Turning On A Dime

As I write this the S&P has rallied by almost 6% in just a few trading days. Get used to it. In an environment of uncertainty rallies and plunges are the norm. Two weeks ago things could not get much worse as far as investor sentiment was concerned. I wrote to you about several of the indicators I watch like the VIX (volatility index) and the insider buying trends. Both were pointing to a confidence amongst investors, not panic. Lo and behold, a few days later the market rallies and all is well again. If it were only so easy.

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Gold continues to set new highs and silver is hot on its tail. The US dollar is falling again, and industrial commodity prices are rising. Retailers are stocking up for the Holiday Season. It’s almost as if the economy is on the mend. Don’t buy it. As I have said over and over again, there can be no recovery until we see jobs created and the housing overhang dissipated. Regardless of what the markets do on a day to day basis, the economics of growth have not changed.

There are two America’s today. The have jobs and the have no jobs. The have jobs are spending a little more freely. Economic growth, however anemic, is providing a cushion for those who are working harder because they have jobs and they have no choice. Incomes are not rising but job security maybe a little stronger than a few months ago. After-all businesses have to run and they are doing it with a leaner, meaner operation.

The have-no jobs contingent is faring worse. Jobs that pay are scarce and the competition is getting stronger, not weaker for what’s available. Social unrest is rearing its ugly head in the form of religious and social intolerance. The radicals on all sides are enjoying their moment in the sun. No jobs means, no growth, no taxes, no dreams. This is a recipe for disaster for everyone concerned. Those with jobs maybe feeling a little better or a little more secure about their futures, but those feelings will not be long lived. Unless the economy improves, taxes will increase, not decrease. The shortfall from housing property taxes alone will bankrupt many municipalities. Again, this will result in higher local and state taxes aimed squarely at those who have jobs and income. So, while the jobless are struggling with the failure of the economy to generate jobs and income, those with jobs will face a future burdened with greater costs. It’s a lose-lose situation.

The Economics of Failure

To understand how economies fail, you have to look first at which ones succeed. The success stories today are economies that manage their fiscal responsibilities. What happens at the top filters to the bottom. Countries like Singapore, Taiwan, Australia, Canada, Brazil, Norway – these are the winners today. Their currencies are a good indication of what is right. When people have confidence in a system, they invest in that system. Countries like Norway are sitting on piles of natural resources, but unlike the oil rich middle-east, the Norwegians have managed to plow resource profits directly into their coffers. A tiny country by all measures, Norway’s Sovereign Wealth Fund is sitting on half a trillion dollars of equity ready to invest. They are not talking about budget deficits or burdening their children or grand-children with debt and taxes, they are looking for places to deploy their cash hoard to make life even better.

The Australians have been raising interest rates in an attempt to manage growth. Yes, growth! The Aussie Dollar is as strong as it’s ever been and the country can actually afford to push through a tax on resource companies to raise even more capital to cover obligations.

Canada, attached at the hip with the United States, and much maligned for its social investments like universal health care is also chugging along even though one of its greatest natural resource exports, oil, is trading 50% below its highs. The Canadian dollar is holding strong and economic conditions while not booming, are not crashing either. Governmental debt is the most manageable of the G-7.

Brazil is on the verge of energy independence – a country just smaller than the United States in terms of population. Granted a good percentage of Brazilians are poor and can’t afford two cars and 3,000 square foot houses. However, the country is booming and interest rates are 900 basis points higher than the US. Rates are higher because the country needs to manage inflation, a byproduct of growth. The Brazilian Real is very strong, again a common theme in economies that are strong and growing. They are attracting capital from the likes of Warren Buffett because they are doing the right things…with a socialist party controlling the government.

The United States has been the single largest consumer per capita of everything since World War 2. It still is. Sure, there are countries like China that may consume more oil, but they have four times the population. The US is still the key driver of global growth, but also the key issuer of debt as well. The world has no choice but to buy US debt as they cannot afford the world’s biggest economy to stumble. Yet, while the world invests in the US, the US government continues to play with fire. Unable to quench the desire to spend money like a drunken sailor on efforts that yield nothing, the US is in danger of becoming a forced socialist country. This change while slow to occur happens when the population becomes overly dependent on government largesse. When the population turns to the government to cure its ills, it becomes a dependent, not unlike the teenager who doesn’t want to leave home.

This is the greatest danger that the US faces. Dependents tend to do whatever is necessary to maintain their dependence and that can lead to a political situation where votes are bought through a generous welfare system. And, in order to continue the welfare, those that have must give up more and more to support the growing needs of those that have-not. It is the direction that the US is heading towards. The only way to stop this train from gathering speed is for the population to elect a government that is less interested in providing for all and instead elect a government that enables all to provide for themselves.

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Best regards,

Kevin Raymond


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