I decided to include a response I made to a well-known website regarding the Business Week article “Unmasking the Economy: Why Its So Much Better than You Think”
Here is the link to the online version of the article:
Comment on the article by a Fortune 50 Executive:
“Everybody interested in the health of our economy should read the cover story of the Feb. 13 (2006) issue of Business Week: "Why The Economy Is a Lot Stronger Than You Think," written by Michael Mandel.
In short, the article makes the case that difficult-to-measure intangibles in our knowledge-based economy are resulting in the following effects:
- The current account deficit is considerably smaller.
- The personal savings rate in 2005 was positive, not negative.
- Investment is rising as a share of the economy, rather than falling.
- The part of the federal budget devoted to current spending is in balance.
- The 2001 recession was deeper than we thought. Current growth, however, may be stronger.
Now my response……….
I wanted to mention that the article in Business Week was flawed from the start. Please bear with me as I explain. First off, the author portrays an inaccurate view that the consensus has been saying our economy is bad shape, which is untrue; quite the opposite. In my view, he put that slant in order to make his article appear more relevant. Hopefully you will agree that among the mainstream media and Wall Street, the view is that the economy is and has been doing fine. However, in my view this is wrong.
(1) Investment as a share of GDP really is meaningless unless we understand where this investment has been made. Iraq, Medicaid, hundreds of pork programs…..
(2) I have never seen it reported anywhere that the savings rate for 2005 was negative; it was negative for a brief period in the fall but it was essentially 0 for 2005 or at least trended downward to 0. Trends are what are important and even if it were positive (lets say 1%), that is not enough to do anything, especially when consumer debt is at all-time highs, foreclosures are not far off 2003 record levels and will most likely surpass the summer of 2003 once the real estate bubble begins a definitive deflation, and bankruptcies were at record levels.
Americans have been consuming 4-6% more than they produce for several years due to the ease of credit and the average total debt per American (Federal and consumer debt excluding mortgages and government liabilities) is nearly $40,000.
Meanwhile, many have been using their homes as ATM machines. There is no more money left; no more home equity loans to take out, rates are rising and credit card companies are smiling. Many Americans are now broke, and with no means to file for bankruptcy, like in the past due to the passage of bankruptcy reform. I do not think it is responsible to change the bankruptcy laws during a period when they are needed the most. Do you?
Furthermore, as more Americans lose their jobs or enter new jobs with decreased benefits, the 16% uninsured rate is likely to grow higher. With about 50% of American personal bankruptcies last year due to medical bills, you can imagine what the new bankruptcy laws will do to many consumers.
(3) The current account deficit means nothing to me; let’s take a look at off-budget financing numbers instead. That paints the real picture instead of one by Van Gogh.
(4) "The part of the federal budget devoted to spending is in balance" <-- how is this relevant to the big picture? We have record trade and federal deficits, as well as record debt and these are trending upward, with no apparent end in sight. Furthermore, Congress is struggling to figure out what to do about Social Security, Pension plans, Iraq, healthcare system, Medicaid, and other issues.
(5) No doubt the recession in 2001 was worse than previously reported. In my view, we are still in a correction period from the excesses consumed during the 1990s (although I am not going by conventional standards of measurement). You cannot print money endlessly for a decade and pump the stock market up by 600% and expect an 18 month recession to correct things. We have much more of a price to pay. I just do not know when it will happen.
In short, when I look around I do not need to consider the official economic statistics, which as we all know are often twisted and distorted by the government. Our standard of living has been in decline for well over a decade. And now that so many jobs have been exported at such a rapid rate and with such poor timing, this is not merely a typical outsourcing event.
Millions are stuck with no career alternatives and must now work for minimum wage or slightly above that. As well, more and more retired individuals have had to come out of retirement for similar jobs, and I predict it’s going to get much worse. While the debt is certainly a huge issue, it could theoretically be corrected. What will be more difficult is the healthcare crisis, which is the unifying link to many of the domestic problems we have today and will have in the future (debt, pension crisis, free trade, inflation, etc).
In closing, I hope you agree that we cannot have an expansive economy and thus a bull market when we have any one of the following:
1) High Energy Prices
2) War or War-like Conditions
3) High Commodity Prices
4) Weak Dollar
Unfortunately, today in America we have ALL 4, and I cannot see any of them changing for several years. And the consequences of America’s poor financial position are going to show be evident and result in devastation to the markets..END.
I continue in my newsletter…
Don’t expect a diversified approach to work well in this type of market because it will not. Perhaps you have already seen that. As such, I do not expect the balanced portfolio of this newsletter to deliver the types of returns it has in the past. As I have been saying for a while now, commodities will remain in a bullish trend due to continued demand by China.
However, when or if China decides to properly revalue its currency to say 30 or 40% upwards from current levels (the fair rate), this will most likely negatively impact the commodity markets. I do not expect that valuation to occur anytime soon, but as the U.S. continues to threaten China with embargos, they might act to begin a currency revaluation over the next two years, so keep an eye out for these possibilities.
My favorite sectors have not changed much over the past year:
- Energy
- Healthcare
- Precious Metals
- Chinese funds (selected)
- Alternative Energy (selected)
High risk remains and has been confirmed by the continued decreasing bond yield spreads, which are pronouncing the inverted yield curve.
Meanwhile, the strength in the equities market has been primarily due to the small and mid caps, which is NOT a good sign. I have highlighted my emphasis in these groups for several months now. I hope you are listening. Large caps are to buy after market corrections and to sell once they get fully valued again in my opinion.
Remember, fund managers take their biggest risks early in the year (buying small caps). I expect a significant sell off over the next few months. Around early December, I alluded to the fact that the year end rally was deficient of small caps and this held for January as well.
And I noted that a rally in the small caps (typically known as the “January Effect” could push the markets higher in early 2006. This year, we got the January Effect in mid-Jan and mid-Feb. But this market strength will not remain once the economic numbers reveal the weakness in the economy.
For those of you who took my advice to get back into gold several months ago, you should continue to add to this volatile sector only after sell offs, which will inevitably occur. The long term trend is bullish for gold so don't let sell-offs scare you. As mentioned many times, I expect gold to reach the $950 mark over the next 6 years. Silver may have even more upside, but my prediction remains at $18-$20. As well, many other metals will continue their bull run for some time.
This market remains lucrative for traders, and I suggest investors take profits at market tops such as the current one and wait patiently for the corrections to occur before repurchasing.
NOTE: I continue to face widespread censorship for the cold hard truth I speak, as I see it. My intention is to wake the people up so they will realize just how useless and deceitful the mainstream media is. I ask that you do your part to help with this mission by emailing my articles to your friends and adding the articles to the various online syndication options provided at the top right-hand side of each article. Together, we can make a difference.
Copyright © 2009. Mike Stathis. All Rights Reserved.
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