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Today I
am going to do something really amazing. I am going to tell you that in my
opinion the U.S. economy has not entered a second recession; it never came
out of the first one. Well, before you professional economists start writing
me that the Webster’s definition of a recession is two consecutive
quarters of negative growth I will simply say for who? Indeed there are many
Americans who have been so economically ravaged by this crisis that they have
not lived through a recession - they have endured a depression. A Gallup poll
that was released in April (when the DOW was 800 points higher than
today’s close) said that 29% of the people polled didn’t care
what the definition of a recession was. They said they were in a depression.
Add to that, another 26% polled said that they felt they had never come out
of the original recession.
Please ask yourself if it is any
wonder that most Americans believe that an economic downturn is still in
progress? One only has to look around to see all the evidence they need to
draw that conclusion. Home prices are at levels we have not seen since 2002
and add to that in many parts of the country like Florida, California, Nevada
and Arizona values of homes have dropped a staggering 50 percent. According
to theNational Association of Realtors home
prices will likely drop another ten 10 % nationwide. They also reported a
staggering statistic. If you had bought a home under the program set forth by
President Obama that gave you $8500.00 towards the purchase of a home, and if
you had put down an additional 20% towards the purchase of the home you would
now be underwater on your mortgage.
It is
painfully evident to most average Americans that there are signs that a full
blown recession is firmly in place. I guess it is harder for the myriad of
professional economists hired by the Fed to see the forest for the trees.
In my
opinion there is nothing that damages the confidence of a consumer as badly
as rapidly rising prices. When I am not writing my posts I have the dubious
distinction of doing the heavy grocery shopping for my family. I have been
amazed and appalled at the spike in the price of groceries. A pound of coffee
that used to cost $2.99 now costs $6.00. Milk is almost $5.00 a gallon. My
children are grown and my wife and I don’t drink milk but as I walk by
the dairy aisle I keep an eye on the price of milk because I often wonder how
parents with children can afford to buy milk. Clothing has gone through the roof
as cotton prices nearly doubled in 2010. The consumer’s ability to buy
the most basic clothing necessities has been undermined.
While
the auto industry has staged an impressive comeback, much of its
profitability has been based on layoffs as much as new car sales. Slower car
sales are not only a sign of lagging consumer confidence but also a sign of
tougher times ahead. Car firms have only just begun to hire again but that
trend will die as the sales of cars plateau.
The
circus that took place over raising the debt ceiling is going to make it very
difficult for Dr. Bernanke to institute another round of quantitative easing.
He will have to be more ‘stealthy’ is his approach because while
the FOMC remains tight lipped many prominent economists like Nobel Prize
winner Paul Krugman say
another round of quantitative easing is essential to create a full recovery.
His theory has seemingly been borne out by last week’s GDP numbers
which had a revised estimate of 0.04% for the first quarter and a 1.4%
estimate for the second quarter. For a robust economy I have read that
economists see the need for a minimum of 5% GDP. The debt ceiling agreement
has caused a call to arms for severe austerity measures which is exactly what
our already fragile economy does not need. The fact is that people are afraid
and they have tightened their belts and are saving every penny they can.
While a healthy savings plan is
the watchword of a healthy society I’m sure the Feds wished that the
American people practice this kind of economic restraint on somebody
else’s watch. What the Feds need are the American people spending to
stimulate the economy. It certainly is a Catch -22 situation. Add to this that today’s
employment numbers promise to be anemic as Cisco has said they would lay off
6000 people, HSBC has promised to lay off 2000 people and state and local
governments have said it is their intention to trim the payrolls by 450,000
jobs this year and next. These government cuts are already well underway. One
can barely open a local newspaper without reading of battles between state
unions and governors over employment, benefits and pensions.
A
slowdown in the Chinese economy is usually seen as a cause of global
commodity price inflation, but this coin has two sides. While China’s
appetite for energy and raw materials may fall, the demand for goods and
services by its very large and growing middle class drop along with it. As
China has raised the interest rate in an effort to slow down the exploding
growth rate the U.S. exports to China have also fallen. According to the U.S.
– China Business Council, over
the last decade we have seen exports to China grow from $16.2 Billion to
$91.9 billion a staggering 468% increase. However, as that rate slows it has
a profound impact on tens of thousands of American companies and their
employees. U.S. firms with large operations in China are also affected. GM is
one of the two largest car firms in China along with VW. Large U.S.
corporations like Wal-Mart and Yum Brands rely heavily on China to boost
global sales. Without vibrant consumer spending in China, American companies
suffer.
Unemployment
creates two problems. People without jobs drastically curtail their spending,
which ultimately affects GDP growth and secondly is the need for tens of
billions of dollars every year in government aid to keep the unemployed from
becoming destitute. That support has increased deficits and the domino effect
is that cash – strapped governments need to make more spending cuts.
The continued high rate of unemployment may well be the biggest challenge the
economy faces.
Unemployment
has worsened because people over 65 continue to work because their homes,
which were once thought of as the financial base of their retirements have
dropped so sharply. Older Americans also fear that cuts in Medicare and
Social Security are inevitable which will increase the cost of their
“golden years”.
The
worst part of the unemployment problem is the roughly 5 million Americans
that have been unemployed for over a year. Their unemployment benefits, in
many cases, may have run out. The burden of their care falls to their
families, friends and community organizations. To the extent that the federal
or state governments can support the unemployed, the cost to run support
programs increases.
Housing
is considered by many economists to be the single largest drag on the
American economy and the housing market has gotten much worse in the last
three months. Whether right or wrong, the American home was the rock that
families built their economic future on. It was the primary source of equity
that was used for college educations, car purchases and ultimately
retirements. While this may once have been true the drop in home prices wiped
out the equity that many people saw as their life savings overnight. Their
ability to consume was severely damaged, further harming the GDP. High
mortgage payments bankrupted people who had lost their jobs or have found
that their incomes had stagnated. The building Industry became a shambles
overnight. Whatever the effects have been over the last three years, they are
getting progressively worse as home values drop to unprecedented lows. Sadly,
there is no relief in sight because potential buyers perceive that the price
erosion of a home has not come close to ending.
So in
conclusion, while I reread this essay, it certainly paints a very bleak
picture. You may rightly ask where the harbor is. In which direction do I set
my compass? The answer is the same as it has always been – follow the
money. China, India and Brazil all continue to amass large amounts of
physical gold and silver. Several days ago it was reported that South Korea
had bought $1 billion dollars worth of gold. Even the people of Greece who
are bankrupt are taking what little paper money they have and buying gold and
silver.
I would
advise my readers to continue to look for opportunities to open positions in
gold and silver. While I have been amazed by the parabolic run in gold and
there are a lot of people that say gold which was had a target price of
$1,600.00 an ounce has blown through that level and seems to have no
intention of correcting. Indeed, I read several analysts report that we may
see gold reaching $2,500.00 an ounce before it pauses. While my Instincts
tell me that the probability for this is remote my brain tells me to follow
the money. As global currencies are debased and global fears continue to grow
it seems that this shiny yellow metal will continue to rise. Let us not forget its baby bother
silver which has broken the $40.04 resistance level and seems on its way to
my predicted level of $55.00 - $60.00 by year’s end. I had a reader
chide me yesterday that my $55.00 level was ridiculous. Silver would be
$100.00 an ounce by the year’s end. So look for the Silver ETF (SLV) to
pull back to $38.00. If it does pullback to $38.00 buy in there. I’m
not sure how to advise you on the gold ETF (GLD). As I
have already written the levels that GLD are trading seem over bought but I
see no red lights in front of it. I would advise that you stand aside until
there is more certainty. I
am fond of quoting Doug Kass who
likes to say “I would rather lose an opportunity than lose
capital.” In the mean time don’t forget about the miners. There
are still great opportunities in these stocks as gold and silver under the
ground have continued to lag gold and silver above the ground. Some names
that continue to stand out are Silver Wheaton (SLW), Barrick (ABX), Goldcorp (GG) and for a longer term
investment US Gold (UXG) have significant upside
potential.
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