The RPO Economy
August 04, 2002

The RPO Economy

  • Allow me to introduce the RPO Economy. It is not to be confused with the recently deceased IPO Economy or New Economy.

    The RPO Economy is the train wreck currently in progress. It stands for "Radically Present Oriented," a term long used by sociologists to describe the orientation, motivation, and behavior of people born into poverty. It is a world in which N-O-W is everything.   It is what is happening to all of us as we adapt to the post 9/11 world.

    The last time we moved toward an RPO economy was around 1980. Inflation was high (13.3 percent in 1979, 12.4 percent in 1980 ). Money market funds peaked at yields around 21 percent. Oil was predicted to hit $70 a barrel.   Credit card interest was tax deductible. It actually made sense to pay 18 percent on credit because the after-tax cost was less than the price increase on whatever you purchased.

    Even canned food was a good "investment." It was easy to make a case for buying just about anything simply because it would cost more tomorrow. Gold soared.   Stocks were sinking because, well, why bother looking for 20 percent in a growth stock when you can get 20 percent in a money market fund with a checking feature?

    Skeptics will be quick to point out that we don't have high inflation or high interest rates today. We do, however, have something equally powerful.


    In the RPO economy everyone doubts the future. No one is willing to pay for anything that isn't immediate and palpable. A change like this has investment implications. It also has political implications that are less clear, but very possible.

    The investment implications:

    •           Stock multiples will continue to shrink. This will happen as  investors seek current income and discount the value of future earnings. It is possible that corporate earnings will grow but  will be offset by shrinking P/E multiples. This is what happened in the seventies.

    •           Financial services will shrink. When trillions of dollars are lost it's difficult for brokerage and investment firms to generate revenue. Like the late 70's (when some feared the  mutual fund industry would disappear) or the late 80's (when  the number of stockbrokers took a major fall after the 87'  crash), financial service firms will reduce their headcounts.  

    •           Savings will be radically redirected. After the market declines of 2000, 2001, and 2002, where millions of workers saw their regular contributions to 401k and 403b plans disappear, the alternative of debt repayment will be seen in a new light.   An extra payment that saves 18 percent credit  card interest, 8 percent car loan interest, or 6 or 7 percent mortgage interest now looks like a brilliant investment with immediate and certain benefits.

    •           Investment will be radically redirected.   The value of a remodeled kitchen or bath, even at 50 percent of cost, compares favorably with an investment in WorldCom at 0 percent of cost and zero useful benefit.

    •           New consumer commitments will be scarce. While many will spend more and save less, assuming new debt and new monthly payments will be psychologically harder. One reason is simple demographics: as the boomers age, their 'debt horizon' will shorten. Another is pure uncertainty.

    The political implications:

    •           Labor will be radicalized. The long decline of labor unions is over. With no reason to trust corporate leadership, abundant  evidence of a broken social contract, and still more evidence of being sold out by both political parties, joining a labor  union will look like the only way to wield some political power.                Being an incumbent, whatever your party will be a liability.

    •           The political center will move left. This movement will be faster than either party can conceive. Last year's tax cuts  will be rescinded, the estate tax will be restored, discussion of privatizing Social Security is dead, George W. Bush will  follow in his father's footsteps as a one-term president, and Tom "the muffler" Daschle will start to look like a Republican.

    •           Healthcare will be nationalized. With health insurance a major  barrier to employment for older workers, it will be demanded.   Deeply frustrated employers and workers will figure out that   we're already paying for national health insurance but aren't  getting it. It will pass like a hot knife through butter.

    Bottom line: buckle up; it's a rough road ahead.

    All this is speculation, of course. It is not to be confused with reporting. Whatever the historical grounding, I could be way off base. If you think I am, tell me. If you agree, tell me. If you disagree, tell me.

    Tell me about the future you see. I'll report it in a future column.

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