There has been a lot of talk lately about whether the U.S. and other economies are in recovery mode. Proofs on both side of the pendulum usually point to the same set of data. So it boils down to how you interpret this data and what benchmark you are using.
In this piece I will argue that the worlds' economies are headed for more trouble in the months ahead. I will also lay out my road map to navigating the treacherous waters created in the name of "big government to the rescue." Keep in mind where we are coming from and what we are trying to achieve; namely coming from the high flying days of cheap and unlimited credit resulting in unprecedented consumer spending and going toward the goal of restoring jobs lost in the last three years, and then some.
Last week's job report was nothing to write home about. Actually it was a very weak one given the almost three trillion dollars thrown at the economy. A year and a half into the supposed recovery and all that money spent should be yielding hundreds of thousands of jobs monthly not just mere thousands . Sometimes one has to look around his surroundings and apply simple logic in order to get a view of the big picture. Here is what my surroundings are telling me: two friends of mine who are small business owners employing 3-5 people each have downsized recently. One gave up her lease on a 7-suite office and downsized to a two room facility with another small business. The other moved his office to his home and stored his equipment with another business paying a fee every time he uses his machines. Both said the move was done to save on overhead as both their clients have cut back on their spending. What is telling about these two stories is timing. Neither one downsized at the height of the crisis or shortly after. Both have done so within the last two months. If indeed the economy is improving and the consumer is back as some would suggest or would chose to view the erratic positive numbers (positive only compared to the very low benchmark) as trend making events than how come these businesses chose to layoff workers in the face of a recovering economy? The U.S. economy is weighed down by too much debt, a weak and worsening housing market, a banking system shackled by its own toxic assets and a bleak profit generating environment as well as deflationary pressures. All the spending programs that were supposed to kick start this economy have failed. All the securities purchases that have expanded the Fed's balance sheet like never before have failed to achieve their stated goals. One of the reasons for this failure is our refusal to accept a lower standard of living. Think about this for a second. All the money borrowed and spent by the government was to return us to a living standard made possible only by excess borrowing and easy availability of money. After all the goal is to restore all the jobs lost in the last few years. Jobs that , again, were only possible by a spend today never worry mentality. The U.S. economy is facing heavy headwinds going forward.
A year ago when I suggested that the Chinese have funneled most of their stimulus money to state owned enterprises with instructions to stockpile commodities and buy shares of Chinese companies I was met with skepticism and ridicule. Recent reports have suggested that Chinese dumping of commodities is behind the recent price decline. If true, this adds credibility to my thinking that commodities prices surge was not due to increased manufacturing activities in China , and by extension increased consumer consumption in the west, rather it was a miscalculated risk on the Chinese part. A risk that now may prove to not have been worthwhile. In his article dated 6/1/10 Jim Jubak points out that the three largest investors in the recent Agriculture Bank of China IPO are China's Ministry of Finance, China's sovereign wealth fund and China's national pension fund. I believe the Chinese banking system and financial policies are not as wise and sound as they are held to be. The Chinese are new at this and the prominence they have gained is courtesy of their foreign exchange reserves which may prove to be a burden (mostly held in U.S. dollars and Euros) (see previous post "China not the savior some thought").
In this piece I will argue that the worlds' economies are headed for more trouble in the months ahead. I will also lay out my road map to navigating the treacherous waters created in the name of "big government to the rescue." Keep in mind where we are coming from and what we are trying to achieve; namely coming from the high flying days of cheap and unlimited credit resulting in unprecedented consumer spending and going toward the goal of restoring jobs lost in the last three years, and then some.
Last week's job report was nothing to write home about. Actually it was a very weak one given the almost three trillion dollars thrown at the economy. A year and a half into the supposed recovery and all that money spent should be yielding hundreds of thousands of jobs monthly not just mere thousands . Sometimes one has to look around his surroundings and apply simple logic in order to get a view of the big picture. Here is what my surroundings are telling me: two friends of mine who are small business owners employing 3-5 people each have downsized recently. One gave up her lease on a 7-suite office and downsized to a two room facility with another small business. The other moved his office to his home and stored his equipment with another business paying a fee every time he uses his machines. Both said the move was done to save on overhead as both their clients have cut back on their spending. What is telling about these two stories is timing. Neither one downsized at the height of the crisis or shortly after. Both have done so within the last two months. If indeed the economy is improving and the consumer is back as some would suggest or would chose to view the erratic positive numbers (positive only compared to the very low benchmark) as trend making events than how come these businesses chose to layoff workers in the face of a recovering economy? The U.S. economy is weighed down by too much debt, a weak and worsening housing market, a banking system shackled by its own toxic assets and a bleak profit generating environment as well as deflationary pressures. All the spending programs that were supposed to kick start this economy have failed. All the securities purchases that have expanded the Fed's balance sheet like never before have failed to achieve their stated goals. One of the reasons for this failure is our refusal to accept a lower standard of living. Think about this for a second. All the money borrowed and spent by the government was to return us to a living standard made possible only by excess borrowing and easy availability of money. After all the goal is to restore all the jobs lost in the last few years. Jobs that , again, were only possible by a spend today never worry mentality. The U.S. economy is facing heavy headwinds going forward.
A year ago when I suggested that the Chinese have funneled most of their stimulus money to state owned enterprises with instructions to stockpile commodities and buy shares of Chinese companies I was met with skepticism and ridicule. Recent reports have suggested that Chinese dumping of commodities is behind the recent price decline. If true, this adds credibility to my thinking that commodities prices surge was not due to increased manufacturing activities in China , and by extension increased consumer consumption in the west, rather it was a miscalculated risk on the Chinese part. A risk that now may prove to not have been worthwhile. In his article dated 6/1/10 Jim Jubak points out that the three largest investors in the recent Agriculture Bank of China IPO are China's Ministry of Finance, China's sovereign wealth fund and China's national pension fund. I believe the Chinese banking system and financial policies are not as wise and sound as they are held to be. The Chinese are new at this and the prominence they have gained is courtesy of their foreign exchange reserves which may prove to be a burden (mostly held in U.S. dollars and Euros) (see previous post "China not the savior some thought").
The European crisis is still unfolding and far from over. All that was done so far is to place a band aid over the wound. All the causing symptoms have still not been dealt with and the patient is bleeding internally, out of sight. Who knows what is hidden on European banks' balance sheets. The spread on some Northern European debt is widening, not a good sign, and the Euro is still under pressure that will be lifted only after a credible rescue plan that includes government spending cuts is enacted. The sense of entitlement has to be replaced by a desire to live within one's means, and competitiveness and productivity have to be restored to the economic models of Greece, Spain, Italy etc. That means cut in government spending, lower standard of living and a lot of time and pain.
The difference between 2007-2008 and now is that now all three major economic zones are facing the same declining growth, banking and sovereign debt crisis (excluding China regarding sovereign debt), weak consumers and currencies that can't hold their value. The U.S. dollar, contrary to some beliefs, has not been gaining lately. It actually has been losing value when measured against the true store of wealth-gold. The dollar has only been gaining against other currencies indicating that the dollar is the best of the bad bunch out there. Don't be fooled by May's China export numbers because they come against a background of falling currencies and may include contracts signed few months ago before the rise of the European crisis. So China won't be able to come to the "fake" rescue like 2008.
There is something of a paradox to the noble idea of wanting to restore lost jobs. These jobs were not created by the government. They were created by the same capitalist phenomena that the Administration wants to protect us from. Taxes and regulations don't create jobs; they sap the ability and desire of businesses to do so. Economic freedom and creativity are the bedrock of an expanding, job creating, economy.
Until I see a well thought out plan that includes spending cuts as well as a plan to reduce the deficit, cut taxes and stop bailouts this is my road map to navigating the economic landscape facing us in the months to come:
1- Cash is king. There will be much better investment opportunities ahead.
2- Gold will preserve your purchasing power and then some.
3- For the little daring, but afraid gold may not pan out, shorting treasuries is the way to protect against a certain inflation.
4- I can always short the market.
The sun will shine one day but not before a painful process takes its course. That is why cash remains king.
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