of new jobs, and that’s just not going to happen this year or the next. Unemployment throughout 2011 should remain above 9%. With 20 million currently unemployed, underemployed, or out of work self-employed, some are now resigned to the prospect of never working again. Millions of jobs have been lost forever, and the economy will have to remake itself in order to employ all those who need/desire employment. Creating new job opportunities in new industries will take years, resulting in prolonged uncertainty in an economy whose lifeblood is consumer confidence and spending.

● New Construction: The current recovery has seen the slowest rebound in residential construction in more than fifty years; and with the administration publicly pushing affordable rentals over the concept of home ownership, homebuilders will see little relief from Uncle Sam. Additionally, changing demographics, tightened lending restrictions, and a market exercising extreme caution, will cause some to remain renters for longer periods than we’ve seen in the past.

In my 2009 post I predicted an ugly mid-term election, and that seems to be coming to pass. Both political parties have sent out their “attack dogs” and are filling the airwaves with both distortions and impossible promises, yet neither has presented a viable plan for recovery. And that’s because there is none—at least none that will satisfy the American voter who demands instant improvement, yet who is unwilling to forgo any portion of their “entitlements.” And the prospects are even more dismal for the coming year, as both parties begin posturing for the presidential election and are carrying partisan politics to the extreme.

Finally, while the economy will continue to grow, it will do so at a rate insufficient to rapidly absorb the millions of unemployed or to stimulate growth in troubled sectors. Crippled by continued high unemployment and weak consumer confidence, the growth will be obscured by the dark clouds of uncertainty. And while some may feel my analysis too negative, the facts are what they are. Of course it is possible that some unforeseen action could inexplicably restore our economy—possible, but most unlikely.

(It could be worse) The above is contingent upon our avoiding other global catastrophes. Should there be any sort of mid-east conflict, a spike in oil prices, economic collapse in Europe, or a significant terrorist attack, all bets are off. And while we will probably avoid such calamities, in today’s world, little is certain.

(source:activerain.com)