Tuesday, 13 October 2009

The big economic picture

John Mangun
Outside the Box

It is very difficult sometimes to separate the “spin” from the truth. And it is more difficult when those who are offering an opinion fail to back that opinion with facts that relate the total picture rather than just that information which supports their conclusion.

Having said that, I am sure you could accuse me from time to time of doing the same thing; choosing information that supports my opinion. It may be just a part of our human nature, but it is not right because that sort of analysis is distorted and misleading.

Over the last many weeks, I have expressed my opinion on the state of the world, at least as it applies to the financial markets and the broad economic picture. And judging from some of the email I have received, I have probably confused you more than normal and failed miserably to “enlighten” you. So in the interest of “truth” and clarity, allow me to describe the situation as I see it as precisely and unbiased and objectively as possible.

The US economy: Anyone who says the US is out of a recession is a fool. OK, sorry. I said I was going to be unbiased but, good grief, are these people looking at the numbers or is their analysis based on reading tea leaves at the bottom of the cup? Quarter-to-quarter fluctuations in economic output are the least reliable of all indicators. They are “guestimates” subject to great revision. The year-to-year numbers are more reliable and the US second-quarter annual change was a negative 3.8 percent. The third-quarter numbers will look slightly better only because 2008 was so bad. But on an annual basis, the US gross national and domestic product will shrink. The US is still and will continue to be in a recession.

Another way to effectively measure economic activity in the US is to look at tax revenue and the numbers are frightening. Revenues collected by the states in the third quarter through income-tax payments, sales (value-added tax) tax, and fees are down annually from 5 percent to 10 percent. You cannot have increased economic activity without a comparable increase in tax revenues. It is impossible in an economy like the US.

It is likely that some government programs, like tax breaks for home and car buyers, have created some economic stimulus. But this is a one-time affair and is not enough to pull the economy out of the recession hole.

Gold: The precious metal is trading at $1,050 and will go higher. The “experts” are saying that this is speculation on increased inflation and without inflation, the gold price will fall. Not true. Gold is not an inflation hedge and never has been. It is a hedge against a bad currency and the dollar is a bad, devaluating currency. To the extent that inflation will be a major US economic problem over the next 12 months, then I suppose gold is an inflation hedge. But as the dollar “dies,” gold will go higher. Canadian-based gold dealer Kitco, a major player, launched an index tracking gold in a variety of currencies that allows investors to monitor gold prices independently from the US dollar. This is another step toward the Super Sovereign Currency I spoke of last week.

The dollar: The US government budget deficit for 2009 will be at least $1.5 trillion; that is more than the Bush budget deficits of the last four years combined. How do you fund that deficit? Two ways: print more dollars or borrow more money. Printing more dollars causes devaluation; borrowing requires raising interest rates. Note this: more of the newly issued US government debt is now being bought by the US government than by foreigners for the first time in decades. Over the next several quarters, the US has no choice but to print money, and that will cause devaluation.

The comments that you read that the dollar is falling because it is no longer needed as a safe haven in light of a recovering global economy is totally false. The Australian dollar is at a 14-month high against the dollar. Maybe Australia is the new safe haven. Actually, it is. Why? Because that is a commodity-based economy and smart money is looking for hard assets to buy, not funny money printed by the US.

The US stock market: More and more Americans will sell stocks and more and more foreigners will by US shares (and other assets) as the dollar devalues. This happened in the 1970s when Americans could not buy anything, so the Japanese moved in and bought everything in sight, companies, real estate, because prices were so cheap in currency terms. The US stock market could double in price over the next two years. Short-term weakness flawed by long-term strength.

The local stock market: Undervalued, long-term, in both peso and dollar terms. Price/earnings ratios are below last year when you factor in the appreciation of the peso versus the dollar. That will continue to encourage foreign buying of local shares. Although there are some issues that might currently be considered “overvalued,” that means nothing. Prices are looking to a bright future. The last two months was the opportunity to sell out. Now is the opportunity to buy.

So again, buy local stocks, buy local companies, buy gold, buy local real estate, and sell dollars.

PSE stock-market information and technical-analysis tools were provided by CitisecOnline.com Inc. E-mail comments to mangun@email.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it .

No comments:

Post a Comment